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What is open banking and why does it matter to your business?

What is open banking?

At its core, open banking is about large, traditional banks opening up the data they hold on customers to allow new products and services to be created, backing all of that up with stringent technical standards. Such data sharing will only be with customer approval and only to companies that have been vetted by the Financial Conduct Authority.

“It will allow customers to share their financial transaction data with authorised third parties, and allow authorised third parties to initiate payments from their bank accounts,” says Ross Dalzell, head of business banking product and propositions at Barclays.

Open banking is driven by two regulatory changes. The first is the Open Banking remedy of the Retail Banking Market Investigation Order 2017, under which the Competition and Markets Authority outlines API standards. The other is the Second Payment Services Directive (PSD2) which requires banks to allow third-party access for payments.

The regulatory changes only apply to the nine major banks: Allied Irish Bank, Barclays, Bank of Ireland, Danske, HSBC, Lloyds, Nationwide, Santander and RBS. The rollout started on 13 January 2018, when banks and the FCA-approved third-parties started testing products, athough five of the nine needed an extension to that deadline. The new services will start to become available in March 2018, though it will take time for apps to be developed and users to take up such services.

What does this mean for businesses?

The changes open up the ability for third-party companies to build apps and services on top of banking. For example, if you have accounts with multiple banks, you could get an app to see them all in one place. Comparison sites could make it easier to compare financial services in one place and clever developers could create apps that have more features than existing banking apps, such as spending alerts, chat bots, or AI for automated financial controls.

What does this mean for businesses? Hopefully easier financial management. “Although we are only at the beginning of the Open Banking journey, the possibilities for small and medium enterprises are quite profound,” said Dalzell. “We expect to see lots of new and innovative tools that benefit businesses in a number of ways. These include tools that provide insights to help SMEs manage their money, that improve comparisons of products on offer, and that use the convenience of open banking to remove laborious and administrative tasks, allowing customers to focus on growing their business.” Add that into existing data – be it insurance, credit, shopping or anything else – and the “possibilities start to grow exponentially,” Dalzell added.

So far, Barclays is using the change to offer businesses a directory of connected apps – all “carefully chosen”, he says – to better link bank accounts with bookkeeping, marketing and more. “As for the rest of the market, while it’s hard to pin down exactly where the financial technology industry will focus its efforts at this early stage, there are a few emergent propositions we expect to see in the short term,” Dalzell says. “For example, digital comparison tools could enable much easier assessment of complex products such as loans, overdrafts and current accounts, and payment initiators could compete with the card payments space, potentially offering cheaper alternatives for SMEs to send and collect money.”

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