Open banking – opportunity or threat?

Have you heard about open banking? Maybe, maybe not. But maybe it’s time to get get acquainted as it comes into force on January 13th. In a nutshell it will allow companies to access bank accounts to gather information about how individuals can improve how they run their money.

Firms – known as Third Party Providers (TPP) – as well banks will be able to analyse people’s transactional behaviour that will allow them to tailor products to their specific needs. For example, a TPP app could use transaction information to find the current account that suits a consumer best – perhaps offer ones with cheaper overdraft rates or those that pay interest.

A TPP might also use the information to find credit at a competitive rate, real-time updates on spending and cash withdrawals, or even find credit when it has been refused elsewhere.  An app might help consumers avoid bank charges or boost savings by automatically moving money between accounts.

Ultimately, it could allow the management of all financial accounts and household bills through a single app.

What is it?

The concept of open banking was borne out of a Competition & Markets Authority’s (CMA) four-year retail banking investigation, which highlighted how the big banks were not being challenged enough to be competitive. The CMA hopes it will encourage account switching and drive down costs.

Naturally there is much concern about security. Many people will baulk at the idea of someone else being able to leaf through their bank statements. Crucially, it’s something that you have to opt into. So if you do nothing, nothing will change.

For those who do wish to engage, there are security issues to bear in mind because open banking does open up new opportunities for fraudsters. Copycat websites pretending to be TPPs could start emerging and some might set up as fake TPPs outside the UK that will therefore fall outside regulation by City watchdog, the Financial Conduct Authority (FCA).

There are, however, strict rules in place designed to protect consumers who use open banking. All Third Party Providers (TPPs) have to be approved by the Financial Conduct Authority (FCA) before they can appear on the Open Banking Directory.

Each bank will offer a section on online banking called the Consent Store. It will name all companies that have consent to access account details, with an option to remove a firm.

Open banking does not mean handing over passwords. Software called APIs (Application Programming Interfaces) will be used to share customer information securely. It doesn’t allow direct access to a bank account, it simply consents to banks releasing certain information.

Consumers can check the Financial Services Register to see if a TPP is regulated.

Crucially, banks are still liable for a refund should a customer fall victim to fraud (unless there has been negligence). If the third-party was at fault, the bank can recover the funds from them. Whether it will catch on, is anyone’s guess. A report by Accenture showed that the majority of consumers (59%) would  only trust their bank with their account information.  Yet money-managing apps are already popular, so if others emerge that can save people money, they are likely to be embraced by some.

Time will tell.

Article is accurate at date of writing.