In layman’s terms, it means data that banks hold on their customer base - balances, transaction history and so on - can be used by other banks and financial service providers to create services that will be of great benefit to everyday customers.
Imagine, for example, a dashboard where you can see information about all of your bank accounts, your mortgage, credit cards, loan repayments all in one place, rather than you having to log in to multiple different services. Or, perhaps, a website where you can instantly analyse which bank would be the cheapest for you based on your account usage: a much-needed initiative in the wake of the recent CMA report that highlighted unnecessary complexity, a lack of transparency and poor consumer understanding of overdraft charges.
The way this data will be shared involves the use of open APIs (Application Programming Interfaces). While outside the world of technology this acronym is likely to be met with blank faces, these are effectively a set of tools that let data that exists within a service or platform - such as a bank - be extracted by third parties and used to build new services.
Open APIs are not new. In the payments industry, PayPal has been using open APIs since 2010. In fact, the financial sector has been responsible for more open APIs than any other sector except for social media, a fact that has played a vital part in the development of fintech.
Of course, the very idea of sharing banking data could set alarm bells ringing in the minds of many ordinary consumers in terms of security and privacy. But the benefits of sharing this data - with customer consent - should greatly outweigh the risks as it will help increase transparency, competitiveness and foster innovation that should ultimately benefit consumers.
While the responsibility to ensure security, as well as communicate the benefits to customers, lies with the banks and fintech companies themselves, the endorsement of the Treasury - which set up the Open Banking Working Group - will add trust and credibility to the scheme.
However, forward-thinking banks and financial service providers shouldn’t just comply with the recommendations in the Open Banking Standard, but go beyond them. As a first step, banks should integrate the APIs of their competitors to launch cutting-edge personal finance management tools and remain the ‘prefered screen’ for financial services to their customers.
Going further, banks could adopt a full Open Banking philosophy and monetise further APIs based on payment initiation and customer authentication services. This would not only benefit banks by opening up new revenue streams but also offer more choice for consumers by providing further opportunities for innovative fintech companies to launch.
These are really exciting times - not only are we seeing the shift of banks’ operations with new revenue streams opening up, but this initiative could also inspire other industries such as healthcare, utilities and insurance to do something similar.