Not much changes in banking in the UK. Sure, there are occasional new ideas – ATMs; apps; contactless payments – but decade after decade the fundamentals remain the same. Over 80 per cent of us bank with Barclays, HSBC, Lloyds, Santander or Royal Bank of Scotland. We find our bank as a teenager and stick with it for life.
Now that could be about to change, thanks to a new directive called Open Banking, which comes into force on 13 January 2018. This is the start of a programme designed to open up banking data. It might not sound like much, but it could transform the way we move and use money.
Like any large initiative, Open Banking has had its problems. (For more on its complex politics, read our deep dive on the history of the project.) Perhaps as a result, it’s been less than energetically marketed – a recent survey from consumer group Which? found that 92 per cent of respondents hadn’t even heard of it. Other polls suggest people find the idea of data sharing scary.
Imran Gulamhuseinwala, head of Open Banking Limited, the non-profit coordinating the system, admits that “it's going to take a while for us to see really new, very different services.” But, he says, once the system’s up and running, “it's going to be revolutionary.” Many across the industry agree.
So what does Open Banking – or PSD2 (Second Payment Services Directive), as it’s sometimes known – mean in everyday terms? To clear things up, here's WIRED's guide to Open Banking.
What is Open Banking exactly?
Open Banking forces the UK’s nine biggest banks – HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide – to release their data in a secure, standardised form, so that it can be shared more easily between authorised organisations online.
This data includes some simple records, such as the location of branches and the exact details of certain banking products. This first part of Open Banking went live in March 2017. It should make it easier to find banks with disabled access, for instance, or compare the features of different personal and business accounts in order to get the best deal.
The more important release concerns the data contained in transactions. Banks hold the authoritative record of everything we spend, lend and borrow – everything from electricity bills to mortgage payments to weekly spend on train travel and coffee – but, for the most part, they don’t make much use of it.
Open Banking makes it possible to pass this rich information to third parties, who can use it to create new products (more on this later). It’s not an app or a service in its own right. It’s a way of facilitating data sharing.
Who does the sharing? The account holder, who must give their explicit approval to any exchange. (Or, alternatively, decide not to use it at all.) As Gulamhuseinwala puts it: “we're giving consumers control over their data.”
Open Banking / PSD2 Summary
- When does the new regulation start?
- January 13, 2018. Updates will follow over the next two years
- Who will enforce it in the UK?
- The system is being set up by Open Banking Limited, a non-profit created specially for the task. However, enforcement rests with the Competition & Markets Authority. Protection for consumers will be done by the banks (for payments) or the Information Commissioner's Office (for data)
- What's new?
- Short term, the system should make it easier to view your finances, take out loans and other financial products, and pay for things online. In the long term it could introduce an entirely new relationship to banking – but that future is probably some way off
- What could go wrong?
- In technical terms, the system is at least as secure as existing services. But it hasn’t been very well communicated to the public, so people could be put off by scare stories. This will benefit the incumbent banks
Why is Open Banking being introduced?
Banking in the UK has some big problems. Gulamhuseinwala lists them off: “People are paying too much for their overdrafts; money is sat in current accounts not earning interest; there's not enough switching.”
After years failing to change this situation, the Competition and Markets Authority brought in Open Banking with the intention of increasing competition and innovation in the market. It comes along with several more immediate measures, such as a cap on overdraft charges (albeit one set by the banks themselves), but is by far the most radical measure being introduced.
Open Banking also part of a sweeping piece of European legislation known as the second Payment Services Directive, or PSD2. Sometimes the two get confused: essentially, Open Banking is the UK version of PSD2. The difference is that whereas PSD2 requires banks to open up their data to third parties, Open Banking dictates that they do so in a standard format.
This makes it much easier to use, so it should help startups (or the technology divisions of banks) create innovative new products. The exact nature of these products is actually a bit of a mystery – when Google put out its maps data, who could have foreseen Uber? But at this stage it’s possible to see three distinct trends.
1. Money management
At the moment, if you’ve got accounts with two different banks, then you have to look at them separately, because the banks’ systems are resolutely incompatible. Open Banking will let you see them at the same time, which should make it easier to manage money.
Banks and startups see an opportunity and are already building apps, usually dashboards where you get a view of your ingoings and outgoings. Dutch bank ING has an app called Yolt. HSBC has sent out its “HSBC Beta” app, built by a startup called Bud, to 10,000 customers.
When you take out a loan, you have to show details of your finances to prove you’re good for it. Open Banking will let you provide that information online – for instance, by giving an investor one-off access to 12 months income and spending history.
There are services that already do this, but in order to use them you have to hand over your login details – this method will be more secure. It will also be more accurate, which should help people with what are known as “thin files”. (For instance if you haven’t worked or been in the country long.)
Like many of the changes brought about by Open Banking, this kind of data transfer should help small businesses (SMEs). Innovation foundation Nesta has been holding a challenge prize for startups to develop new tools specifically for SMEs. One of the winning products – from loan comparison startup Funding Options – lets SMEs share bank account data digitally.
"A perennial absurdity is that SMEs end up scanning their paper bank statements, only for the data to be manually re-entered into the underwriting systems of modern online lenders," says founder Conrad Ford.
The current payment system is very complicated. At present, when you buy your nephew a Minions doll on Amazon, the retailer contacts an “acquirer”’, such as WorldPay or Global Payments, which gets in touch with Visa or MasterCard to take the payment from your account. Cue much fumbling around with cards and passwords.
By opening up banks’ data, Open Banking makes it possible to pay directly from a bank account – which should be both quicker and (since the various middlemen each charge for their service) cheaper. The bank authenticates the purchase without involving other organisations.
Is it safe?
From a technical point of view, Open Banking is at least as safe as online banking. APIs – the technology used to move the data – are trusted and the law requires account providers to use strong customer authentication, a procedure which allows the payment service provider to verify the identity of both the user and the service.
Only startups that have been approved by the Financial Services Authority (FSA) will be allowed to use the system. However, just like online banking, increased movement of data does offer opportunities for scammers, who might try and trick people into sending over their data.
The key thing to remember: anyone using an Open Banking service will not need to share their banking login or password with anyone but the bank. This is actually an improvement on existing services, which sometimes require this as a workaround for existing incompatibility.
If something does go wrong with a payment, your bank should be able to help you get a refund. If someone misuses your data, then the case is subject to data protection laws and you will be able to complain to the Information Commissioner’s Office.
What’s the big deal?
If you’ve got this far and you’re wondering why Open Banking is such a big deal, that’s not surprising. Like the internet itself, its benefits aren’t immediately obvious – if someone told you about a bookseller with no shops, it would be hard to picture Amazon.
The iteration of Open Banking that arrives on 13 January 2018 isn’t likely to bring that future into being. The limited initial scope only includes current account data, with credit cards and other payment accounts added slowly over the next two years. There are also likely to be difficulties with integration. “I think initially it will be pretty clunky and pretty slow and hard to use and kind of broken unfortunately,” says Tom Blomfield, founder of challenger bank Monzo. “It will not be this great epiphany.”
Nevertheless, the system has the potential to upend the way we bank, disrupting the sector in the same way as media or retail. It could, for instance, enable digital-only banks that manage money automatically via intelligent software. Whether this is a dystopian or utopian future depends on your perspective – either way, it just became more likely.