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What is open banking, and why does it matter?

What is open banking, and why does it matter?

Data is power. The modern digital economy is fuelled by the exchange of data from individuals to third parties.

Whole new monopolies have been fed and watered in the process. Governments have been toppled. Disruptive new technologies have emerged.

What’s in it for us? The data-driven economy was supposed to be a two-way street. Oftentimes, it feels that we receive a pittance in exchange — tailor-made YouTube ads.

Open banking offers something different. The exchange of data enables businesses to access tailor-made services and products that fit their needs.

It was introduced to the UK in 2017. Since then, it has fundamentally rewired and streamlined the way we do business. It’s clearly working too — over 6 million businesses in the UK have already used it and that number is increasing.

But what is it? And why does it matter to UK exporters?

This article at a glance

Open banking is relatively new in the finance industry. It enables third-party service providers to use your financial data to generate new personalised products and services for business. But it’s more than that. This article will explain open banking, its benefits, how it works, and whether it is safe or risky for businesses.

What is open banking?

Open banking is the system that enables businesses to share their bank information, such as their transaction history, payment history and other financial data, with authorised third-party service providers through the use of application programming interfaces (APIs). It also allows businesses to make payments directly from their payment accounts to the bank account of their clients without using a card.

What’s the difference between PSD2 and open banking?

To begin with, we need to understand the difference between PSD2 and open banking.

Payment Services Directive 2 (PSD2) is mandatory European legislation designed to secure banking by implementing multi-factor authentication (MFA) for online transactions. It ensures that banks enable the account holder to consent to third-party service providers accessing their account and payment data.

Under PSD2, it outlines two types of third-party providers that are allowed to use the financial data:

  • Payment Initiation Service Provider — it allows third-party providers to initiate payment directly from the account holder’s payment account with their consent.
  • Account Information Service Provider — third-party providers are allowed to access the account holder’s financial information (with their consent) and provide an overview of their various payment accounts in one place.

Open banking enables businesses to view their financial data in one place while using pre-defined APIs implemented by the nine largest banks in the UK.

The main difference between open banking and PSD2 is that only the nine largest banks can adopt open banking — whereas PSD2 applies to all payment account providers, regardless of their size.

Despite its difference, open banking and PSD2 work together to make digital banking safe and versatile.

How does open banking work?

Open banking enables authorised third-party providers to access your important bank information — your account name and type, currency and transaction history.

If you’re worried about your financial data being compromised, you can rest assured that it’s safe — the data can only be given with your approval.

Suppose you have signed up for a provider’s product. The provider asks if you would like to share your financial data with them to personalise products for your business. Once you have given your consent, they will send a request to your bank, asking them to process and share your details. The good news is that you can withdraw your permission at any time.

3 benefits of open banking for your business

Open banking is an innovative and flexible feature of modern banking. But how does it help in your business? Here are 3 benefits:

Better financial management

With the amount of paperwork you have to handle daily, it can be difficult to keep track of your finances. Open banking helps you view your finances at one glance.

Ease of receiving and making payments

Likewise, open banking allows you to receive and make payments through account-to-account (A2A), which is more cost-effective than typical card payment transactions. It also means you get up-to-date cash flow data, which you can use for your forecast planning or even self-generate new forecasts.

Tailored to your business needs

By providing third-party service providers with your data, they can customise new products and services for your business’s needs based on your company’s transaction history and payment trends.

Are there any risks of open banking for your business?

All new technologies carry risks. Open banking is no different.

It can be vulnerable to risks like identity fraud and data loss. If banks or third-party service providers are not careful, hackers can steal financial information.

However, government agencies and regulatory bodies oversee open banking standards to ensure banks comply with PSD2. Banks risk financial or reputational loss if they fail to uphold those standards.

3 examples of open banking

Since its launch in 2018, some banks have already offered open banking services to businesses. Here are 3 examples of open banking:

Account Aggregation

Businesses commonly have multiple bank accounts for different purposes, but such a sprawling and fragmented system is hard to manage. Open banking has account aggregation, which allows businesses to view their figures from different bank accounts in one place.

Business Accounting

This helps businesses streamline their accounting process through the automation of the collection and categorisation of financial data. It’s cost-effective and significantly frees up your time.

Subscription Management

Businesses may subscribe to products and services that will improve their workflow. But as the business grows, the subscription to products and services will also increase. Similar to account aggregation, subscription management enables companies to view all their subscriptions in one place.

What is open banking in the UK?

The Competition and Markets Authority (CMA) started open banking in the UK after an inquiry into the retail banking sector.

Subsequently, CMA authorised the nine largest banks — Lloyds, Barclays, HSBC, Bank of Ireland, Santander, AIB Group UK, Nationwide Building Society, NatWest Group and Northern Bank — to create Open Banking Implementation Entity (OBIE). This is where the Open Banking Standard was developed.

The Finance Conduct Authority (FCA) is the UK’s open banking regulator. Only FCA-authorised companies can use open banking APIs to access financial information.

How safe is open banking in the UK?

Open banking in the UK is generally safe. But that doesn’t mean you shouldn’t thoroughly research the third-party service providers in question.

With that being said, third-party service providers will only use your data for your requested products or services if you have authorised them.

Besides, third-party providers must comply with data protection laws, including GDPR. They must inform you of what they’ll do with your data, the duration, and the type of data they will use.

Simplify your payment processes with Silverbird

Open banking has revolutionised banking. Gone are the days when you had to make an appointment with your bank manager to discuss the different products suited for your business.

Open banking enables you to understand your business needs better through a personalised product and service created by third-party service providers.

It’s one cost-effective solution among many.

Silverbird streamlines your payment processes, allowing international merchants to seamlessly trade with their international partners with a multi-currency business account tailored to your business needs. Make cross-border payments at the click of a button. Rest easy with Tier-1 security.

Sign up today for a truly free and global trade experience.

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