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What is open banking and how will it affect businesses?

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Written by: Hannah Baker | Posted 05 February 2018 15:08

What is open banking and how will it affect businesses?

Open banking came into force in January 2018 and is set to be one of the biggest shake ups that the UK financial sector has seen in recent years. But what exactly is it, and what does it mean for business?

The Competition and Markets Authority’s new directive will force the country’s nine biggest banks to share customer data – only with permission – with third parties.

The reforms are designed to create more competition within the industry and open up banking data, transforming the way people move and use their money.

The idea behind the initiative is to allow new financial organisations and digital service providers to access consumers’ bank accounts, offering online services and personalised financial products to people.

For example, a company might develop an app that a consumer could use to monitor their spending, or track their account and highlight ways the person can save money.

Open banking is heavily regulated by the Financial Conduct Authority (FCA) and is underpinned by legislation that requires third parties to be regulated and hold insurance to ensure that the customer is fully protected.

“It will bring benefits for businesses and consumers alike,” said Dave Tonge, chief technology officer of financial management technology company Moneyhub.

“These reforms will change the way in which we bank, making interaction with the financial services industry more personalised and responsive.

“It will lead to more competition in the sector within a stronger regulatory framework that ultimately will result in improved products and services for businesses.”

Dave explains that in an “increasingly complicated” financial world, open banking will make it easier for people to streamline their money management and retain control.

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But what does it mean for companies?

“It will make it easy to share financial data with regulated, secure third-party applications that in turn can automate everything from utility switching to invoice payment to identifying where savings can be made then enabling real-time switching to higher interest products,” explained Dave.

“Overtime, it will deliver efficiency and productivity savings while ensuring banks have to prioritise the needs of their customers in their product development.”

One of the biggest benefits for businesses is the time and cost savings.

Dave added: “For example, a business could use Moneyhub to review daily outgoings and have automatic alerts to where they could accrue savings – such as through switching energy provider, business loan, property mortgage or company car provider.

Dave Tonge

Dave Tonge, chief technology office of Moneyhub in Bristol

“Secondly, the business could give access to a third-party app to their customers or employees who, in turn, would benefit from increased financial control. Businesses have found this offers a real opportunity to build loyalty.”

Open banking will also enable designated funding platforms, such as Bristol-based Alternative Business Funding, to fund companies faster, according to Adam Tavener, chairman of ABF.

He explained: “This is because open banking will require the banks to have online connectivity with designated platforms, meaning that an SME can quickly compare all the available banking and alternative finance products in one place and instantly.”

“If the business then decides to proceed with a request for finance all of their relevant credit data will be instantly available to all the funders that they have selected - meaning that they can compare both price and suitability immediately and compare both bank and non-bank finance in the same place.

“This will undoubtedly lead to faster and better-informed decision making by the funders as they will no longer need to rely on outdated information, which can often reside on Companies House.”

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The transparency of information will also be of benefit to businesses, says Adrian Shedden, banking and finance lawyer and FinTech expert at Keystone Law.

He said: “As service providers, new businesses can use banking customer data to provide new finance models to compete with incumbent financial service solutions.”

He points out that companies will be able to offer more efficient and tailored risk modelling to provide a better-priced line of credit to SMEs or consumers, or insights that allow those customers to make more informed business-decisions and link them to more effective financial services solutions. 

He added: “It will also enable SMEs that traditionally struggle with cashflow to get access to those more competitive financial solutions that take the SME’s profile and historic banking data into consideration. 

“It will also enable the provision and access to financial data analysis that was previously expensive and reserved for larger businesses.”

However, there are still a number of challenges surrounding open banking, with financial institutions still struggling to come to terms with the measures.

Adrian said: “This means that the new businesses that are seeking to provide the innovative solutions still don’t have complete access to the data (with the customer’s permission, of course) – the revolution as intended, is still waiting for full implementation by the banks.”

Another issues is that many people still do not know what open banking is or understand the benefits.

In fact, a survey from consumer group Which? found that 92 per cent of respondents hadn’t even heard of the initiative.

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Dave added: “The biggest challenge facing open banking is that people do not understand the benefits of the legislation and ultimately believe sharing financial data is a risk that will lead to fraud.

“While it is a daunting prospect, open banking and PSD2 legislation is underpinned by data security protocols that currently surpass protocols used for direct debits and they will continue to be strengthened over time. Alongside, within open banking, consumers will be asked every three months to opt in to share their data. This means it is more secure than current data protocols.”

Dave’s advice to businesses is to view open banking as an opportunity to gain savings, but says it’s important for firms to do their research.

“As a first step, businesses should research the third party applications being developed specifically for them,” he said. “There are a myriad of apps available to help with every aspect of business finances from invoicing to supplier relationships and expense management. Before going ahead with any app or platform, make sure the company behind it is regulated by the FCA.”

Adrian advises businesses to read up on the initiative and feed back to banks and third-party service providers.

He added: “This will drive the open banking project to ensure that it follows a human-centred design approach where customers’ real-world financial problems are at the heart of any new products, rather than the historic profit-centred design of 1970s to 2000s banking product push.”

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