Although Open Banking is relatively easy to understand, there’s a lot of unhelpful jargon involved, which can cause confusion. To ensure you completely understand what it is and what it means for you, this guide introduces you to the key aspects of Open Banking in the UK.
What is Open Banking?
Open Banking is a safe and secure way for you to provide key financial information to third parties. It’s a piece of legislation implemented by the government to provide individuals with more control over how their financial details are managed. All of the big banks in the UK – HSBC, RBS, Lloyds, Santander, and Barclays, are all required to use Open Banking and must offer their customers the chance to opt-in.
Why is Open Banking a good thing?
Your bank stores a great deal of your personal information, particularly in relation to your income and expenditure. If you opt-in for Open Banking, you can:
- View details of your different accounts from the same place
- Allow selected lenders to view your financial information, which may improve your chances when you apply for a personal loan
- Provide access to an app that could advise you on how to get a better deal for your savings
Prior to Open Banking, it was much more difficult for customers to access helpful information in regards to managing their money and financial data. One of the main reasons why Open Banking was launched was to encourage innovation in an industry that was lagging behind and not doing a great deal.
Can Open Banking help you get a loan?
One of the undisputed benefits of Open Banking is that it may help some borrowers access loans that they may not have been eligible for in the past. Traditionally, most lenders go to credit bureaus for information regarding a loan applicant, using their credit score to determine whether or not they’re a credit risk. However, Open Banking allows trusted lenders to look at an applicant’s bank transaction data in a completely secure way. The lender can see the income and expenditure of a potential borrower and make a much more informed decision about whether to approve them for credit.
Before Open Banking, lenders had no way of reviewing real-time financial information, which meant they relied on credit scores above all else. The fact that lenders can now get a much fuller picture of your financial situation means they’re more likely to approve your application, particularly if your credit score isn’t as good as you had hoped.
What else is Open Banking used for?
There are lots of ways that companies use Open Banking, and some examples include:
- Moneybox: The app allows you to save money by rounding up transactions and depositing them into a savings account or ISA. So, if you spend £2.85 on a latte, you can round the transaction up to £3.00, and the 15p will head straight for your savings.
- Canopy: You can easily track rental payments on a property, which can then be included in your credit report.
- Kalgera: This app helps to keep vulnerable people safe by tracking unusual activity on their bank accounts.
These innovative services are just scratching the surface when it comes to the possibilities associated with Open Banking. Ultimately, the legislation means that ordinary people are now fully in control of their financial data and have better access to financial products and services.
Open Banking API explained
API stands for Application Programming Interfaces. It’s commonly used in association with Open Banking, and it basically means the way that financial institutions share information or at least the technology associated with sharing information.
Is Open Banking safe?
Open Banking regulation is extremely strict, and participating parties must comply with FCA guidelines. The very essence of Open Banking is to make financial transactions safer, and you’re allowed to opt-out if you don’t want to participate.
Which banks use Open Banking?
All of the UK’s largest banks and building societies utilise Open Banking. Others that use the scheme include Monzo, Revolut, and Starling. You will also find that third-party lenders like Koyo Loans also use Open Banking, and the number of third-party providers using Open Banking is on the rise.
Benefits of Open Banking loans
If you apply for a loan from a lender that uses Open Banking, you may be able to access a lower rate, and they’re particularly appealing to borrowers who don’t have a strong credit history. Ultimately, they provide lenders with more information to make a decision on your application, which increases your chances of approval.
Although it might seem a little confusing at first, Open Banking is of benefit to customers as it gives you full control over how your financial data is managed. It also makes certain financial products and services more accessible, such as loans, and may increase your chances of approval.