UK pioneers Open Banking: easier credit, no charges on plastic
13 January 2018
The UK is making fundamental changes in its banking laws with Open Banking, which will change the way people can bank, manage and spend their money in the digital world, and could potentially make it path-breaker in the sector.
A change in the law and the start of the Open Banking system means people can allow businesses other than their bank to access their financial data.
Under the scheme, nine of the biggest lenders operating in the UK - Lloyds, RBS, Barclays, HSBC, Santander, Danske, Allied Irish Bank, the Bank of Ireland and the Nationwide Building Society - must open the information they hold on the transactions history of their customer, should that customer give their permission.
That information is then made available to third parties who have signed up to the Open Banking register set up by the Financial Conduct Authority (FCA).
These third parties, which include other challenger banks and financial technology or 'fintech' companies as well as utilities and other businesses, will, assuming the customer has given their approval, be able to securely access that customer's account and analyse their finances in order to offer them new products and services that have been tailored to their needs.
Organisers say this has the potential for consumers to get better deals, such as cheaper overdrafts, and to speed up the switching process.
An example of how this might work in practice could be a supermarket developing an app that enables a shopper to se e their bank balance and receive offers on groceries and other goods as they wander around the store.
The bank can only block access if it suspects fraud or unauthorised access.
As part of the same legislation, surcharges for payments made by credit card, debit card, or other payment systems such as PayPal will be banned. The UK's Open Banking system is mandated to ensure that such access is given by the UK's nine biggest current account providers in a secure way, and without the need for customers to reveal their online banking login details or passwords.
The main idea is that individuals can allow apps and online services to analyse their spending and find better deals on everything from loans and mortgages to shopping and broadband. Customers can give, and withdraw, permission at any time.
Imran Gulamhuseinwala, trustee of the organisation overseeing Open Banking, said, "It is difficult to overstate just how revolutionary open banking could, and should, be. New products will emerge from incumbents and entirely new entrants will join the market."
The Competition and Markets Authority (CMA) told the UK's nine biggest current account providers to be ready to start Open Banking by 13 January. However, only four - Allied Irish Bank, Danske, Lloyds Banking Group and Nationwide Building Society - will be fully ready to begin.
A maximum of six extra weeks of preparation time has been given to Barclays, Bank of Ireland, RBS and HSBC by the CMA. Santander-owned Cater Allen, which offers business accounts, has been given an extra year.
Only firms which are regulated and registered on a directory will be allowed to take part in Open Banking.
Fears of fraud
However, NatWest, one of the banks ordered to be ready for the new system, has warned that fraudsters could mimic these firms to trick people into giving them access to their accounts.
Such a fraud could leave consumers at risk of losing their money.
New financial service providers are also expected to be targeted by hackers, although they must prove their robustness to regulators.
The changes surrounding access to financial data have been introduced as the European Union's second payment services directive comes into force in the UK.
No more 'plastic' costs
The same legislation will bring an end to the extra cost added on at the end of the process of buying something online, such as a flight ticket, when using a credit or debit card, or being hit with a surcharge when using a card in a small shop.
The Treasury estimates that surcharging cost British consumers a collective £166 million in 2015.
The legislation also means bank and building society customers will have the right to a free monthly paper bank statement.
Open Banking has its origins in an investigation two years ago by the Competition and Markets Authority (CMA) into the retail banking sector.
It concluded that there is insufficient competition in the sector, with smaller and newer banks struggling to grow or attract customers, resulting in too many customers paying more than they should do for banking services and not benefiting from new services.
The FCA, the UK's financial regulator, hopes Open Banking will drive competition, bring down costs and lead to innovation in banking services.
It comes in alongside the Second Payment Services Directive (PSD2) from the European Commission, which rolls out the new data-sharing rules across the EU, although some countries, such as the Netherlands, have not yet made it law.
So Britain is effectively acting as the pioneer and the thinking is that, as it is going first, Britain can set the standard elsewhere.
Singapore, Japan and Australia, as well as the rest of the EU, are all in various stages of following Britain's lead, with Hong Kong also expected to follow.