{"id":10640,"date":"2023-09-26T12:15:52","date_gmt":"2023-09-26T11:15:52","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=10640"},"modified":"2024-02-14T11:24:10","modified_gmt":"2024-02-14T11:24:10","slug":"open-banking-explained","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/open-banking-explained\/","title":{"rendered":"Open banking explained"},"content":{"rendered":"

Open banking allows users to share their financial information with authorised third-party providers in exchange for efficient and personalised money management services.<\/p>\n

This is a new industry, but since 2018, it has shown immense growth and innovation in the banking sector, especially in the UK. In fact, as more customers and businesses adopt open banking, its global market value is expected to reach $43 billion by 2028, a compound annual growth rate (CAGR) of 24.4% since 2021.<\/p>\n

With this new banking trend growing rapidly, we discuss below exactly what open banking is and how it works. We also explore its business benefits, and highlight some of the top open banking apps for small businesses. Let\u2019s get started.<\/p>\n

What is open banking?<\/h3>\n

Open banking is a banking system that allows financial institutions (like budgeting apps and cash flow management tools) to gain read-only access to their user\u2019s financial data. This could be their bank balance, transaction history, or savings. Access can only be gained with the user\u2019s explicit consent, and it can be withdrawn at any time.<\/p>\n

Should I open a business bank account for my company?<\/span><\/a>\n Opening a business bank account in the UK as a non-resident<\/span><\/a>\n <\/p>\n

By sharing financial data, open banking allows financial service providers to understand their client’s habits and needs, and offer them unique products and solutions.<\/p>\n

What can open banking be used for?<\/h3>\n

Depending on the provider, there are many ways for both customers and businesses to use open banking. For example, many people use it for quicker and smoother online shopping experiences, that eliminate the need to enter their personal payment card details.<\/p>\n

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Another use for open banking is to get personalised financial services such as saving, budgeting, or investing advice. Many open banking providers can analyse customers\u2019 bank balances and spending habits to offer tailored money management solutions.<\/p>\n

There are also plenty of ways for businesses to use open banking. For example:<\/p>\n

1. Accountancy and tax<\/h4>\n

If you own an accountancy firm, you could use open banking to access your clients\u2019 bank statements for audit, run automated audit tests, or send and receive faster audit confirmation requests.<\/p>\n

If you\u2019re self-employed or file an annual Self Assessment tax return, open banking can help you pay your tax bill online or easily manage your expenses and invoicing.<\/p>\n

2. Cash flow<\/h4>\n

Manage your cash flow easily by seeing your past, current, and future business transactions.<\/p>\n

3. E-commerce payments<\/h4>\n

Open banking allows you to receive payments from your customers quicker than traditional methods, with reduced processing fees. You can also implement a rewards system for your customers with open banking, or make quick and easy international payments.<\/p>\n

4. Loans and financing<\/h4>\n

Access your customers\u2019 credit reports via open banking, or share your company\u2019s health data with lenders to source a business loan.<\/p>\n

How does open banking work?<\/h3>\n

Open banking services are carried out through Application Programming Interfaces (APIs). An API is integrated software that safely and seamlessly connects customers\u2019 data with an authorised third-party provider. In other words, APIs allow financial providers (for example, banks, budgeting apps, accountants, etc.) and open banking providers to \u2018talk\u2019 to each other.<\/p>\n

Here\u2019s how open banking works at a glance:<\/p>\n

Step 1: Customer authorisation<\/h4>\n

The financial provider must request consent to access a customer\u2019s details. This is normally done when the customer signs up for the provider\u2019s services. Then, a request is sent to their bank, which processes and shares the customer\u2019s financial information.<\/p>\n

Step 2: Data sharing<\/h4>\n

Once consent is given, the customer\u2019s data is safely shared through an API.<\/p>\n

Step 3: Transaction request<\/h4>\n

As well as securely accessing the customer\u2019s information, the financial provider can also use open banking APIs to send transaction requests. This allows the customer to approve payments without logging into the mobile banking app.<\/p>\n

Unlike traditional banking (e.g. direct debit or credit cards), open banking is safer and quicker, as there is no need to enter any payment details. The middleman (bank) is removed, allowing the API to connect directly to the right financial data.<\/p>\n

Is it safe?<\/h3>\n

Open banking uses several security measures to make sure that customer\u2019s data is safe and shared securely. Some of the main protective features include end-to-end encryption, multi-factor authentication, and access controls that allow customers to choose the information they share.<\/p>\n

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Once data sharing is permitted, third-party providers gain read-only access to customer\u2019s information. This means that they can simply view the data and are restricted from making any changes.<\/p>\n

Finally, open banking tools are regulated by the Payment Services Directive 2 (PSD2) in Europe, and the Financial Conduct Authority (FCA) in the UK.<\/p>\n

The benefits of open banking for small businesses<\/h3>\n

Some of the key benefits for SMEs are:<\/p>\n