Can open banking help you manage your money?

New research has found more than half the population don’t know what open banking is. Even among open banking customers: one in two don’t know they already use it for payments.

If you’ve not heard the term before, let us talk you through it.

What is open banking?

Open banking lets you share your bank account data with third parties who offer financial services.

Traditionally, only you and your bank could access this information. With open banking, you can give permission for your bank to share that data with another financial provider.

There are two types of access third parties can be given: the ability to see your financial data, and the ability to take a payment. Providers need a customer’s explicit consent for both.

Letting a company see information about your account can simplify and speed up the process of setting up services with them. For example, instead of having to get copies of bank statements and send them over to another company, with your permission, that company can access the information directly from your bank. This means you have less to do and the company you’re dealing with doesn’t have to spend time checking your bank statements are genuine.

As open banking has gained momentum, a concept known as ‘open finance’ emerged to refer to the money management and payment uses that open banking allows. Experts predict a future where the data-sharing principles of open banking extend to all types of finances, like mortgages, pensions, investments, and savings.

What is it used for?

A range of financial service providers have started using open banking technology. This includes smart budgeting apps that use open banking to collect details of the money you have coming in each month and your bills and saving apps that can help you put money aside for a mortgage or to pay off credit cards.

Open banking is increasingly used for services like loan applications and debt management that may involve extensive background checks.

Lots of people use open banking to pay their bills. More and more bill providers are building open banking software into their apps - letting you connect to your bank account and make fast, secure payments when your bills are due. 

This can be useful if you get a reminder to pay your bill while you’re out and about, for example, as you can pay directly from your provider’s app with just one click. Quickly sorted and means you avoid late payment fees.

Open banking has played a huge role in the popularity of buy-now-pay-later (BNPL) services. By accessing customer’s financial data, BNPL providers can make faster credit assessments and more accurate credit decisions. This makes it easier for consumers to access credit and allows merchants to offer more flexible payment options.

Using open banking for BNPL also lets you make faster payments. If you authorise the provider to connect to your banking apps, you can make a one-click payment instead of having to input your bank details manually.

Is it safe?

A financial service provider has to ask for your consent to access your bank data. It’s similar to privacy permissions on your phone that allow an app to use your camera or location data.

Open banking uses security software to make sure your bank data is only being shared between your bank and the financial provider you gave permission to access your details.

On top of this, only websites and apps owned by firms regulated by the financial conduct authority (FCA) can enrol in open banking.

In Europe, open banking technology is regulated by the revised payment services directive (PSD2) legislation, which makes sure payment transactions and consumer data are protected.

Staying diligent

Open banking is highly secure. But when it comes to your money, it’s important to take the necessary measures to protect yourself again fraud.

If you have cause for concern about a company, you can check whether it’s authorised on the FCA Register or the Open Banking Directory.

If a payment has been taken out of your account without your consent, ask your bank for a refund. It’s their job to refund you for fraudulent activity as long as you haven’t been ‘grossly negligent’.

What data can third parties see?

Whether or not a provider can take a payment is up to you. If you’ve only permitted them to view your information, a third party may be able to access your:

• account information: name, addresses, account number, IBAN

• transactions: information about deposits, withdrawals and transfers
• balances: current and available
• regular payments: standing orders and direct debits

If you have allowed a provider to take a payment, that doesn’t automatically give them the right to also see your account data. That’s a separate permission you need to specifically give.

The case for financial inclusion

With the spread of open banking, there have been calls for open finance initiatives to focus more on helping people who are financially squeezed.

It’s claimed more efforts are needed to meet the needs of vulnerable consumers who have been poorly served or ignored by financial services markets in the past.

But advocates of open banking say it drives financial inclusion by improving people’s access not just to bank accounts, but to other financial services that help them manage their money more efficiently.

But is this true?

The 2022 global index of online banking looked at more than 50 places around the world that have adopted open banking. It found that data-sharing simplifies application processes and makes it easier to access affordable credit. The report says this creates a fairer and less time-consuming system.  

On top of this, open banking can be used to compare products and prices, like insurance and mortgages, which could help consumers make better and more affordable decisions. 

In the UK, open banking has only been around since 2018. It’s likely to take many years to gather conclusive data on whether it’s making a real difference to people’s lives.