Open banking is when third-party financial service providers are allowed to access your consumer banking information. This typically includes your transactions and payment history within your bank account. You may find that open banking is utilised when you are looking to borrow money online through a bank or other credit provider.
Banks perform open banking using application programming interfaces (APIs). Open banking promotes interoperability and networking between banking information and service providers to create a more straightforward banking experience.
What Data Is Shared When You Use Open Banking?
When you hear that your banking information and data are being shared with third parties, you may be concerned about what data this refers to. When using open banking, you'll be sharing your account data, as well as financial product and services data.
Under open banking, third parties will be able to access your account data. This includes:
-
The account holder's name, e.g., John Smith
-
The account type, e.g., Savings, Current
-
The account currency, e.g., Euro (€), Pound Sterling (£)
-
The account's open date, e.g., 07/04/2022
-
Transaction details, e.g., amounts, merchants, etc.
What Are the Benefits of Open Banking?
The main benefit of open banking is that it creates a financial profile for you. From this profile, banking and financial products, ranging from a £500 loan to a larger mortgage, can be tailored to your needs, and personalised recommendations are made by the credit provider.
By accessing your data, payment services and financial providers can share relevant information with you and provide tailor-made offers. For instance, the lender or financial services provider can also help determine whether you can get a 3 month loan or whether you should spread repayments out over a longer period via a 6 month loan.
While previously you would have had to book a meeting with a banker in person to go over potential products and services, now individual recommendations are automatically generated for you, with banks and other authorised companies being able to access the data and information they need much faster and more efficiently.
How Does Open Banking Work?
In practice, open banking can make managing personal finances a simpler and more efficient task and can help you with your budgeting as you go through life. Personal finance has so many facets, from saving and spending to budgeting and investing.
Most of us have money separated into different bank accounts, various loans, interests, standing orders, payments, and ongoing spending. Now that personal finances have been brought online, it is becoming easier for people to manage their wealth without visiting a bank branch and talking to a banker.
- Online banking allows consumers to access and manage finances on the go from their phones or laptops.
- You can check your balance and transfer funds instantly. Open banking works alongside online banking to add to your banking experience. By accessing your account information, third-party providers can accurately provide relevant suggestions of services.
- This can, in turn help you when it comes to applying for a loan or mortgage, where a lender may need to check how you spend money. Rather than having to manually check, open banking can facilitate the access a lender or credit provider needs in order to make a lending decision when you apply to borrow money online or otherwise.
- Let's run through an example:
You have created a savings account called 'new car' and put away a specific amount each month from your salary. With open banking, the financial providers can suggest a loan based on this information that is tailored to your income and savings capabilities. This should allow you to reach your goal of getting a new car faster.
It will also help you avoid having to look for a £2,000 loan for example in order to pay for the purchase of your new car, as you will already have the funds saved up and available.
What Other Banking Features Can Open Banking Provide?
With open banking, your data is analysed to provide suggestions for your finances, which may help you stay on top of your monthly budgeting and credit card debt . Features are likely to include:
-
Budgeting advice
-
Personalised investment tips
-
Savings notifications
-
Price comparison features
How Do I Know If I Have Agreed to Open Banking?
With open banking, banks allow regulated financial providers to access, use, and share your banking data. This is always done with your consent. Often, open banking is included in your terms of service, and you may have agreed to this by ticking a box when opening your account.
Some banks send official emails to inform you about open banking practices. Regardless of how they request this, all banks need your consent to be able to access and share your data to build your consumer profile. You can check with your bank and ask whether they are using open banking.
