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Although having been around for quite some time now, Open Banking may still be a new concept to everyone. As one of the initiators, Open Banking United Kingdom has risen quickly to become essential to the UK Fintech companies. To understand more about the state of Open Banking in the UK, see more of our article below.
Everything about Open Banking in the UK
Open Banking is a mechanism that allows third party providers access to customers’ banking data through APIs. In the old days, banks were almost the monopoly in the financial world, only they could hold and have control over everyone’s financial information. Everything from a customer’s name, their age, address, marital status, to their banking activities, where they shop, how much they spend, what they usually spend money on, and et cetera, is all monitored by banks. These data are really informative and useful, they say a lot about a person, almost like their “financial-digital footprint”. But in the past, with old technologies, banks could not make the most of these data. So recently, with the help of open banking, both banks and customers can benefit a lot from these information.
The Open Banking revolution has changed bank monopolism forever
Open Banking UK, much like other countries, works according to these principles. Instead of keeping data to themselves like in the past, banks are now sharing their customer data to third-parties. When developing software, the third party providers will need a lot of personal info to make a customer-oriented application. Therefore, they will make an API call to extract information from the bank database.
How Open Banking works
Third Party Providers are businesses and organizations that are authorized by banks and customers to access their information. They are financial service companies, technology businesses, or fintech corporations who need banking data to develop their services. There are two main types of Third Party Provider (TPP) in Open Banking, especially Open Banking UK:
The Payment Initiation Service Provider (PISP):
These service providers are those who are authorized by customers to make payment on their behalf. With the help of PISP, customers won’t have to access their bank account, or use their credit and debit card every time they want to pay for something.
After having been given approval by customers for the first time, PISP will then have the permission to withdraw money straight from their account. Recurring payment can be handled smoothly by these Payment Initiation Service Providers. Customers won’t have to worry about remembering to pay bills every month, invoices will be automatically paid by PISP.
Management over these third parties is quite simple. If using multiple bank accounts, customers can easily choose which account they want for automatic payments. They also can set up a payment limit over this account and for the PISP to control their expenses.
Businesses can benefit significantly from Payment Initiation. Because it brings a more convenient and simpler payment journey, customers can purchase repeatedly without a single click. This leads to a much lower cart abandonment rate, as a result better conversion rates for the business. Open Banking Payments UK is diversifying more than ever with the presence of these PISPs.
The Payment Initiation Service Provider (PISP) explanation
The Account Information Service Provider (AISP):
Once consented by customers, the Account Information Service Providers will have a hold of all their banking details. However, unlike PISPs, AISPs are on “read-only” mode, they don’t have the right to make payment or move money out of customer accounts. An AISP can only view, manage, and transfer customer information.
No matter how many accounts a customer may have, the AISP can gather all of their data in one place. Thereby, giving a transparent overview of that customer's financial status. In case that customer wants to apply for a loan, or extend their credit card payment limit, or in need of financial assistance, banks can quickly and easily grant their wishes. In the past, the data collection and data analysis process can take up a lot of time and effort for both bank and customer. But now, with the help of open banking and AISP, customer’s transaction history, their earnings and expenditures, can accurately and almost immediately be extracted by banks. In order to do this, the United Kingdom AISPs are supported significantly by the Open Banking API providers UK.
By having access to this massive amount of data, AISP can analyze, understand, and learn more about customer behavior. This gives them more opportunities to find valuable insights from consumers than ever before. Therefore, helping businesses develop much more customer-oriented products, tailored customer services, and put personalized marketing on a whole other level.
The Account Information Service Provider (AISP) explanation
API (Application Programming Interface) is a set of codes and protocols that connects computers, applications, and softwares to each other. In other words, softwares will use application programming interfaces to communicate with one another and exchange information.
Open Banking API UK, same as other countries, works like this. When developing software, the third party providers will need a lot of personal info to make a customer-oriented application. Therefore, they will call API to extract information from external servers. For example: When a TPP needs a customer’s transaction history, it will submit a request to an API Banking. That API will retrieve the requested information from the bank database and get it back to the TPP. This whole process is defined as an API Call.
Open Banking API UK is the data retrieving method of Open Banking UK
There are a lot of Open Banking standards UK that an API has to achieve to seem legit. Here are some API Open Banking UK specification for your reference:
Meet all of these requirements, and the service provider will be considered up to the UK Open Banking standard.
With the rise of technology, many companies are fighting for the market of providing API across the United Kingdom. Here are the list of some popular API Open Banking examples UK in the market:
With the help of Open Banking, customers can:
On the other hand, businesses and service providers can:
Open Banking has been introduced to the world ever since 1980, but has only been widely recognized recently. It was first started as a small trial by a Post Office, and is now developing to become a global phenomenon. According to Nordigen and FinTecSystems research, here are some highlights on the history of UK Open Banking:
A screen test trial was conducted with 300 providers of Deutsche Bundespost, 5 external computers, and around 2,000 private participants in 1983. The screen test’s slogan was “My bank in the living room”, which showed their hope for a new online banking service that everyone can access from their living rooms, which happened to be our reality. The idea was that users could make transfer their money online using the code *300$, this was advanced technology then. The experiment was so impressive and innovative that it led to the development of HBCI 1998 and FinTS 2002. The interface had been used up until 2005, and it is considered the starting point of Open Banking.
With the increasing amount of multi-banking, came the HBCI and FinTS to protect users from banking fraud and identity theft.
Home Banking Computer Interface (HBCI) was launched in 1998 as a standard interface for customer self-service and online banking systems. This innovation came with message formats, transmission procedures, and security protocols.
In 2002, HBCI was replaced with the release of FinTS, Financial Transaction Services. Security got to a higher level with the PIN/TAN procedure and the use of signature cards.
UK Open Banking technology and the UK Open Banking regulation have been continuously developed by many for over four decades
In 2004, the HBCI was combined with screen scraping to create SOFORT, also known as “Screen Scraping By Sofortüberweisung”. Screen scraping is the act of reading and sharing information on a screen or application, for instance, viewing your account balance online.
With the SOFORT, the bank allowed a non-bank service provider access to log into customer banking data. The service provider would then have as much control over the account as much as the account owner. It could perform all of the essential steps and take the owner right to the transmission phrase. This is considered by some, the precursor of the PISP, but without an API. However, APIs are much more advanced and safer in terms of security.
The European Commission first implemented a set of rules for Open Banking in 2007. These rules set a higher standard for the UK Open Banking regulation. Its idea was to create a more competitive banking industry, as well as increase financial service quality, protect all users. The PSD1 has created:
The tension between Giropay and Payment Network AG came to its peak in 2009. Giropay filed a lawsuit against SOFORT for endangering online banking security and unfair competition. In 2011, the lawsuit was countered by the European Cartel Office and Federal Cartel Office to prevent discrimination against non-banks and untraditional financial organizations.
This event marked a turning point for the increased competition in online banking and suppressed monopolism in the banking industry. It also created a precedent in the Open Banking regulation UK, paved the way for fintech companies to rise as they are today.
Based on the Payment Services Directive, the UK Government enforced a legislation asking banks to open up their database and share them with third party providers. The Financial Conduct Authority (FCA) regulated these rules to benefit all users, and increase competition for banks and financial companies. This made the United Kingdom one of the initiators of Open Banking. Open Banking in the UK has transformed spectacularly because of this legislation.
An update for the first regulation was passed in 2018. The PSD2 made it mandatory for banks to share their database with third party providers via APIs. It expands and re-defined the roles of third party providers, at the same time making it easier for them to access data and improve their products. The current UK Open Banking regulation is much affected by this crucial directive.
History of Open Banking UK
Nine of the biggest banks in the United Kingdom are compliant with the PSD2 Open Banking UK. These banks are a part of the CMA 9, Competition And Markets Authority, consisting of Lloyds, HSBC, Nationwide, Santander, Barclays, RBS, Danske, Bank Of Ireland, and Allied Irish Bank. They are the banks of more than 90% of the UK population. Their significant number of users made their databases extremely rich and informative. So the CMA9 are made to share their financial information with non-banks organizations in a secure and standardized manner.
The CMA9 takes over more than 90% of the UK market, making Open Banking in the UK almost mandatory for everybody
These banks have to find a way to release their data smoothly, but also have to protect customer accounts safely, so they call for the help of Open Banking UK API. The extended PSD2 mostly require banks to use API for Open Banking, and elaborate the role of Third Party Provider, separate it into two:
There are hundreds of authorized providers active nowadays in the United Kingdom. The number of Open Banking third party provider registrations in Europe has increased up to 4 times within the last year (2019 - 2020). This shows that UK Open Banking is at its peak and will continue to grow in the future to come.
The number of Open Banking third party provider registrations in Europe implies the rise of Open Banking United Kingdom
Let’s look at the list of some popular Open Banking examples UK. Their work contributes a lot to the growth of Open Banking and they are popularly recognized not only in the UK, but across Europe:
The prime time of Open Banking UK is right now, with the massive increasing amount of online banking usage in Great Britain every year.
Online banking usage in the United Kingdom has been increasing rapidly, forecasting a bright future for Open Banking UK
This gives a perfect opportunity for new financial corporations and technology companies to emerge and participate in the market. The future of UK Open Banking is expected to be extremely bright and full of amazements, with the great benefits of Open Banking, and the arrival of new technologies introduced to the world everyday. Open Banking paved the way for many innovative products and creative financial solutions, its future is destined to be filled with even more wonders.
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