Open Banking: What is it and how can it help your business?

Have you heard of ‘Open Banking’? It could be something you’ve come across more recently as a business or as an individual consumer in your own right. No matter how you were first introduced to Open Banking, it’s arguably one of the biggest changes in UK retail banking for some time. But what exactly does (or could) it mean for you?

The Open Banking data model aims to make things easier for you and your business. But there are obviously going to be some concerns about the idea of your data being shared. So, we’ve created this guide to explain what it is, how Open Banking works, and the impact it may have on the way that you do things as a business. So first, let’s look at what it is…

What is Open Banking?

Open Banking was designed to make it easier to manage your money and take out new financial products. It describes how banks and other financial institutions, such as alternative providers of commercial finance, handle your personal information.

Under the Open Banking data model, your details can be accessed and shared by any provider in one single, standardised format. It’s also known by the less-catchy Second Payment Services Directive (PSD2).

This data can also be shared with third-party providers and fintech firms who are involved in offering products to boost your financial health. It enables third parties like Pulse to provide the exceptional insights that we offer and Open Banking is key to making it all happen, alongside Open Accounting.

But it’s equally important to remember that the access and sharing of data is only allowed if you agree.

What Open Banking means

So, what does it all mean for you and your business? In practical terms, Open Banking means a person or business can share details about their accounts with another provider. It could include Current/Business Accounts, credit cards, or savings accounts.

Open Banking isn’t a data-sharing exercise but an attempt to benefit retail bank customers. It could mean you can switch accounts easier. You might even find it easier to get a business loan by sharing your data with an authorised provider. It’s also driving the development of tools and services to help save your business time and money.

In late 2021, the UK government and Competition and Markets Authority (CMA) estimated that half of UK small businesses were using services that drew on Open Banking technology – and that number is only set to grow.

When did Open Banking start?

The move towards Open Banking started after the CMA concluded its probe into the UK retail banking market in 2017. It also forms part of PSD2, which came into being at European level in 2015.

In the UK, Open Banking took effect from 13 January 2018.

How does Open Banking work?

Up until the dawn of Open Banking, banks were the gatekeeper when it came to making a payment. As a business, this meant payments in and out would go via your bank to your suppliers and customers. No one else could see your financial data. So, there was no way that you could be sure if you were getting the best deal or service.

At the heart of Open Banking are “application programming interfaces”. You might know them better as APIs. These create connections between various computers or programs.

As soon as you give consent for your data to be shared, it’s made available through an API to others. And those others can include another bank, a financial provider, or a third-party app. Data that can be shared includes your account data, as well as information about products that may be of interest. It can even make it easier to send and receive money.

How can it benefit my business?

Open Banking is designed to be a step in the right direction. For SMEs in the UK, that’s exactly what it is in several different ways. The benefits to your business can include:

• Easier to secure funding: For SMEs, getting external funding is a challenge – not least if your credit history isn’t great. However, Open Banking can show lenders that you’ve got a track record of managing your finances. It can also cut the need to send in documents.
• Simple payment solutions: Payments made with a credit card or Direct Debit can take time to go through. For card payments, there may also be charges involved. But now it’s possible to make direct payments quicker and without any charges from middlemen involved.
• All your info in one place: Some apps and products make it possible for your business to see all its financial data in one place – no logging in and out of different services to keep on top of your income and outgoings.

Open Banking can also help you automate some of the more mundane aspects of your financial to-do list. By doing so, it frees you up to focus on more of what’s best for your business.

What are the benefits of Open Banking?

Apart from the above, there are some overall benefits of Open Banking – both for your business and for your bank. Here are some examples of them:

• Tailored offers: For financial institutions, the products they offer can be tailored to your exact needs. That’s a benefit for your business too. After all, it boosts the chances of you finding the exact support you need.
• More competition: As well as high street banks, Open Banking brings new fintech firms into the marketplace. No longer do you have to rely on the same old names. Instead, it’s possible to apply to alternative providers and online organisations.
• Greater transparency: You’ll have total control over who sees your financial data and when. Data can’t be shared without your say so. Similarly, providers can get an accurate picture of your financial situation in a standard format.

What are the implications of Open Banking?

Open Banking is still relatively new. As such, we’re still in the growth phase of apps and service providers who want to make your financial life easier. That said, there are some implications of the Open Banking data model to be aware of:

• As things happen in real-time and online, there are fewer interactions with real people. Gone are the days when it was common to have a dedicated relationship manager with your bank. This may be a bonus for some but could make communication more difficult for others.
• Trust is undoubtedly a big worry. Even though trust is high in how Open Banking works, the sharing of personal data may be a concern for you. Can you trust the new crop of fintech providers? What if someone accesses your data without your consent? These concerns have been addressed by those using Open Banking within their user journeys, and it’s widely regarded as being a trustworthy and reliable way of sharing your personal data.

How safe is Open Banking?

Safety and security are paramount when it comes to Open Banking. For a start, the APIs used are pretty robust and there are some strict authentication measures in place. That way, you’ll have to prove you are who you say you are. And you’ll have to give your consent each time.

In addition, whilst not all providers are regulated by the Financial Conduct Authority, they are subject to UK data protection laws.  You don’t have to use an authorised provider, but some prefer to for added peace of mind.

Make Open Banking work for your business

The Open Banking revolution is making a positive difference to SMEs across the UK. It’s massively levelled the playing field between incumbent banks and alternative/Fintech lenders – for the better.

The evolution of financial services to being digitised is inevitable, and in the new ecosystem that’s generally been embraced, there is no place for traditional banking anymore. Innovation is key and it’s happening everywhere we look.

To make extensive use of it, master the process, or decide whether it’s right for your business, use our resources in our blog hub to learn more. For more guidance, feel free to get in touch with the Pulse team.