'Open Banking' for Noobs: A Primer

My intention with this primer is to give you just enough information to inspire appreciation for Open Banking as an initiative that is changing our financial landscape.

This primer will show you the immediate application of Open Banking in your everyday life, and also encourage you to think of other use cases for it.

Key Terms

Here are some key terms you’ll need to understand Open Banking:

• Core Infrastructure: The core systems of a bank which hold information about its customers, e.g. bank balance, personal information, and transaction history. It is this core infrastructure that Third-Party Providers interact with in order to provide open-banking products and services.

  
  

• Third-Party Provider: Any external party outside the host bank which is accessing the bank’s core infrastructure in order to use the information accessed to provide open-banking products and services.

  
  

• API: Software intermediaries that dictate how two pieces of software can communicate or interact with each other. In Open Banking, the API dictates how the Third-Party Provider’s software interacts with the bank’s core infrastructure

What is Open Banking?

Open Banking is an initiative which has led to the enablement of Third-Party Providers, with the prior consent of the customer/account holder, to interact with the customer’s financial information which is being held in the bank’s core infrastructure.

These interactions enable the creation of new financial offerings and services, which enhance the financial experience of the account holders. Third-Party Providers are able to access the bank’s core infrastructure solely through the use of APIs which helps the banks limit the information these providers have access to.

Up until a few years ago, banks’ core infrastructure was locked away from external access, so what brought about this shift towards a more collaborative, “open” system? The intention of Open Banking is to bring about more competition and innovation to the financial services industry, with the ultimate goal of enriching the financial experience of the consumers.

“Open Banking was designed to increase innovation and competition in banking and payment services.[…] It introduced a secure environment that enables customers to consent to third parties accessing their payment account information or making payments on their behalf”

Source: The UK Financial Conduct Authority’s “Open finance - feedback statement”

How is this useful to me?:

Source: https://www.moneydashboard.com/

The immediate benefits of Open Banking can be evidenced by its application to bank accounts.

The proliferation of easy-to-set-up digital banks and financial apps means that these days people can easily have multiple financial accounts. Let’s say you’ve got 3 different accounts: your daily spending account, your secondary one (which could be used to receive and sort your salary), and your credit card.

This could easily go up in number if you have other savings or investment accounts. Ideally, you would want to be able to manage them all without having to log onto their various apps.

You want one app that would have access to these accounts and would be able to present this information to you at once. The benefit of this would be especially visible in areas of personal finance management e.g. budgeting. This compilation of your various financial information in one place is called Account Aggregation and is a type of Account Information Service in Open Banking. A good example of this is Money Dashboard in the UK.

Account aggregating apps can also go a step further from just showing you information to enabling you to make payments from within the app. Imagine you wanted to move some of your salary from your salary account to your primary spending account, make a payment from your primary account to a friend and also send some money to your investment account.

Instead of having to log onto the various apps to make these transfers, you would be able to carry them out in the account aggregator app. This capability falls under Payment Initiation Services, which is not limited to just transferring funds between bank accounts; but is applicable wherever a payment can be made. E.g. Businesses can utilize Open Banking APIs to enable their businesses to receive payments directly from a customer’s bank, eliminating the need to input card details.

Additional Use cases

Since there exists the opportunity for innovation wherever any financial activity is taking place, an exhaustive list of use cases for Open Banking does not exist, neither would it be helpful.

The fact that Open Banking is predicated on the interaction between a third-party and the financial information being accessed means that the limit of its use cases would be the extent of innovation that the third-party can bring.

That being said, an additional use case that is gaining popularity is Variable Recurring Payments (VRPs). VRPs are a way of using Open Banking APIs to make recurring payments straight from a bank account. VRPs replace the need to have card information on file, and you would be able to set rules regarding variables such as how often, how much, and for how long money can be taken from your account.

On-boarding and KYC diligence is also made much faster and easier with Open Banking. For any onboarding procedures that would require some sort of financial verification (e.g. applying for a loan), Open Banking APIs would enable this information to be accessed directly.

This is especially useful in situations where you would need to verify information such as financial income and proof of address. Imagine all the time saved that would have been spent inputting most of this information manually or waiting for a bank statement in order to verify an address.

Conclusion

While it may take a few years for us to experience the full extent of Open Banking’s development and innovation, we can already acknowledge that it will change the legacy systems that have lagged behind the new age we live in. Data and technology are playing a greater hand in improving the financial industry and we can see that this leads to new business models and products and services, creating innovative ways for consumers to interact with their finances.