Understanding open banking: What to know

Open banking refers to a system of allowing access and control of consumer banking and financial accounts through third-party applications.

How does open banking work?

Open banking can allow third-party providers to access a person's bank account information. Such access is generally only possible after someone expressly gives their consent to a financial institution, such as a bank, building society, fintech company, or regulated payment services provider.

With open banking, individuals can:

• Give and revoke consent for their data to be used at any time.
• Choose what data can be accessed and by whom.

Examples of open banking use cases

Approximately 11% of British consumers were active open banking users in 2023¹. Here are some examples of open banking in practice:

• Payments: May enable people to access and use payment methods to send and receive money.
• Budgeting: Securely connect financial accounts to a budgeting app, allowing someone to track and manage their expenses.
• Loan approval: Can facilitate easy sharing of transaction history with lenders, potentially expediting the loan approval process.
• Business integration: Integration of accounting software with banks through open banking APIs can streamline financial transaction reconciliation.
• Investment portfolio: May allow individuals to aggregate their investment accounts, providing a comprehensive view of portfolio performance.
• Personal finance aggregation: May enable people to aggregate their account information across banks and building societies to better understand their total cash at hand, net wealth, and other indicators.

What data can be shared through open banking?

The UK Open Banking Standard 'opens' the following data to be shared among participating banks, building societies, fintech companies, and third-party providers. Data can only be shared when a person agrees to data sharing and open banking.

Account data

This may include basic account information, such as the account holder's name, account number, and sort code.

Payment initiation

Open banking may also enable third-party providers to initiate payments through connecting to a customer account held at a bank.

Potential benefits of open banking

There are several potential benefits of open banking. Here are some examples:

• Personalised financial services. Financial institutions that are given permission to securely access and share customer data may be better placed to tailor products to individual needs and preferences.
• Simple account management. With seamless integration between different financial institutions, people may gain a more consolidated view of their financial information and transactions. It may also save time and ease the process of applying for other financial products.
• Informed decision-making. People who can easily access and analyse their financial data across accounts may gain greater clarity regarding their overall financial health.

Potential risks and concerns of open banking

There may also be risks to open banking. Keep these potential concerns in mind:

• Privacy concerns. Any sharing of sensitive financial data is prone to potential misuse of personal information.
• Data breaches. Open banking may create a risk of a data breach, potentially exposing customer information.
• Cyber threats. Phishing attacks, malware, and other malicious activities remain common across many financial services and standards, including open banking.

There are stringent regulations and rules regarding what, when, where, and how often consumer data can be shared. Protect yourself from fraud by only allowing trusted financial providers to access data. Also, review access levels regularly and only share the required level of information needed.

How open banking regulations work

The regulatory frameworks that govern open banking include the UK’s Payment Services Regulations and the UK Open Banking Standard. Here is a brief overview of both frameworks.

• UK’s Payment Services Regulations. This framework aims to make payments smooth and integrated across the EU. The framework works to create fair competition among different payment service providers while ensuring consumers can make secure, legally protected payments.
• UK Open Banking Standard. British legislators implemented common standards to allow customers to securely share their financial data or safely initiate transactions. Trusted companies can use this consented data to help offer new, innovative services.

Making sure data stays secure

Open banking may point to a growing awareness of changing finance habits, needs, and preferences. Learn how PayPal works to protect data.