Open Banking: Customer-centred financial services?
Updated: Aug 31
Khadra Mohamed explores the merits of Open Banking including its transformation of financial services, paving the way for the removal of barriers for previously excluded customers.
Open Banking helps consumers opt in and enable third-party providers to be able to access and view their financial data to improve services. At its most fundamental level, it's the process of using APIs (Application Programming Interfaces) to open up consumers’ financial data to third parties. Via APIs, fintech companies will be able to access information on different types of accounts, insurance, card accounts and leases, and consolidate data from multiple countries into one overall picture.
Open banking in the UK is regulated through the Payment Services Regulations 2017. Through Open Banking, banks share your financial data which can include regular payments, savings statements with authorised financial service providers such as CreditKudos. Credit Kudos specifically holistically considers what you can afford, current financial commitments and does not penalise you for typical risk factors such as whether you have not taken out credit before or your age. This provides banks and lenders with a more accurate profile of a consumers’ financial stability.
The rise of Open Banking
The popularity of Open Banking continues to increase with an estimated 3 million users within the UK, roughly 4% of the population which is a significant portion. Furthermore, throughout the pandemic, consumers have been found to be less likely to use cash, ultimately resulting in the continuous use of open banking as users of Open Banking in the UK doubled between April and September. Therefore it is no surprise that traditional banks and fintech companies are looking to utilize Open Banking within their services. Regulation has been the catalyst behind the proliferation of Open Banking. In 2018, an Open Banking directive was implemented which required the UK’s largest banks to release data through standardised Open APIs. This enabled Banks to seamlessly integrate FinTech apps and services into their existing infrastructure providing customers with an improved customer experience.
How can Open Banking help customers?
Open Banking enables customers to make informed choices which can result in increased savings and a reduction in losses. For instance, an individual who is paying high overdraft fees could authorise a comparison app to analyse their account in the hopes of finding a low overdraft fee which could result in a switch enabling greater efficiency in handling their accounts. With consent and the ability to switch between different providers, this enables customers to gain greater clarity and control regarding their finances. Rather than sticking with your bank’s overdraft fees, customers can essentially control their finances with a greater piece of mind. Open banking through greater information sharing and algorithms ensures the management of consumers’ finances is tailored to their needs.
Customer experience is at the heart of Open Banking, which is evident in the number of challenger banks focusing on refining the user experience customers face. In June 2020, Revolut introduced its “Super App” which sought to enable users within the app to manage their finances even across different banks. This provided customers with a cohesive service as it enabled them to manage multiple areas of their finances, on top of the additional Open Banking integration. This perfectly exemplifies how Open Banking has provided challenger banks with key tools in the ongoing competition against traditional banks while forcing financial services to rethink the customer experience.
Open Banking is being praised for its ability to enable excluded groups to be approved for loans and credit decisions.
Common examples of Open Banking
Ever paid for an uber through the app? It was a form of embedded finance - a form of Open Banking that will likely become more common across financial services such as lending and investing. It is the expansion of non-financial services, providing financial products within their own applications via APIs, enabling greater user engagement. Furthermore, transferring money to your friends could not have been simpler - Rather than using your banking app, Open banking enables payments to be made directly rather than the payment undergoing a complex process via a bank’s BACS.
Like everyone else, many of us often find it tedious and time-consuming to fill in our credit-card details every time we make a purchase online. With Open Banking, online shoppers have the luxury of paying straight from their bank, enabling e-commerce businesses to reduce their financial burden as processing fees for refunds, credit and debit cards can be costly. TrueLayer, a London startup that offers a developer-friendly platform for companies to utilise open banking, has raised $70 million from investors such as Temasek, Northzone, Mouro Capital, Anthemis Group, etc.
The Limits of Open Banking
While Open Banking has resulted in a transformation of financial services, doubts remain on it being fully utilized by consumers. Being heavily reliant on online customers and considering the digital divide, some consumers may be excluded and left behind in the race for the digitalisation of finances.
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