What is Open Banking?

You’ve heard about it. You might’ve even used it. But do you know what open banking really is, the products and services it powers, and how it works? And did you know that it actually refers to two separate things?

Here’s everything you need to know.

Fun fact: two in five British adults still use their childhood bank account.

So, banks have a lot of information about our financial behaviour. Yet they’ve mostly done nothing with it.

The result:

  • A monopoly on our data
  • A lack of tailored products and services
  • Our money sitting in current accounts doing nothing

To solve this, the European Commission introduced Payment Service Directive 2 (PSD2). This forced Britain’s banks to release customers’ financial data to third-parties (with our consent, of course).

This kickstarted open banking.

What is open banking, exactly?

Many people assume open banking is a single concept, but it is in fact two things.

One: A liberalisation of financial policies

This global movement began appearing in mid-2010s. It sought to actively encourage easy data sharing between banks and non-bank third-parties over modern, secure channels.

PSD2 mandated change in the European union but it has not yet been made law in the same way elsewhere in the world.

A huge change is that banks covered by PSD2 legislation are now required to open up their data channels to Third Party Providers (TPPs). The former should share customer data with the latter when end users request it.

Importantly, we – the consumer - will know who has secure access to our data and what their access level is. We will also have the ability to easily allow or deny this access.

So, financial service providers (other banks and TPPs) can access and consume financial data as quickly, consistently and accurately as possible.

Two: A reference to Open Banking Limited

Open Banking Limited (formerly the Open Banking Implementation Entity (OBIE)) is a UK-specific collaborative organisation that sets standards for PSD2-compliant technology at banks and other services providers. As one of the world’s first instances of a government-sponsored rollout, the standards and processes it has established are proving influential globally.

What is PSD2?

PSD2 (the Payment Service Directive 2) is a January 2018 EU-wide directive for making the European payments and banking sector fairer. It was the regulatory trigger for open banking and in many ways - it is synonymous with open banking.

It mandates that banks make user financial data available for sharing with alternative service providers. Uses for this data could include:

  • Initiating payments
  • Aggregating finances
  • Giving account access to insurers or lenders to make affordability decisions or more.

PSD2 introduced two new regulatory entities for setting open banking rules: the Account Information Service Provider (AISP) and Payment Initiation Service Provider (PISP). Both of these represented legal permissions required by businesses to have payment service providers access open banking data.

National regulators in Europe are in charge of handling the application process for such permissions. For example in the UK it’s the FCA, in France the ACPR, Germany has BaFin and so on.

Why does open banking matter?

Open banking has a big impact on many areas of the economy, people’s day-to-day lives as well as greater opportunity for financial inclusion.

Access and utilisation of financial data

Open banking means that financial institutions no longer have a monopoly over financial products.

It allows third-party providers (TPPs) to access consumers’ bank data. This data might be basic records, like account name and address. Or more specific information, like regular payment details and transaction history. It does not allow access to the funds held by the account provider.

Ultimately, access to this data could help consumers do many things better. This could include:

  • Finding a mortgage
  • Accessing credit
  • Saving
  • Investing money
  • Finding a cheaper utility provider
  • Switching insurance
  • Personalising shopping experiences

Everyone wins!

This does not mean traditional banks cannot gain from open banking. In fact, greater access to personal and business financial data across APIs, with added security and a ban on screen scraping, is a huge step and presents opportunities for everyone!

Individuals and businesses can now choose service from a more competitive range of financial services companies. Service providers can make more informed financial decisions about who they lend to and consumers have access to services they may have previously been denied.

Payments services

Open banking can also significantly affect the payments services consumers use.

Take sending money to friends and family as an example…

Before open banking, if you wanted to split a dinner bill, you had to send money via bank transfer. Now, you can pay your share using a TPP like Emma, which doesn’t require sharing your account number and sort code.

In short, open banking has changed how we make payments. And it will continue to do so in the future.

How does open banking work?

To access our bank data or initiate a payment from our account, a TPP needs a consumer’s consent.

Once it has it, the consumer’s bank will then issue an access token and a refresh token. This enables a TPP to access the consumer’s data without any additional effort from the consumer.

Note: consumers have to re-confirm their consent every 90 days, and can revoke it at any time.

Open banking is like plumbing…

Our financial data flows through “pipes” called Application Programming Interfaces (APIs). These pipes (APIs) enable software to send data to one another.

This network of pipes are text in bold__everywhere. And they’re multiplying. Sending an email? There’s an API behind that. Sharing a post on Facebook? You’ve got it, an API.__

In open banking, the consumer consents to a TPPs having a direct pipeline to the consumer’s bank. This enables the TPP to handle your data quickly and smoothly.

Want to know your API from your AIS? Check out our open banking glossary.

The tech bit

Open banking incorporates technical and security developments, too. PSD2 introduces mandatory Strong Customer Authentication (SCA), meaning individuals and businesses can only access their data through secure online gateways.

Data and payment requests are to be made over APIs, a real-time, accurate alternative to the old days. You can test open banking connectivity yourself with the Yapily API.

PSD2 compliant-APIs represent official, modern, secure and efficient alternatives to older technology. And - crucially – they do not involve the sharing of user bank credentials.

Building open banking API integrations is a big task. This is because the PSD2 API market is set to soon explode. What happens when businesses gain users around the world, for example? You don’t have a choice in the matter - you need to integrate fast.

Is open banking safe?

The short answer: yes, very.

In fact, open banking was built with security at its heart.

To offer open banking services, a TPP needs to gain an open banking license from the Financial Conduct Authority and enrol with the OBIE Directory.

They also need to be registered with a regulator who will issue a digital certificate. These certificates serve as their identification which gets registered and verified by every bank.

Once this is done TPP and banks can then establish a secure channel to transfer consumers’ bank data.

But before this happens, consumers receive a Strong Customer Authentication (SCA) notice from their bank. This is a form of two-factor authentication, involving extra steps to reduce card fraud. To prove their identity, they need to enter their PIN, password, or biometrics.

How are consumers using open banking?

Right now, six million people in the UK use open banking.

Since its implementation in 2018, a wave of financial tools has emerged to help people better save and manage their money. The best part? Consumers don’t have to switch banks to use them.

Our latest research sound the following information:

  • 88% of consumers could be using money management tools powered by open banking without knowing it.
  • 80% thought they understood their financial options
  • 52% hadn’t even heard of open banking

So, how can open banking support us in everyday life?

Below are three examples.

1. Multi-banking

1 in 3 people in the UK have more than one bank account.

The problem? They don’t always know what they’re paying for.

Previously, they’d have to audit their bank statements to spot a duplicate charge or an unused subscription. Now, they can use an app powered by open banking to aggregate their accounts and spot stray transactions.

2. Intelligent savings

10.7 million people in the UK rarely or never save. In fact, our latest report revealed half of consumers save 5% or less of their salary each month.

But Variable Recurring Payments (also known as me-to-me payments), are positioned to change this. They do so by automatically sending excess money into users’ savings accounts.

3. Tax and utility payments

A growing number of businesses and public sector organizations now accept open banking as a payment method.

For instance, it can be used to pay self-assessment tax, corporation tax, VAT, and other taxes through HMRC. Some utility companies, like United Utilities, now accept open banking payments, too.

How are businesses using open banking?

More than 600,000 UK businesses now use open banking-powered solutions. It can help them in a number of areas, including:

  • Getting paid faster
  • Safeguarding cash flow
  • Reduce admin time (by automating tasks like payroll and invoices)

We found a third of finance and business leaders already knew about open banking and were considering using it. 19% were unaware of how open banking can benefit them. And 13% were unaware of it all together… that’s 65% of leaders keen to hear more.

Are you one of them? If you want to understand open banking providers more, check out our comprehensive open banking questions. Find out more on how to get buy-in for open banking from the top, too.

Benefits of open banking for businesses

So, what benefits are the businesses already using open banking seeing? In our latest report, they said…

  • It reduces administration (31%)
  • It lowers payment processing fees (29%)
  • It improves cash flow management (28%)
  • It provides real-time insights (26%)

Let’s explore a few use cases…

1. Payroll

It was previously impossible for businesses without a corporate banking account to bulk-pay salaries from the same bank account.

But things have changed…

Our award-winning Bulk feature in partnership with Comma is one example of a solution to this problem. Now, businesses can submit payroll from their phone or desktop in one go.

2. Identity verification

Around €5.7 billion is lost during the onboarding process.

Why? Because businesses still rely on physical documents for identity verification.

The paradox is that paper documents are riskier than digital credentials. In fact, they’ve contributed to a surge in identity fraud. But with access to data, companies can verify a customer in seconds.

3. Point of sale (POS) payments

Right now, businesses are shouldering a 600% increase in card transaction costs. Considering card payments make up nearly 80% of retail sales, that’s a lot to bear.

So, merchants are starting to use QR codes to offer open banking payments in the physical world. Smaller processing fees and faster settlement? Yes, please.

The future of open banking

Over the decades, the banking industry and the financial services industry more broadly have seen innovation. ATMs, digital wallets, and personal finance apps, and more. But the underlying system hasn’t changed.

That was until PSD2.

Now, open banking is building financial inclusion. But wait, there’s more…

1. Open finance

Open finance applies the principles of open banking to the broader financial ecosystem. It uses APIs to secure data sharing between institutions.

This brings innovation, competition, and benefits to consumers in areas such as insurance, mortgages, pensions, investments, and more. It encourages financial service providers to innovate with other financial data.

What’s the difference between open banking and open finance?

The main difference between open banking and open finance is that the former is limited to payment accounts. Open finance, on the other hand, can be applied directly to other types of accounts, such as savings accounts, pensions, etc.

2. Open data

Open data takes open finance one step further. It moves beyond financial services into almost every area of our lives. For example:

  • Healthcare
  • Telecoms
  • Utilities
  • Transport

And more.

In fact, open health is already transpiring in Brazil, and open energy is taking shape in Australia.

3. PSD2 becomes PSD3

While PSD2 achieved most of its intentions, it created barriers in the journey to open finance.

As the EU Commission takes steps to move forward, PSD3 is beginning to materialise. We’re heading in the right direction with a series of consultations on PSD3. This includes a new, ambitious framework for open finance. Watch this space.

Got more questions about open banking? We’ve got answers. Head to our FAQs for more.


Open banking refers to two things:

  • A global movement aimed at liberalising financial data sharing between banks and third-party providers (TPPs) via secure channels
  • Open Banking Limited - a UK-based collaborative organisation

Both were initiated by policies like the EU’s PSD2. This breaks the financial institutions’ monopoly on user data, fostering competition and innovation. This data can be used to streamline payments, improve affordability decisions, and personalise consumer experiences.

In essence, open banking enhances financial transparency and user control. It allows both individuals and businesses to make more informed financial choices. It also modernises payment methods, making transactions like splitting a dinner bill faster and more secure.

It is also a secure way to give service providers access to your financial information. It has strict data protection rules and operates through APIs and requires strong customer authentication. Customers must give consent every 90 days to maintain data access by third-party providers (TPPs).

For businesses, it offers advantages like faster payments, improved cash flow, and reduced administrative costs. In the UK, six million people and 600,000 businesses are already utilising open banking-based services.

Future trends point towards open finance, which extends the principles of open banking to other financial services, and even open data, expanding into areas like healthcare and utilities. Regulatory updates like PSD3 are in the pipeline to address the limitations of current policies like PSD2.


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