In September 2017, the Financial Conduct Authority finalised the requirements to implement open banking.
Designed to create more competition within the financial services sector by making it easier for consumers to manage their money across different institutions, open banking will be a huge shake up to the traditionally closed market.
A report published by the CMA (Competition and Markets Authority) in August 2016 found that larger, older banks do not have to compete very hard for customer’s business. Consumers are therefore restricted on what services are available to them and paying more for banking than they should. In addition, smaller, newer banks are finding it difficult to enter the market, depriving consumers of choice and driving up costs.
Open banking comes into force in January 2018 as part of the second European Payment Services Directive (PSD2) and requires banks to give data access to other financial institutions and third parties. Open banking will enable consumers to securely share their data with other banks, allowing them to spend, save, borrow and invest their money across different institutions.
Banks, third party developers and other financial institutions will be required to create API’s (Application Programme Interfaces), software which allows secure data sharing across different companies. This provides an opportunity to link their services together with other institutions, creating a banking experience tailored to individual customer’s needs. This will also give consumers access to more varied services and better rates.
Open banking and PSD2 will give consumers complete control of their banking data, who gets access to it and what they can do with it.
PSD2 includes several regulatory technical standards with an emphasis on strong customer authentication, including two-factor authentication. PSD2 also suggests that companies must pay extra attention to risk factors including location, transaction history and spending patterns, which should be considered in authorisation decisions.
Large banks will need to review their outdated procedures to ensure they comply with the new regulations, and guarantee that they provide the best possible service to their customers. The new open banking will create a more open market, allowing newer, smaller banks to snap at the heels of the banking giants.