Open Banking: What is it and how does it work?

Open Banking has changed the way businesses and individuals in the UK use and grow their money. Fast, efficient and more innovative than traditional financial systems, Open Banking gives customers complete control. But what exactly is Open Banking, how does it work and how can it benefit you? Read on to find out everything you need to know about this financial revolution..

What is Open Banking?

Open Banking already exists in the UK since 2018. It authorizes leading banks to let you share your financial data electronically with other third-party financial providers. Your permission gives these entities ‘read only’ access to your banking data, such as transactions, payments, and available balance, allowing you to obtain financial services and make transactions without needing to visit your bank. With Open Banking, you don’t have to fill out long forms to provide data that third-party apps or websites need. Once you give permission through your bank’s mobile or online banking, these services can access the necessary information directly.

Example of open banking

Open banking is used by thousands of businesses and millions of individuals in the UK every day and for hundreds of different uses. The following are four examples of implementing Open Banking:

Business and personal financial management has been positively transformed by Open Banking. Data aggregation allows companies to access and combine customer bank account data, such as savings balances, to provide personalized money management support and actionable insights.
Proof of income is essential for many personal and business transactions, incl loan or rent residential or commercial property. Open banking changes that with instant income verification—no pay stubs, bank statements, or tax returns required.
Affordability check important for lenders in both consumer and business loans. However, assessing a borrower’s true financial position can be challenging due to limited financial data. Open banking allows lenders to analyze financial records for up to two years to achieve an accurate affordability profile.
Online payment eliminating the need for paper documents. However, in the business world, paper invoices are still very common, and this is the main reason why so many small businesses struggle with this problem. late payment. Open banking can eliminate time lag when incorporated into a business’s receivables and payments flow. Automatic bank-to-bank payments are triggered on an agreed schedule, resulting in a fast and seamless experience.

How does Open Banking work?

Firstly, no person or business has to use Open Banking. That is your choice. You should be opting in to Open Banking, not opting out. Second, any third-party financial provider must ask for your consent to access your data when you sign up for their service. Third, your bank may only share some of the data you want – such as available balance but not recent transactions. You can also revoke your permission from any provider at any time, and they must renew your permission every 90 days. If you do not renew it, access to your data will automatically expire.

As for technology, without any technical hassle, banks share your information securely through technology called Application Programming Interfaces (APIs). APIs act as technology translators, allowing systems and platforms from different providers to ‘talk’ to each other in the same language and seamlessly convey the information you have agreed to share. You’ve almost certainly experienced this kind of technology before on popular platforms or apps like Google, Uber or Deliveroo. For example, Deliveroo might use the Google Maps API so it can know where you are and where its delivery drivers are to let you know when your takeaway will arrive.

How is Open Banking different from traditional banking?

There are significant differences between Open Banking and traditional banking:

	Open Banking	Traditional banking
Data ownership	Users have control over their own data	Banks have control over their customers’ data
Data sharing	Permitted between authorized third parties	Data is usually not shared
Supported services	Personalized financial services	General financial services
Innovation	Drive innovation and advanced services	Often limited by the need to adhere to established processes
Collaboration	Encourage collaboration between service providers	There is almost no collaboration
Competition	Encouraging competition that can improve services	High barriers to entry hinder competition
Service speed	Very fast	Usually slower – for example, bank to bank transfers can take days instead of seconds
Regulation	Set to safeguard data sharing	Comply with customary regulations

How is Open Banking regulated?

The rules regarding Open Banking are strict and designed to protect customer privacy and financial data. These rules have been in effect throughout Europe since 2007. In the UK, Open Banking is regulated by the Financial Conduct Authority (FCA). Only companies authorized by the FCA can use Open Banking technology (API) to access financial information or make payments on behalf of customers. Penalties for misuse of Open Banking systems and data can be severe.

Is Open Banking safe?

Yes. As long as they are authorized, providers can only access the data necessary for the services you signed up for. For example, if you are an SME looking for a business loan and you have asked the comparison marketplace to look at your business checking account, the marketplace also cannot look at the commercial mortgage you have at the same bank unless you provide your loan. express permission.

In addition, all third-party financial providers must comply with data protection rules. This includes GDPR. The provider must tell you exactly which data will be used, for how long, and what it will do before you sign up. If you’re unsure about anything, make sure you ask the data provider what they want and what they’re using it for before you grant access. If something goes wrong, don’t share your data with that provider.

Benefits of Open Banking:

Open Banking has huge benefits for businesses and consumers:

Benefits of Open Banking for business

Allows businesses to access their customers’ financial data (with their consent), enabling them to offer better, more personalized products and services.
Enables businesses to automate and simplify their financial processes, such as accounting and compliance. This saves time and saves costs, thereby increasing efficiency and productivity.
Helping businesses tap into new sources of financing, which can increase their revenue.
Helps businesses detect and prevent fraud. This improves customer experience.
Can help organizations close more sales (especially online and consumer-facing businesses, where slow checkout systems often cause customers to leave unpurchased items in their carts).

Benefits of Open Banking for consumers

Enables customers to share their financial data with third party providers. This allows access to more tailored products and services compared to traditional banking
Enables instant payments without requiring a credit or debit card
Helping customers save money on loans and mortgages – providing instant comparisons
Increasing financial inclusion by providing access to financial services to underserved communities
Helps prevent financial fraud by giving customers more control over their data and who can access it

Open banking challenges:

Not everything is perfect in the world of Open Banking. Still a relatively new innovation, Open Banking has yet to address the following important weaknesses:

Security fears: By design, Open Banking gives third-party financial service providers access to confidential customer data. As a result, many business and personal customers remain concerned about security breaches that could occur due to increased sharing. This is mainly due to customers’ lack of understanding of how Open Banking works, but this has created concerns among customers that are difficult to dispel.

This eliminates interpersonal relationships with customers: As everything is handled digitally, the old-style face-to-face meetings between customers and their banks are diminishing. This can lead to damaged relationships and brand loyalty between customers and service providers, and it also provides banks with an excuse to close thousands of branches across the UK, which could disproportionately impact older and less technically savvy customers.

Find out more with Swoop

Open Banking can give businesses instant access to a wide range of financial services and products – loans, mortgages, investments, leasing and more. Swoop is at the forefront of this new financial freedom. Our mission is to provide UK SMEs with the best and most cost-effective financing options when they need them and with the least hassle. Contact us today to find out how your business can benefit from the biggest change in business financing since money was invented.

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