The history, overview, and future of Open Banking In The UK

Monday, 15 Aug, 2022

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

Everything about Open Banking in the UK

1. What is Open Banking? How does Open Banking work?

1.1. Overview of Open Banking.

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

The Open Banking revolution has changed bank monopolism forever

1.2. How does Open Banking work? How is UK Open Banking functioning?

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

How Open Banking works

1.3. Who are the third party providers in Open Banking?

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) 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 Payment Initiation Service Provider (PISP) explanation

The Account Information Service Provider (AISP) 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

The Account Information Service Provider (AISP) explanation

1.4. What is an API? How does Open Banking UK API work?

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

Open Banking API UK is the data retrieving method of Open Banking UK

1.5. What Open Banking API providers UK need to meet the Open Banking standard 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:

  • Read/ Write API Specifications.
  • Open Banking API Specifications.
  • Directory Specifications.
  • DCR - Dynamic Client Registration Specifications.
  • MI Reporting Specifications.

Meet all of these requirements, and the service provider will be considered up to the UK Open Banking standard.

1.6. What are some popular Open Banking API providers UK?

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:

  • Nordigen
  • Afterbanks
  • Saltedge
  • Tink
  • Truelayer
  • Budget Insight
  • Bud Financial

2. What are the benefits of Open Banking UK?

2.1. The benefits of Open Banking Uk to customers:

With the help of Open Banking, customers can:

  • Make immediate payments.
  • Execute automatic payments.
  • Perform recurring payments.
  • Plan future dated payments.
  • Use SEPA - Single Euro Payments Area to move money across Europe.
  • Manage multiple bank accounts effortlessly.
  • Get efficient financial advice and assistance easily.
  • Receive hyper-personalized products and services.
  • Save a massive amount of time when applying for a loan, or extending credit card limits.

2.2. The benefits of UK Open Banking to companies and TPPs:

On the other hand, businesses and service providers can:

  • View detailed banking data of almost everyone.
  • Know the incomes and expenses of customers.
  • Have a massive amount of information to customize hyper-personalized applications and services for customers.
  • Initiate payments on customer’s behalf.
  • Receive payments on time without having to remind every customer.
  • Get loyal customers and gain brand loyalty.
  • Give business an edge over the competitors.
  • Decrease cart abandonment rate and increase conversion rate.
  • Diversify merchant payment methods.
  • Reduce the time needed to gather and examine customer finance status.
  • Grant transparency before making any decision, such as approving a customer’s loan application.

3. History of Open Banking United Kingdom.

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:

3.1. In 1983, the Screen Test trial was performed by the German Federal Post Office:

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.

3.2. In 1998 and 2002, HBCI and FinTS were introduced:

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

UK Open Banking technology and the UK Open Banking regulation have been continuously developed by many for over four decades

3.3. In 2004, the SOFORT invention came to public:

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.

3.4. In 2007, the First Payment Services Directive (PSD1) was implemented:

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 payment service industry and the growth of financial technology companies.
  • A framework for non-banks to follow in execution of financial services.
  • SEPA - Single Euro Payments Area.
  • A transparent set of regulations to increase UK Open Banking standards specifically, and Europe Open Banking standards in general.

3.5. In 2009, Giropay sued SOFORT:

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.

3.6. In 2015, the UK banks were asked by the UK Government to share their database with TPPs:

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.

3.7. In 2018, the Second Payment Services Directive (PSD2) was implemented:

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

History of Open Banking UK

4. The summary on Open Banking UK regulation and PSD2 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

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:

  • The AISP - Account Information Service Provider.
  • The PISP - Payment Initiation Service Provider.

5. What are some Open Banking examples UK?

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

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:

  • Cake
  • Acquired Limited
  • Trustly
  • ClearScore
  • Nordigen
  • Experian Limited
  • Spendee
  • Tink
  • Truelayer
  • Wise
  • Cleo
  • Plum
  • Tully
  • Afterbanks LTD

6. The future of UK Open Banking.

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

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.

7. Key takeaways:

  • What is Open Banking? Open Banking is authorized data-sharing among customers, banks, and non-bank organizations using APIs.
  • What is an API? API is a bunch of codes softwares uses to talk to each other and extract information.
  • Who are the Third Party Providers? Non-banks who benefit from Open Banking usually are fintechs, solution providers such as payment initiators and account aggregators.
  • The PSD2 gives Open Banking lawful rights to execute across Europe, it classifies non-bank organizations as:
    • The AISP: the service provider that only reads and analyzes customer data.
    • The PISP: the service provider that can make payment on behalf of customers.
  • Open Banking brings a lot of benefits to customers, as well as businesses, and third party providers.

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Frequently Asked Questions

Yes, Open Banking United Kingdom is highly secure. Open Banking UK uses API as its information extraction method so it could transfer data quickly and safely. These Open Banking API UK protocols are built by the biggest UK banks and are also developed by a lot of authorized high-tech companies. Their main responsibility is making sure Open Banking is fast, secure, and functions properly. So there is no need for you to worry about the safety of UK Open Banking.

Open Banking is a set of rules and regulations that enforces data-sharing between UK banks and non-banks organizations. It counts on the help of Open Banking UK API to enter banks’ databases and collect customer information. These data are used to develop the financial industry, especially in the payment service and account aggregation sector.

In 2018, a UK Open Banking regulation known as PSD2 was enacted to make banks share their database with other corporations. It is obligatory for the nine biggest banks in the UK to comply with the PSD2. These banks are also known as the CMA9, and they serve more than 90% of the UK population. So in other words, Open Banking is mandatory in the UK.

However, as a customer, you can choose whether or not you want to use Open Banking. Your data can only be shared with your consent. Despite Open Banking's many benefits, you can still choose not to use it if you feel uncomfortable.

Only nine biggest banks in Great Britain and Northern Ireland are enforced by the UK Government to use Open Banking. These banks take up to 90% of bank users in the whole United Kingdom, and are called the CMA 9. The Competition And Markets Authority (CMA9) consists of:

  • Barclays Bank
  • Lloyds Banking Group (including Halifx and Bank Of Scotland)
  • HSBC Group (including M&S and First Direct)
  • Royal Bank Of Scotland Group (RBS) (including NatWest and Ulster Bank)
  • Nationwide Building Society
  • Santander UK
  • Danske Bank (Northern Bank Limited)
  • Bank Of Ireland
  • Allied Irish Bank Group UK (First Trust Bank in Northern Ireland)

Yes, Open Banking is legal in the UK. In fact, UK Open Banking regulation is enacted by the UK Government. Its legal aspect is regulated and protected by the Financial Conduct Authority (FCA). Only companies and businesses authorized by the FCA are permitted to use Open Banking API UK to access customer information.

Some may say that Open Banking in the UK started in 2015. But it was not until 2018 that Open Banking UK was made official across the UK and all over Europe. In 2015, the nine biggest banks in the UK were requested by their government to share customer information with authorized third party providers. Then in 2018, an Open Banking UK regulation called PSD2 came into force and made this mandatory for the CMA9. The nine largest banks, CMA 9, since then started to open up their databases and make the most of their customer data. As a result, the account aggregation and payment service industry has been blooming ever since.

Open Banking UK uses Open Banking API UK as its method of retrieving information from bank databases. When a third party provider (TPP) needs any information from customers, for example, their marital status. The TPP will send out a call to an Open Banking UK API to request for the information. The API will then enter bank databases to extract marital statuses of customers, and get them back to the TPP. Through API, customer data can be quickly and securely transferred between banks and third party providers.

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