Open Banking is changing the way that consumers transfer money with new regulation forcing banks to share financial information with third parties.

Rapidly advancing technology has taught consumers to demand everyday information instantaneously and with little effort – and now consumers want more control over their money. Enter Open Banking.

What is it?

Open Banking describes the sharing of financial information from banks to third parties. With consent from the consumer, these third parties can access reams of financial data, such as transaction history and spending behavior, which was, until now, held solely by the banks.

The second Payment Services Directive (PSD2) is the European legislation responsible for ensuring that banks adhere to these rules.

How does it work?

PSD2, which is now fully implemented, grants regulated third party providers the right to access a customer's bank account information and/or request payments.

For example, instead of only hearing from your bank, third party providers will be able to suggest alternative financial services that better serve your needs. This could include loans, mortgages, broadband and many other things.

This is a significant move for the payments industry as access to this information will help new entrants create innovative new products and services and ultimately better serve the consumer.

Do we need it?

While some may be unaware of Open Banking and what it means, it is expected to revolutionize the industry.

Some of the key benefits include:

Increased flexibility and transparency for consumers: Open Banking will give more control to the consumer by offering flexibility and allowing a clear and unified overview of finances by amalgamating information. In addition, PSD2 will provide tighter security, with third parties regulated by the Financial Conduct Authority (FCA).
Scope for development of new products: Third parties will be able to create new and innovative products and services that were previously unavailable, as well as initiate bank transfers directly from a consumer's bank account at their request.
Competition between financial providers: Century-old banks and new entrants will now be positioned on a more level playing field, which will likely encourage more competitive rates, therefore reducing costs for consumers.
Ability to effectively manage finances: The option to aggregate a variety of financial information; helping consumers to understand patterns in their own spending, could lead to better money management. In addition, this could pave the way for automated data-led financial advice.
Who will it affect?

While initially it is thought that Open Banking could hit the banks hard – according to a report by PwC, bankers fear they could lose up to 24% of their market share to FinTech companies – it could also offer lucrative outcomes for all three players: banks, third parties and consumers.

If banks are willing to embrace the change and work with their incoming competition, they have the opportunity to trade years of payments' experience with digital understanding.

PSD2 will also assist in creating a more efficient European payments market.

Why now?

In 2016, The Competition and Markets Authority (CMA) published a report on the UK's retail banking market which found that older, larger banks do not have to compete hard enough for customers' business, and smaller and newer banks find it difficult to grow and access the market.

The CMA's Open Banking Implementation Entity aims to create software standards and industry guidelines that drive competition and innovation in UK retail banking, ultimately attracting new providers and technology companies.

What are the risks?

Open Banking appears to offer many positives, however, regulators must be careful, as it is not without its risks.

Regulators will need to keep a close eye on all involved parties to ensure that consumers do not lose even more control over their data. Consumers will also need to remember that third-party advice may not be impartial.​

In addtion, strong authentication standards are needed to deliver the promises of Open Banking and a careful balance between fighting fraud and keeping consumers happy must be struck.

To discuss your digital banking and payment transformation challenges as well as opportunities around PSD2, Open Banking, Banking as a Service, Digital Identity and Blockchain, visit Gemalto at the Paris Fintech Forum on 30-31 January.​

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