Open Banking (aka PSD2) forces the biggest UK banks to open up their precious data, which could mean big changes for the way we use money. Our need-to-know Open Banking guide explains what the changes mean – and how the controversial policy is being accepted
Not much changes in banking in the UK. Sure, there are occasional new ideas – ATMs; apps; contactless payments – but decade after decade the fundamentals remain the same. Over 80 per cent of us bank with Barclays, HSBC, Lloyds, Santander or Royal Bank of Scotland. We find our bank as a teenager and stick with it for life.
Now that could be about to change, thanks to a new directive called Open Banking, which comes into force on 13 January 2018. This is the start of a programme designed to open up banking data. It might not sound like much, but it could transform the way we move and use money.
What is Open Banking exactly?
Open Banking forces the UK’s nine biggest banks – HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide – to release their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online.
This data includes some simple records, such as the location of branches and the exact details of certain banking products. This first part of Open Banking went live in March 2017. It should make it easier to find banks with disabled access, for instance, or compare the features of different personal and business accounts in order to get the best deal.
The more important release concerns the data contained in transactions. Banks hold the authoritative record of everything we spend, lend and borrow – everything from electricity bills to mortgage payments to weekly spend on train travel and coffee – but, for the most part, they don’t make much use of it.
Open Banking makes it possible to pass this rich information to third parties, who can use it to create new products (more on this later). It’s not an app or a service in its own right. It’s a way of facilitating data sharing.
- Why is Open Banking being introduced?
Banking in the UK has some big problems. Gulamhuseinwala lists them off: “People are paying too much for their overdrafts; money is sat in current accounts not earning interest; there’s not enough switching.”
After years failing to change this situation, the Competition and Markets Authority brought in Open Banking with the intention of increasing competition and innovation in the market. It comes along with several more immediate measures, such as a cap on overdraft charges (albeit one set by the banks themselves), but is by far the most radical measure being introduced.
Open Banking also part of a sweeping piece of European legislation known as the second Payment Services Directive, or PSD2. Sometimes the two get confused: essentially, Open Banking is the UK version of PSD2. The difference is that whereas PSD2 requires banks to open up their data to third parties, Open Banking dictates that they do so in a standard format.
This makes it much easier to use, so it should help startups (or the technology divisions of banks) create innovative new products. The exact nature of these products is actually a bit of a mystery – when Google put out its maps data, who could have foreseen Uber? But at this stage it’s possible to see three distinct trends.
1. Money management
At the moment, if you’ve got accounts with two different banks, then you have to look at them separately, because the banks’ systems are resolutely incompatible. Open Banking will let you see them at the same time, which should make it easier to manage money.
Banks and startups see an opportunity and are already building apps, usually dashboards where you get a view of your ingoings and outgoings. Dutch bank ING has an app called Yolt. HSBC has sent out its “HSBC Beta” app to 10,000 customers.
When you take out a loan, you have to show details of your finances to prove you’re good for it. Open Banking will let you provide that information online – for instance, by giving an investor one-off access to 12 months income and spending history.
There are services that already do this, but in order to use them you have to hand over your login details – this method will be more secure. It will also be more accurate, which should help people with what are known as “thin files”. (For instance if you haven’t worked or been in the country long.)
“A perennial absurdity is that SMEs end up scanning their paper bank statements, only for the data to be manually re-entered into the underwriting systems of modern online lenders,” says founder Conrad Ford.
The current payment system is very complicated. At present, when you buy your nephew a Minions doll on Amazon, the retailer contacts an “acquirer”’, such as WorldPay or Global Payments, which gets in touch with Visa or MasterCard to take the payment from your account. Cue much fumbling around with cards and passwords.
By opening up banks’ data, Open Banking makes it possible to pay directly from a bank account – which should be both quicker and (since the various middlemen each charge for their service) cheaper. The bank authenticates the purchase without involving other organisations.