What is Open Banking?

In 2018, European banks were forced by regulations to usher in a new era of financial transparency in the form of Open Banking. Knowing what they know now, banks would have jumped on the opportunity. Open Banking broke the technology hiatus that had rocked conventional banking for years.

Through Open Banking, the financial sector was able to improve service delivery. Innovation and competition in the financial sector also grew. These changes have benefited banks, customers and payment service providers.

Open Banking has had far-reaching benefits and an immense impact on the finance sector. Still, it’s not a clearly understood concept.

What is Open Banking?

Unlike most banking terms, Open Banking is a relatively simple one. It describes the practice of banks sharing customer data with regulated third-party service providers. The information is shared through secure interfaces called Application Programming Interfaces or APIs.

Through open banking, anyone can create apps or websites for the financial services sector. The applications allow sharing of customer data securely between banks and trusted third parties with the customer’s consent.

It sounds reckless, but it’s controlled and highly regulated through the open banking standard and the European PSD2 guidelines.

Open Banking opens a world of opportunities for every stakeholder in the finance sector:

• Financial service providers – Through open banking, financial service providers can offer more innovative products to their customers, widen their customer base, run more efficiently and, in the process, rake in more revenue.
• Fintechs – Payment service providers have all the information they need to create customised products to suit the customer and business needs.
• For businesses – Businesses, large and small, are also beneficiaries of this technology. Open Banking makes businesses more effective and efficient. Automation becomes a reality with financial tools customised to your business’s needs. You reduce manual tasks, save money and provide your clients with easy and flexible payment options. It could potentially increase your conversions and sales.
• For customers – The impact of Open Banking trickles down to the bottom of the food chain where the customer sits. It provides customers with better, faster, and easier ways to spend, invest and borrow.

What are the Principles and Objectives of Open Banking?

Open banking is designed to serve three main objectives. These cut across the financial sector and impact every stakeholder.

1. 
   

   Enhance customer control

It’s an exciting time to be a customer in the banking field. Gone are the days you would fill out paperwork, never to see it again or know what happened to it. Historically, customer data has sat in the hands of financial institutions like banks.

Open banking breaks this monotony into pieces. The information is now shareable. Open banking is a big step towards digitising shareable information and handing customers the reigns to control their data. It allows financial data to be integrated with third-party applications to build customer-centric financial products and tools.

2. 
   

   Encourage competition among financial companies and institutions

For customers, competition among service providers is always a good thing. It produces better and more innovative services and competitive prices.

Unfortunately, the financial sector has become complacent over the last few years, particularly among banks that enjoy monopolies.

One of the objectives of Open Banking and PDS2 regulations was to light a competitive fire in the banking sector and steer them away from the comfort of their legacy systems and hierarchical structure.

Open Banking has been the driving force of innovation in the innovative space with enhanced customer support and consumer products. The influx of innovation by third-party providers like ourselves has forced banks to improve their products and keep customers engaged on their platforms.

3. 
   

   Improve customer products

Open Banking has and will continue to encourage innovation in the financial sector. Customers can use new and improved products that cut across personal and business accounts. Finance management apps and tools will ease the movement of money. Open banking also helps account holders manage their savings, financial goals and loan applications faster and with less paperwork.

We’re just scratching the surface with Open Banking. In the short period it has existed, banks and consumers have experienced tremendous growth. Only time can tell what other objectives Open Banking will have as technology and innovation continues to roll out.

How Does Open Banking Work?

Open Banking has been around for a while. But besides checking on a small box to consent, everything else seems magical – and it is. But a lot is happening behind the scenes, and it all starts with an API.

What is an API in Open Banking?

An API program comprises codes and protocols that allow software and other applications to communicate.

In Open Banking, an API is used to connect banks and licensed third-party providers in a standardised, secure and efficient manner.

The APIs in Open Banking facilitate the flow of financial information like customer data and transactions.

There are three types of API in banking:

1. Private APIs – These are designed by the bank or financial institution itself. They are only used within the same private system, usually to exchange information.
2. Partner APIs – These are APIs made for a financial institution like a bank by its partners. These APIs might be used within the bank or between the bank and the partners that make the API.
3. Open APIs – These are available to third parties who don’t need to be partners with the bank. They are the most common and provide merchants with innovative payment structures and tools.

Are Third-Party APIs Safe to Use

The issue of financial information and security is a sensitive one. Although you trust your bank, you might have reservations about allowing them to share your information with a third-party provider through an API.

Granted, your concerns might be valid. But open banking APIs are guided by strict rules in the UK. These rules determine who can create and open an open banking API from scratch. Only a few organisations are authorised by the Financial Conduct Authority (FCA) to access open banking APIs.

Some of the types of providers who qualify for FCA authorisation include;

• Account Information Service Providers (AISP) – These providers rely on APIs to read account transaction data.
• Payment Initiation Service Providers – These use APIs to initiate payments directly from the customer’s bank account, with the customer’s consent.
• Account Servicing Payment Service Providers (ASPSP) – These are the banks. They use APIs to maintain payment accounts and give access to third-party services.

Every aspect of open banking APIs hinges on customer consent. Without your approval, everything is dead in the sand. Customers have complete control and can determine whether they want to share their information with third-party service providers.  

Now that you know what an API is, it’s easier to explain and understand how open banking works. It’s actually straightforward.

The process begins with the bank giving its API to an authorised third-party financial services provider. You will give the third-party service provider consent to obtain your financial information from the bank using the API when signing up. The information is shared through a secure channel with various security features like end-to-end encryption.

The information provided includes the account holder’s name, the account type, currency and transaction history, among others.

This information is only made available to the third-parties after the account holder agrees to share the data. You can give consent through an online form or by agreeing to the terms and conditions of the provider.

After signing up and consenting to share your details, the provider and the bank communicate and can execute the various transactions you initiate seamlessly and in record time.

Benefits of Open Banking

One of the reasons collaboration on open banking has been so successful is because every industry player stands to gain. This is because open Banking benefits aren’t centralised to a single stakeholder but spread across the board.

Why not also read: Benefits of Opening Banking?

For Businesses

Open banking is a major hit among merchants and other businesses. However, after reading through its benefits, you will see why many businesses are jumping ship and prefer opening banking services.

• Lower fees – Businesses pay less for transactions using open banking. Services like account-to-account payments cut transaction costs by overriding card schemes and eliminating card providers’ charges for accepting payments. Businesses can also choose a payment gateway that makes the most financial sense for them. With more payment service providers joining the services, the rates will only get more competitive.
• Higher conversation rates – Payment gateways with an easy and convenient checkout flow, multiple payment methods, and seamless integration improves customer experience and increases conversation rates. It reduces cart abandonment amongst eCommerce stores and increases revenue for the business.
• Higher acceptance rates – With open banking, businesses can accept consumer payments anywhere in Europe. So you’re not only confined to the UK. You can scale your business and enter new markets without any problems.
• Instant settlement – Payments are settled instantly, even with cross-border payments. Transactions are instantly validated, and businesses fulfil their orders quickly and maintain a healthy cash flow.
• Personalisation – Businesses can obtain crucial data about their consumers, finances and expenditure habits. Using the information, businesses can tailor customised shopping experiences and services aligned with their customers spending habits to help them save money or find preferred products and services more easily.

For Consumers

You can still enjoy the benefits of Open Banking even when you don’t own or run a business. One of the objectives of Open Banking is to improve financial services for consumers.

• Customer experience – For the longest time, banks have been out of touch with customer support. Open banking has created a competitive environment that challenges traditional banking methods. In order to stand out, banks must meet the highest customer service standards. Also, legacy banks have improved their online services and platforms for better customer experience.
• Security – Sharing consumer data with third-party payment service providers should present serious security risks. But that’s not the case. There are regulations and high-end security features involved that minimise fraud. All third-party providers must meet the highest security standards in the market. The latest security features, like consumer identity authentication, have been improved and fortified to add an extra layer of security.
• Reduced service costs – Like businesses, you can enjoy reduced service costs with better service delivery. If you don’t agree with one provider’s pricing, you can turn to another with more favourable rates.
• Centralised information – Open banking is about sharing information that was previously closely guarded by banks. The data can now move around among licensed providers with consumer consent. It makes banking operations faster and more convenient.
• Innovative solutions – How would you like the latest banking features and benefits delivered straight to your phone or PC? Information sharing has encouraged the development of more innovative solutions, and Fintech companies are leading the charge. You can enjoy the latest features delivered directly to your phone.

For Banks and financial institutions

Considering banks and financial institutions have lost control of what they guarded so jealously, you might argue that open banking has given them the short end of the stick. But that’s not entirely true. They have something to show for it as well.

• Bank and fintech collaboration – Partnering with fintech companies allows banks to keep up with the fast-changing financial world. Banks can stay ahead of the competition and use the innovative infrastructure developed by the fintech companies.
• New financial technologies – Courtesy of open banking, legacy banks are not the only licensed players in the financial playground. New companies with new and innovative ideas have joined the pool. They are motivating banks to invest in technology and the resources to change their operations and run more efficiently. So don’t be surprised if you walk into a banking hall one day and can’t find a teller.
• Better customer engagement – The customer has always been king. But they haven’t always felt that way. Financial institutions have been forced to step up in a big way to improve customer engagement and services. Shifting services to the online world has increased investment opportunities, enhanced customer satisfaction, and dramatically increased revenue.

Disadvantages of Open Banking

There’s no doubt that Open Banking is a revolutionary technology. But there’re two sides to every coin. We’ve looked at the benefits. Let’s now look at the downsides.

• Consumer trust is still low – Open banking is still relatively new. Some consumers and companies have been slow to adapt and are worried about sharing financial information with third parties. Fintechs and banks are still working hard to eradicate myths and help consumers and businesses understand the benefits of open banking. But it’s a slow process that will take time to reach its full potential.
• Personal interactions are decreasing – With all the technology and innovation, you have fewer reasons to visit your bank branch physically. Banks relied on interpersonal services to build customer loyalty. Now that physical connection is slowly wasting away, exposing banks to loss of clients.

How is Open Banking Regulated in the UK?

Open Banking is tightly regulated in the UK. It’s among the reasons it has been so successful. When you authorise your bank to share your information with a third-party financial provider, regulators ensure your details are not misused.

In the UK, Open Banking is regulated by the Financial Conduct Authority (FCA) using the Payment Services Regulations (PSRs).

The law governing Open Banking is known as the Payment Services Directive. It’s a European law passed in 2007 and implemented in the various member states at different times. The laws were updated in 2015 and are now called the PSD2. The UK uses this law through the PSRs to regulate Open Banking.

The PSD2 and the PSRs give customers the right to ask third-party providers to:

• Make payments on their behalf. This is called the Payment Initiation Service or PIS.
• Access their financial data for the purpose above. Also called Account Information Services or AIS.

Before PSRs came into effect, banks had terms and conditions that prevented customers from using third-party providers to access their bank accounts.

Under PSRs, banks and payment service providers must open their systems to third-party providers at customers’ request. The PSRs form the regulatory framework for open banking and guide how the information is used.

The CMA Regulations

The UK has an added layer of safety through the Competition Markets Authority (CMA). The CMA regulation governs the nine largest UK banks, which serve about 99.9% of the population. The banks are known as the CMA9. Under CMA regulations, these banks must comply with PSRs and build APIs. The APIs must be built to specific standards and specifications, which the banks must develop themselves.

Open Banking Implementation Entity

The Open Banking Implementation Entity was implemented to facilitate the CMA9 in creating the API. The OBIE develop the Open Banking Standard with banks alongside customer experience guidelines. The customer experience guidelines provided a blueprint for banks on how to implement Strong Customer Authentication (SCA) to fight fraud and unauthorised information access.

Currently, open banking is regulated by the FCA. Only companies authorised by the FCA can use open banking APIs to access and initiate payments on behalf of customers with the customer’s consent.

Evidently, Open Banking is buried deep in regulation and legislation. There’s no shortage of safeguards to protect your information as it streaks through APIs to different third-party providers. Although transaction processes are fast and seem unprotected on the interface, the backend has numerous security features to protect your information.

The Best Open Banking Platform

Open banking does most of the heavy lifting. As a customer, all that’s left is to pick a platform that best serves your needs. Like banks, third-party platforms appeal to different customers and offer varying features. You need to find one that serves you best. Lucky for you, you might not need to search very far because we’re right here and we are Pay iO!

What is Pay iO?

 Pay iO is a payment gateway that has created a technology that makes sending and receiving payments for businesses easy and seamless.

Using Pay iO, bank accounts can connect directly for simple and transparent transactions. Our goal is to facilitate timely and secure payments. We have the latest technology in the open banking framework. We make life easier and increase your chances of success in the competitive UK market.

We are the perfect partner for you if you’re looking for a robust payment processing platform that can fuel growth and ease sending and receiving of payment. We bring efficiency and new revenue opportunities to your business with our cutting-edge ecosystems.

How Pay iO Works

Our operations are the epitome of simplicity redefined for your customers and business. Our straightforward platform is easy to use – even on your first try.

For businesses

Go to our website and click on the sign-up tab. Follow the instructions and provide the relevant documentation to set up your account. We have various accounts you can set up to suit the nature of your business and serve your customers better. Select the type of account you want and leave the rest to us.

Once approved, you can add our API to your payment options, and it’s ready to use. Our rapid transaction processing makes your business more efficient and allows you to confirm orders quickly.

For customers

Create your Pay iO account. Leading security features like biometric authentication provide security and safe access to your information. You don’t have to worry about your password leaking or exposing your information to cybercriminals. We use the latest security features to fight fraud.

After creating your account, proceed to your favourite online store and shop for the goods you want. Add your items to the cart and proceed to Checkout.

At Checkout, select Pay iO – Pay with Bank. Connect your banking app and confirm payment. Just like that, your order is complete. It’s easy, fast and secure.

What Solutions Does Pay iO Offer?

We have a variety of solutions that allow businesses to take full advantage of open banking. Each of our solutions is packed with features to help your business receive and send payments smoothly and efficiently and keep up with the changing trends in the financial industry.

Business accounts

We offer business accounts for merchants looking to grow their businesses. With features like account-to-account payments, you can receive and send payments instantly. Our business account solves the most rampant business problems, like expensive transaction fees and slow payment processing.

Account-to-account bank payments remove middlemen, enhance customer experience and reduce transaction costs. Payments on your business account are quick, easy and secure.

Pay with link

Simplify invoice payments using our pay-with-link solution. You can send payment links embedded in your invoice via email or SMS for instant payment.

Customers can complete payments with a few clicks enhancing cash flow in your business and minimising back and forth as customers struggle to clear your invoice. You receive payments instantly and directly to your bank account.

Currency conversion

The world has become a global village. Your business should expand its wings and reach out to customers across the border. Your business account can receive over 100 currencies. With our currency conversion solution, you can switch back and forth between your preferred currencies, all for one low currency conversion fee. You can also transact in various cryptocurrencies giving your business complete flexibility with same-day conversions.

Why You Should Use Pay iO?

Pay iO deploys the latest financial technology to power businesses and provide them with features that help them grow and leverage advanced security features to protect their cash flow and profits. By opening a Pay iO account, you can enjoy the following benefits:

Transact with ease

Simplicity and flexibility are our languages. We live to make payment processing for businesses easier and faster. With your Pay iO account, you access over 130 currencies that you can convert using our currency conversion service. However, some currency pairs are traded OTC only.

Mobile app and web access

You can download the Pay iO business account app via the Google Play Store or the App Store. You have unlimited access to your account in your office, at home or on the road.

Perfect small and big businesses

We have the tools to support small and big businesses. You can get payments directly from local and global clients and manage multiple bank accounts, transactions and expenses in one place. We offer an efficient way to cut costs and administrative efforts.

Global access

We support payments to over 180 countries with SWIFT and SEPA capabilities. Payments are same-day, helping your business grow locally and globally.

You get to keep your name

Every business has a named virtual multiple-currency account. You keep in touch with customers, and they know they are sending money to you. It’s easy, fast and maintains that personal touch.

Payment processing for businesses operating in the UK and globally doesn’t have to be a juggernaut. With Pay iO, you have a simple and effective solution to send and receive payments to multiple countries and in various currencies. Our competitive rates help you maintain your margins and maximise profit. All thanks to open banking!