What is Open Banking? Everything You Need To Know
When you hear the term 'open banking', what springs to mind? If the answer to that question is nothing, then you’re not alone. In a recent survey, Which.co.uk found that 92% of the public had never even heard of open baking. Let’s assume the same applies to the term 'Payment Services Directive 2' (PSD2). If you are one of the rare people who has actually heard of these terms, well, congratulations.
It’s easy to look at the phrase, open banking, suspiciously. Firstly, the idea of anything being open when it comes to your finances is scary. Nobody wants the details of their Amazon order out in the open. Secondly, what even is it? Considering both initiatives have been active for several years now, it’s probably time we explored the topic. So, if you’ve ever asked yourself, ‘What is Open Banking?’ or briskly googled ‘PSD2 summary for dummies’, look no further.
Introducing PSD2: A new banking innovation
PSD2 came into effect on 13 January 2018, but let’s take it from the top. It all started with the initial 2007 PSD. The goal of the Payment Services Directive (PSD) was to create a single payment market within the European Union. Or, as Barclays bank put it “This legislation established an EU single market for payments to encourage the creation of safer, more innovative payment services. PSD’s authors also aimed to make cross-border payments in the EU as easy, efficient, and secure as payments within a member state.”
So, PSD2 is essentially a revised version of its predecessor. It was proposed in 2013, only to come into effect five years later. PSD2 came into play in 2018.
However, some of the more complex measures weren’t put in place until September 2019. It was created to revolutionise the way we bank. Yet, while we know this is a bold choice of words, the initiative really does have the opportunity to shake things up.
What is PSD2?
Enough about dates and abbreviations. What actually is PSD2? It was created to make the payment industry more innovative, safer and fairer. The ways in which we pay have undergone constant evolution.
This is the same, whether it be through contactless card readers, multi-factor authentication or online banking. But it is fair to say the banks themselves haven’t kept up. The new movement promises the following:
Improved security through strong customer authentication.
Third-party access to data, with the consent of consumers.
Enhanced protection and rights for consumers.
An increase in competition in the market — banks have to become more transparent as they face a push to innovate the industry.
Standardising, integrating and enhancing payment efficiency.
Adding new payment services into the regulation.
These changes mean that new rules both promote and protect open banking through mobile and online payments. This allows customers to use third-party providers to manage their finances.
With customers’ consent, third-party payment providers can access banking data through an API (application program interface). This data sharing enables approved financial technology businesses and startups to both challenge and help banks innovate the industry.
PSD2 is also enabling banks to catch up with modern secure banking methods and payment solutions. The law requires that stronger identity checks take place when making online purchases. This makes your transactions safer through multi-factor authentication, but more on this later. To summarise, banks are finally coming into the modern world.
What does this mean for me?
They have told you that your customer rights will be enhanced, but how? One significant change is increased transparency. The initiative calls for more transparency with exchange rates and currency. It also calls for simplified terms and conditions that people can actually digest.
PSD2 has also made it mandatory for payment providers to respond to complaints of high importance in good time. If you put forward an important complaint, your provider will now have to get back to you within 15 days. Payment providers also face regulations on how to respond to complaints and record them internally. This gives your voice a signal in the noise.
One prominent change is the bar on surcharging certain card transactions. This includes consumer debit cards, prepaid cards and credit cards. However, commercial cards do not have to abide by this rule. France, Sweden and Italy have all opted against surcharging on commercial cards. However, the Netherlands, Germany and the UK have decided to allow it.
If you have multiple bank accounts, the new regulations are good news for you. They allow certain account information service providers to enable customers to view all of their account information in one place. Say goodbye to managing multiple accounts.
How safe is it?
It can be argued that it is just as safe, if not safer, than traditional banking. As Wired reporter Rowland Manthorpe points out:
“APIs – the technology used to move the data – are trusted, and the law requires account providers to use strong customer authentication, a procedure that allows the payment service provider to verify the identity of both the user and the service.”
New secure customer authentication laws have introduced multi-factor authentication requirements for particular transactions. For instance, online or mobile payments. To proceed with a payment, customers will have to supply two of the following:
Biometric data,
Identification, such as a password or PIN,
Something that belongs only to them — for instance, a card or phone.
What is Open Banking?
Obviously, open banking and third-party data sharing are the features of the new regulations that have attracted the most attention. But what does this really mean? Here’s open banking explained. First things first, what is the difference between PSD2 and open banking? Rowland Manthorpe describes it in a nutshell.
“Open banking is also part of a sweeping piece of European legislation known as the 2nd 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.”
For the UK, this means the nine largest banks out there have to become a lot more transparent. Those banks include HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide. These banks have to push out their data in a standardised, secure manner. This allows approved organisations, such as tech startups, to use the data to make some serious changes.
Considering over 80% of Brits bank with HSBC, Royal Bank of Scotland, Lloyds and Santander, this is big. Open banking benefits consumers by sharing secure, open data. As such, the UK payments industry will undergo a metamorphosis.
What does this mean for me?
We should point out that to share a standardised version of your data, the account holder must give consent and can opt-out. There are, however, so many pros to opting in. We’ve been sitting on a bed of useful data and doing absolutely nothing about it.
While account holders get to choose what they share, banks don’t. Banks will now have to make certain information public. This can be anything from which of their branches has disabled access to where their branches are located. It will also make it easier to compare the biggest banks against each other. You can easily do this with all of their information out in the open.
Banks have masses of data on how we spend our money. They know what we spend and where we spend it. A wealth of information is at their fingertips and could be put to better use.
Sharing this data with third parties opens up so many doors and possibilities in the product realm. Startups, companies and banks can really start to transform the way we spend our money.
On top of that, services and customer care will improve as a result of transparency. It will also allow customers to have a deeper insight into their accounts. In addition, it will help them to make more informed decisions with their money.
How safe is it?
According to Open Banking Limited, “Open banking has been designed with security at its heart. Here are the measures that have been put in place:
Regulation: For an app or website to partake in open banking, a financial conduct agency or a similar EU agency needs to approve them.
It’s all up to you: You only share your data when you want to, for as long as you want to.
Security: Extremely high-level software and security systems are implemented and tested repeatedly.
Assurance: If fraud takes place, your bank or business society will pay back all money lost. Additionally, data protection laws and the Financial Ombudsman Service will protect you.
So, if it is technically just as safe as how we currently bank online, surely it is worth the reward? With an increase in customer rights, added security with transactions, and an increase in innovation in the industry promising new products, solutions and services will be tailored to our spending habits, so it seems time to give open banking and PSD2 a chance.
If you want to enter the future of payments, check out our website. To hear more about the payments industry, as well as discover business tips and tricks, visit our blog.
