Over the past few years, ‘open banking’ is a term that has crept into common parlance.
It has graced the side of taxis and buses and no doubt found its way into many pitch decks of start-ups looking to raise venture funding.
Many of us may have used it without even knowing it, let alone being able to explain how it worked or how it became a potential infrastructure upon which to build the future of our personal financial ecosystems.
In this article we take a brief tour of the origins of open banking in the UK, its evolving use, cases and how it is changing the way we interact with our finances.
What is open banking?
We could fill this entire publication with the many ways open banking can be explained, but at its core, open banking involves granting access to your bank account to a third party using an application programming interface, or API for short.
With your consent, that third party can access the financial information within that account and, in some cases, direct the bank holding the account to make payment transactions.
What is the history of open banking?
The UK has led the way internationally in the development of open banking and is a significant early adopter.
The Open Banking Implementation Entity, an entity charged with implementing central standards and industry guidelines for the development of APIs needed to support open banking, was established in 2016.
In 2017, the UK’s Competition and Markets Authority issued an order requiring the UK’s nine largest banks and building societies to open their current accounts and work to implement common API standards to facilitate that access.
While the CMA’s actions launched open banking, the revised Payment Services Directive, or PSD2 as it is commonly known, acted as a catalyst for its expansion.
PSD2, which was implemented into English law in January 2018 through the Payment Services Regulations (PSRs), provided a legal obligation for all account servicing payment service providers to give regulated third parties access to the online payment accounts they maintain.
Provided certain conditions are met, account servicing payment service providers must grant access where requested and may refuse such access requests only in certain circumstances.
The PSRs also created two new payment services that would cover third-party providers accessing accounts: account information services and payment initiation services.
Account Information Service Providers may access and use information in your bank accounts in various ways, but they cannot provide instructions regarding payment transactions in those accounts.
Accordingly, the regulatory regime imposed on account information service providers is lighter than on other payment institutions.
Payment initiative providers are able to provide a form of software bridge that facilitates push payments between accounts without using a traditional payment instrument such as a debit card.