Open Banking was first introduced by the Competition and Markets Authority on behalf of the UK Government. It was essentially designed to bring greater competition and innovation to financial services.
Open Banking is a secure way in which providers can gain access into their potential borrowers’ financial information. It is the process by which all UK-regulated banks must allow their customers to share their spending habits, regular payment bills and companies that they use with authorised providers, as long as the customer wishes to do so and give their permission.
Open Banking allows lenders to fully understand the finances and outgoings of all of their customers, including their transactional data, debts, income and spending patterns. This consequently gives lenders a greater financial picture of the potential borrower so that their loans are affordable.
Since the introduction of Open Banking, many financial apps have since been able to use this data to help their customers manage their money more efficiently and effectively.
Providers authorised under Open Banking typically offer two different types of services:
1 – Account Information Service Providers (AISPs) – This includes budgeting apps and price comparison websites
2 – Payment Initiation Service Providers (PISPs) – Includes retailers and tech companies
Open Banking is considered a good thing for a number of important reasons. A strong argument is that the process allows for consequent personalised services for customers. It allows customers to decide and hold control over how their private financial information is shared with providers so that they can receive the best deals across a range of financial products and services. This means that the financial products offered to them can be tailored and adapted to customers’ needs. A prime example of this is HSBC’s Connected Money app. The app gathers data across a range of different financial providers to provide a summary of a customer’s financial situation, providing them with suggestions and advice.
“Open Banking allows for a centralised service,” explains David Beard of Lending Expert.
“Banks are able to hold full control over the various services that their customers need, including advice, transfers, financing and loans. The banking data can be accumulated together onto a single dashboard, meaning that banks are able to offer complete solutions to their customer’s financial needs. As such, everything is completed under a clear, single administration.”
“Open Banking additionally benefits customers through streamlined payment services” explained Rick Dent of Finger Finance.
“More flexible payment options can be delivered to suit the customer’s specific needs, making the process easier for both individuals and suppliers. These new payment mechanisms reduce the risks of non-payment.”
“Finally, Open Banking is beneficial in that it allows for better underwriting. Lenders are able to make more informed, and thus better decisions concerning new customers preventing potential losses and debts. Thus, this consequently allows for lower default rates since the process is more personalised for the customers’ financial habits, meaning payments are made on time to suit them.”