Over the past few years ‘open banking’ is a term that has crept into common parlance.
It has adorned the side of taxis and buses and has no doubt featured in many pitch decks from start-ups seeking to raise venture funding.
Many of us may have used it without even knowing it, let alone being able to explain how it works or how it came to be the potential infrastructure upon which we might build the future of our personal financial ecosystems.
In this article, we take a brief tour through the origins of open banking in the UK, its evolving use, cases and how it is changing the way we interact with our finances.
What is open banking?
We could fill this whole publication with the many ways that open banking could be explained but, at its core, open banking involves the granting of access to your bank account to a third-party through the use of application programming interfaces, or APIs for short.
With your consent, that third-party can then access the financial data within that account and, in some instances, instruct the bank maintaining the account to execute payment transactions.
What is the history of open banking?
The UK has led the way internationally in the development of open banking and has been a significant early adopter.
The Open Banking Implementation Entity, the entity tasked with implementing central standards and industry guidelines for the development of the APIs required to support open banking, was founded in 2016.
In 2017 the UK’s Competition and Markets Authority made an order requiring the nine largest UK banks and building societies to open up their current accounts and work to implement common API standards for facilitating that access.
While the CMA’s actions kick-started open banking, it was the revised payment services directive, or PSD2 as it is commonly known, that acted as a catalyst for its expansion.
PSD2, which in January 2018 was implemented into English law through the payment services regulations (PSRs), provided a legal obligation for all account servicing payment service providers to supply regulated third-party providers with access online payment accounts they maintain.
Provided certain conditions are satisfied, the account servicing payment service providers must grant access where requested, and may only reject those access requests in certain circumstances.
The PSRs also created two new payment services that would capture the third-party providers accessing accounts: account information services and payment initiation services.
Account information service providers can access the data in your bank accounts and use it in a variety of ways, but they cannot give instructions with respect to payment transactions on those accounts.
Accordingly, the regulatory regime imposed on account information service providers is lighter than for other payment institutions.
Payment initiative services providers are able to provide a form of software bridge that facilitates push payments between accounts without the use of a traditional payment instrument, like a debit card.
