What is Open Banking?

Topic: Open Banking (Fri 15th Nov 2019)

What is Open Banking?
Open Banking is a simpler way of transferring money from one account to the other. You transfer money directly to a company's account rather than via a third party of a merchant account. By paying money directly helps save the company save money as it is no longer going through a third party. It is ideal for small to medium business. It gives a business a more in detail understanding of your accounts and helps you make the most of your money. It is a government lead change set up by the Competition and Markets Authority on behalf of the UK Government. Open banking is a secure, online way of transferring money. Application programming interfaces (APIs) allow third parties to access financial information efficiently which then results in the new development of technologies and services.

Why was it developed?
Open banking was developed in order to bring some competition into the card payment industry. Currently, Visa and MasterCard are leading in the industry and by bringing in some competition may encourage other providers to upgrade their current technology and ways. Open banking is a simpler way of banking, it goes from one account to another rather than through a merchant account which can be a complicated process. Going through a merchant account may become expensive for companies as merchant accounts often take a percentage of the profits for processing the transaction. This means open banking can save companies thousands of pounds depending on how many transactions they make/ how large the transactions are.

Why is it useful for businesses and consumers?
Open banking will be useful for customers because it forces the big banks to go into competition with smaller banks, enforcing new technology, lower rates, and improved customer service. It is forcing a new level of transparency which enables customers to get a clearer overview of their finances.
From a Banks perspective, they will be able to use this opportunity in order to spend money where its needed on new technology where it's needed. This will give banks the chance to strengthen their customer relationships by helping customers instead of facilitating transactions.
Open banking can have the ability to save businesses hundreds of thousands of pounds because its direct and doesn’t go through a third party which is where a cut is take.

What is open banking and why should you care?
Did you ever play Monopoly? If you did, then you will know that the game cannot be played without the banker. The banker holds all of the title deeds, facilitates the pay out of dividends, and also receives your taxes and fines. Until January 18th 2018, the world economies worked in a very similar way. It was your bank that held all of the data about how you spend your money, and your financial history. Your bank was the only organisation that had an accurate picture of your economic health. This was an incredibly powerful position for the banks to hold.

Is the evolution of banking really necessary?
Under the old rules, your business was at the mercy of your bank. When it came to liaising with other organisations that you wanted to do business with, your bank held all the cards. Even being able to rent a property, or apply for external funding would rely on a bank reference. This is all very well, as long as the bank provides information accurately and within the time frame you need it.

There are a number of cases going through the courts, where customers claim that their banks mismanaged information, provided incorrect information and even throttled borrowing power. In some cases, it was alleged that commercial bank accounts were managed in such a way that the business was forced to close down.

A significant number of business banking customers had their loans and overdrafts sold on to “Vulture funds” whilst they were still trading. Vulture funds are effectively non regulated debt collectors. Often backed by private equity schemes, these vulture funds would freeze high interest rates and then expect rates to be honoured for the term of the loan, even in cases where a low introductory rate had been offered by the bank. Whilst this kind of behaviour from banks is not normal practice, there are a significant number of businesses claiming foul play. One business banking customer even went as far as hunger strike to save his business and his home.
With multiple business banking cases going through the courts, we can only wait to see how the business owners fare. What we do know is that Open Banking offers a new era in customer choice.

What is Open Banking?
In January of 2018, a new scheme called “open banking” was initiated. The roll out of Open Banking has been the subject of much speculation and even some negative press. In this article we will explain the concept of Open Banking, how it affects your business and what has been said. We will also look at the benefits the new system of banking will bring business owners, and customers.

We have already seen how a businesses bank can make or break your decision to access a financial service or product. By providing a vague bank reference, responding too slowly, or even misrepresenting your financial position, a bank could easily thwart your plans. Open banking provides a technological solution to the problem of a banking monopoly. The new scheme has forced banks to share information they once closely guarded. With your permission, any FCA regulated provider is entitled to see all of the data the bank holds on you. Rather than a singular bank reference, an organisation can now access your account history and financial details via a highly encrypted back door. This back door is known as an API.

An API is a powerful tool which allows a business account holder to negotiate deals, apply for services or financial products, and even plan using third party platforms. Let’s look at an example of how this might work.

Applying for credit under the banking old system
A business owner decides that they need new capital equipment to expand their business. In the past, they would find a supplier, apply for a credit deal, and then await the bank reference. The supplier of the capital equipment would then make a decision on that bank reference. In some cases, the business owner would be forced to print out years worth of statements. The bank would often charge for this. This data would then be manually added to an external finance programme, or even read by a human underwriter. This process could take weeks. Should the bank decide that it is going to provide a poor bank reference, based on its own system of measurement, the deal could be dead in the water before statements were even requested.
As you can see, the old system was unfairly weighted. The whole decision really lay with the bank, regardless of the clients knowledge of their real situation or the lending criteria set by the capital equipment supplier.

How is Open Banking different to the old system?
Looking at the exact same scenario, if the capital equipment supplier has a relationship with a finance company which owns its own API, or even if it were to have developed its own finance product with an API, the bank is now forced to allow access to the business owners entire financial history. The capital equipment supplier, (or its finance partner) can now see everything the bank has stored on the business owner. A bank reference is no longer necessary. With this amount of access the business owner is at liberty to negotiate a finance deal without the banks permission. On the converse, the capital equipment supplier, or it’s financial partner can make their own decision as to whether to lend, rather than being influenced by the banks rating. The whole process is far more transparent and takes the power away from the bank. The power is now squarely with the business owner, and the third party. This is a much more progressive and efficient system. Whereas a bank could take weeks to respond to a financial enquiry, the average API response time over a single month in 2018 was just over 800 milliseconds with no paper production required.

Our example only demonstrates the advantage of open banking in the case of a capital equipment loan. The reality is far broader. With an API, any FCA registered organisation can now design and app, web based platform, or software solution for business owners and their customers.
Other uses for an API include, but are not limited to:
Financial planning apps
Equity plans
Pension plans
Vehicle financing + other capital goods
Business angel services
Delivery and collection services
Online retail platforms
Commercial Auctions
Merchant retail accounting
The only limit to the use of an API is the imagination of the app designer and the commercial awareness of retail, financial and service industry businesses. As businesses become wise to the advantages of API driven services, banks will be forced to become more efficient and competitive. This is a great deal for business owners and their customers.

What is PDS2?
An API is designed exclusively for the UK banking system. The API platform also demands that all of the information supplied by the banks is provided in one uniform standard. PDS2 is very similar to an API in its concept, but is tailored more toward the European financial systems.
Why is open banking important to your business?
Aside from the obvious advantages that we have mentioned, it is possible that your business could benefit financially from open banking. As well as giving you the freedom and choice that you deserve as a business owner, open banking could open a whole new world of possibilities:
• Owning your own API could allow you to reach new markets or demographics.
• Giving your customers the flexibility to pay you via third party apps could save you a lot of money in transaction charges.
• International currency exchanges are more cost effective

Which banks are offering open banking services
The FCA provides access to all of the businesses that are FCA registered. This resource is a handy search tool for any business considering the use of API based apps and services. In order to operate an API, a company must be FCA registered.
In addition to the FCA registration list, you can also cross reference to the Open Banking register. This register contains details of all businesses currently offering API solutions.

Is open banking secure?
With all of the paranoia surrounding data protection and freedom of information, many business owners have concerns about the security of API systems and payment gateways. Any developing technology is subject to much speculation and opinion. There has been some negative press surrounding API and open banking. In its early days, some banks washed their hands of any responsibility should fraud take place while using an open banking system. More recent regulations have seen banks being brought in line on this matter. Maximum liability for a customer using an open banking system with an API integration is now set at £35.00.
Publicity for API has also been somewhat muted. This is not surprising, as a technology product such as API is not really the stuff of marketeers dreams. If we mention the word “Uber” however, then it is likely that you know exactly what we are talking about. Uber is driven by multiple API applications. It is the convenience and novelty that sells the “Uber” open banking system, not the technology driving it.

Is open banking regulated?
In short, yes. The combination of FCA regulations, PDS2 requirements (outside of the UK) and CMA (competitions and market authority) all have regulatory requirements.
Many international economies are now streamlining and solidifying their open banking policies. I tis a safe assumption that open banking is not only here to stay, but will have a huge effect on the digital economies current landscape over the coming years.

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