What is open banking, and what could it mean for Britain’s Financial Wellness?

Clemency Hitchings 11 January 2017

Open banking is the latest buzzword in the world of personal finance, and whether you know what means or not, it’s probably going to change the way you save, invest and manage your money forever. Simply put, open banking is a directive forcing banks to make individual’s banking data available (with permission of the account holder) to third-party services, which will mean that you’ll be able to view and manage your money through any website or application that you choose.

In 2015, an EU-wide law called ‘PSD2’ was passed, which stands for Payment Services Directive. PSD2 is the second version of the law that’s forcing the banks to open up access to their payment facilities and information, so that customers can access and share more data with third-party services and manage their money through services other than their bank.

See and manage all your finances in one place

Once banks open up access to their data, you’ll be able to see all your accounts, investments, mortgages and pensions in one website or application, known as an ‘AISP’, or Account Information Service Provider. AISPs will have either read-only access to your information, or write access. Using an AISP with write-access, you’ll be able to move your money around and pay bills and other payees.

At the moment, if you use a third-party service to see your bank balance and transactions, they have to use what’s known as a ‘screen scraper’ to access your data. A screen scraper is a bot that goes to your bank’s website, logs on using the data you’ve provided, scrapes your data and sends it back to the third-party app or website that you’re using.

Once the data is open, the screen scraper will no longer be needed. The AISP you’re using would just go directly to your bank, your bank would check with you that you’re happy to share your data, then the AISP would be able to access it until you say otherwise.

Manage your money more intelligently

The introduction of AISPs with write-access to your accounts should help you to manage your more more intelligently, as lots of day-to-day management tasks which we undertake to improve our financial wellness will be able to be automated. For example, you could instruct your AISP to move money from your savings to your current account if you’re approaching your overdraft limit, helping you to avoid being charged. AISPs could also help you to save money on your utility bills with an instruction to switch providers to the cheapest every six months. They could even help you to start investing with an automated instruction to move any spare cash at the end of each month into an investment account.

Open data access will also make it easier to compare financial products and find a better fit for you. If you’re looking for a mortgage you’ll be able to share your account information in order to get offers based on your own finances. Providers will also be able to make better and more personalised recommendations for products like current accounts and savings accounts.

Make payments through PISPs

PSD2 will also change the way that we pay bills, buy things online and transfer money to family and friends. At the moment, if you want to pay for something online, you provide the online retailer with your details, then the retailer goes through the customer’s bank, the customer’s card scheme, and their own bank.

Open banking will see the introduction of PISPs, or Payment Initiation Service Providers. A PISP is like a bridge between the customer’s account and the retailer’s account, which could mean that you’re able to pay for things online without even inputting your card details.