Open banking, a system that allows third-party financial service providers to access bank account information and transaction data, is transforming the banking industry. This system can give a consumer more control over their money and the way they move, manage, and make it. Consumers have the right to give access to these third-party financial services. Access is granted when the individual’s bank or financial organisation transfers their data to regulated third-party providers.

Open banking is heavily regulated, and access is granted using application programming interfaces (APIs). These APIs are programmable codes that act as the ‘middleman,’ connecting one software platform to another. Of course, there are other security measures in place, such as two-step verification processes and the use of artificial intelligence (AI).

What Is Open Banking and How Does It Work?

The concept behind open banking started when the UK government investigated the supply of retail banking services and found that there was a need to improve competition in retail banking and financial services. Open banking has improved the way that clients are able to control their finances. Similarly, businesses have better opportunities to implement different innovative services.

For example, apps such as TaxiApps utilise opening banking to access users’ bank details to pay for cab fares.

Who Can Use Open Banking?

Anyone can opt into open banking services, including individuals and businesses. The UK’s largest retail banks and building societies, such as Barclays plc, Lloyds Banking Group plc, Santander, Danske, HSBC, RBS, BoI, Nationwide and AIBG, are legally obligated to share certain information online through open banking.

For Personal Customers: What Are the Pros and Cons of Open Banking?

As with any financial decision, for all the benefits a system can offer there are likely to be some areas for consideration. For personal customers, here are some of the areas that one should take into account before agreeing to an open banking system:

Advantages of Open Banking

As open banking has given the consumer more power and options in managing their finances, there are a multitude of advantages to using open banking. The biggest advantage is that the consumer now has a stronger ability to manage their finances through tailored products and services. Customers will also benefit from the debt management tools offered through open banking, such as overdraft alerts and recommendations to help them choose between interest rates. Some of the advantages for personal customers also include the following:

• Customer Experience: With the perks of better online accessibility, consumers can experience an advanced customer experience with open banking.
• Competitive Services: With regulations in place that now obligate the largest banks in the UK to partake in open banking, it means the consumer benefits from competitive services that are constantly on offer.

Disadvantages of Open Banking

While open banking provides several benefits to personal customers, there are also potential drawbacks to consider. Some of the disadvantages for personal customers include the following:

• Security Concerns: Open banking requires sharing financial data with third-party providers, which may raise concerns about data privacy and security. Although regulatory bodies have set stringent security measures, the risk of data breaches and cyberattacks cannot be entirely eliminated. Make sure to thoroughly research any third party site before sharing any personal information to keep your information protected and secure.
• Complexity: The increased number of available services and products can lead to confusion for some customers, making it difficult to choose the best options for their financial needs. Navigating multiple platforms and interfaces may also be challenging for those who are not tech-savvy.
• Limited Availability: Open banking is still in its early stages, and not all banks or financial institutions have fully implemented it. As a result, some customers may not have access to the full range of benefits open banking has to offer.

For Businesses: What Are the Pros and Cons of Open Banking?

In the rapidly evolving world of open banking, understanding the advantages and disadvantages for businesses is crucial in order to fully leverage the opportunities it presents and mitigate potential risks. Here are some factors to consider:

Advantages of Open Banking

Open banking also benefits business owners. For example, there are often unwanted credit card fees for merchants that use a card processing service. As a result, this inflates the cost of goods and services for the consumer. However, with open banking, a business will have more options when choosing card payments and can potentially eliminate these fees altogether. Here are some other benefits of open banking for businesses:

• Higher Conversion Rates: In the eCommerce world, open banking has the potential to increase sales significantly. For example, allowing the customer to purchase your product with ease by using a payment gateway that offers multiple transaction types will improve a business’s sales.
• No Chargebacks: Traditionally, a disputed payment can incur a chargeback fee to the business. However, with open banking, this is not the case. Your business will not receive a chargeback with open banking.
• Lower Fees: Open banking gives businesses the upper hand in choosing from an array of competitive services and rates. In turn, there are often lower fees on transactions through account-to-account payments (A2A).

Disadvantages of Open Banking

Though open banking offers numerous advantages for businesses, there are also potential challenges that need to be considered:

• Implementation Costs: Adopting open banking may require businesses to invest in new technology, infrastructure, and personnel to manage and maintain these systems. These initial costs could be a significant hurdle for small businesses or startups, depending on their financial health.
• Reliability: As with any technology, there is a risk of downtime or technical issues that could disrupt the services offered by open banking. Businesses relying on these services may face operational challenges during such instances.
• Regulatory Compliance: Open banking comes with a set of regulations and standards that businesses need to comply with. Ensuring compliance can be time-consuming and may require additional resources, which could be a burden for some businesses.

Maggie Clarke Content Ops Lead

Maggie leads the content operations team at Doddler.co.uk. She is an expert on personal finance, by way of a lifetime of gathering practical knowledge on what to not do with your pocketbook. When not blogging about money, Maggie can be found rambling through the roughest terrains. She considers herself charming yet troublesome and would love to meet you someday, just not today.