How open banking has facilitated data-driven business models

What is open banking?

Open banking is a framework allowing customers to share access to their bank accounts and data with trusted third-party providers.

Historically, the relationship between bank and customer was private, with the bank controlling customer data. “Screen scraping” offered customers a workaround to aggregate their financial data by sharing bank log-in details with unregulated third parties, but was plagued by security concerns.

Under open banking, customers gain control of their banking data and can choose to share it securely with regulated third parties; importantly, banks are legally required to permit and facilitate this. Open banking has unlocked opportunities for innovative business models in the financial sector, enabling customers to access more and better products and services. 

In Europe, the legislation underpinning open banking is the second EU Payment Services Directive (PSD2), also implemented in the UK pre-Brexit. Separately, the UK Competition and Markets Authority (CMA) has been instrumental in driving the UK’s open banking initiative, seen as key in promoting competition and innovation in retail banking.

Account information services

PSD2 created two new regulated payment services: 

• account information services (AIS), where the customer gives a third-party provider (TPP) access to information on their payment accounts held at account servicing payment service providers (ASPSPs); and 
• payment initiation services (PIS), allowing customers to make payments to third parties via a TPP, as an alternative to paying online with a credit or debit card.

Firms undertaking these services must be regulated or registered with their local financial regulator. 

The PSD2 framework has enabled the growth of new business models, including those making use of customer data shared via AIS. 

AIS providers

AIS is generally provided by three categories of market players: 

• Traditional payment service providers.
• Fintechs and other technology companies.
• Marketplaces and other businesses looking to enrich their offering and add value to their core services. 

Financial dashboards

AIS facilitates a popular financial management tool: online dashboards which provide a consolidated view of a customer's finances across their accounts and/or banks. 

This service allows customers to manage their finances without having to log in to separate online banking portals and record the data manually. Dashboards can make it easier to manage accounts at multiple banks, promoting competition in the retail banking sector. 

Dashboards offer numerous money management tools, including: 

• Viewing total balance across all accounts.
• Alerts for low balances and bills.
• Other budgeting tools, such as categorising spending and setting savings goals.

Some services use transactional data to suggest subscriptions customers could cancel, flag bills which would be cheaper with alternative providers, and offer discounts and vouchers for businesses where customers shop frequently. 

Loan eligibility

Another use case for AIS is to support creditors assessing the loan eligibility of new borrowers. 

The AIS model gives the option to a customer to share their account and payment transaction data – such as income and expenditure – with a third party, such as a prospective creditor or lender (or someone acting on their behalf). This simplifies the information-sharing process for the customer and benefits the prospective creditor, as they obtain information directly from the bank, and in an easy-to-use digital format.

Accountancy services

A third use case for AIS is in accounting, bookkeeping and banking management solutions. AIS allows businesses to aggregate data on a customer using the information from their bank accounts. Tech companies have developed solutions such as operating systems and algorithms allowing utilisation of the data, for example to create management accounts. 

Open finance

In the EU and UK, open banking only applies to payment accounts (typically, current accounts), which represent a small subset of financial products a customer might hold, such as insurance, investments and mortgages. 

The success of open banking is prompting authorities to consider broadening the initiative to other parts of the financial sector, such as the forthcoming UK Pensions Dashboard. This would create more opportunities for data-driven business models, as customers could share more data across more financial products.

UK progress

Regulators are working on how best to bring about open finance. The UK Financial Conduct Authority (FCA) concluded that “[o]pen finance has the potential to […] help unlock the value of data across the economy”. 

Authorities are also working on initiatives for sharing customer data beyond the financial sector. The UK government calls this “smart data”, or “the secure and consented sharing of customer data with authorised third-party providers”. 

In future, customers may benefit from services driven by secure data sharing, such as automatic switching between providers and better management of bills across sectors like energy and communications. This is expected to promote innovative services, stronger competition and improved customer outcomes.

Challenges

The FCA believes open finance “would create or increase risks and raise new questions of data ethics”, for example relating to data bias and use of machine learning. These questions would need to be considered as part of system design and risks managed with appropriate regulation. Customers would need to be confident their data is used ethically and in line with their expectations. 

It remains to be seen whether participation in future open finance initiatives will be mandated. Legislative compulsion, requiring ASPSPs to facilitate data sharing under PSD2 rules, has been key to the success of open banking, and could be crucial to ensuring open finance is taken up by enough of the market to be useful to customers. This would impose costs on smaller firms with fewer resources, but would benefit businesses seeking to capitalise on the unlocked data. 

Paul Anning is head of international payments, Karima Lachgar is a banking and finance partner and Seirian Thomas is a senior knowledge lawyer at international law firm Osborne Clarke.