Open Banking: What is it?
by Arnab Dey Loans & Credit 01 February 2022
You’ve probably come across the term ‘Open Banking’ while you’ve been researching loans provided by various online lenders. Although the concept of Open Banking is far from complex, it is a reasonably new approach that is often referred to with unhelpful jargon – think fintech and PSD2, for instance.
To help you understand Open Banking, we’ve put together this guide that explains the concept as simply as possible.
Open Banking definition
At its core, Open Banking provides a safe and mutually beneficial way for lenders to access financial information before approving a borrower’s loan application.
It enables lenders, like Koyo Loans, to fully understand your financial circumstances, meaning they don’t have to rely solely on your credit score. Open Banking isn’t a service or product, it’s a set of rules that benefits lenders and borrowers in the United Kingdom.
In January 2018, new legislation was passed in the UK to transform financial services in a good way. The Open Banking directive supports customers to make better use of their financial data and ensures that financial institutions like banks and building societies open up their data, hence the name.
The result is secure and available financial data, which can be accessed by various companies. The largest banks in the UK are required to participate in Open Banking, including:
- AIB Group UK (First Trust Bank)
- UK Bank of Ireland
- Barclays
- HSBC Group (First Direct and M&S)
- Lloyds Banking Group (Bank of Scotland and Halifax)
- Nationwide Building Society
- Natwest Group (Ulster Bank NI)
- Northern Bank Limited
- Santander
Collectively, these institutions are referred to as the CMA9 and were required to come together to create open-source OpenBanking APIs in January 2018. Other banks are also included, and you can find out more by accessing the Open Banking website directly.
Why is Open Banking helpful?
Following its introduction in 2018, UK customers have been able to access a wealth of services that were previously off-limits. For example, Open Banking has made it easy for people to aggregate their accounts from different banks into the same place while receiving better offers and rates from online lenders.
What’s more, some apps are now able to view your savings, which leads to better deals being offered if you switch accounts to other banks.
That’s not it, either. Open Banking has the potential to transform the way you move and use money and provides you and other customers with a whole host of benefits.
How is Open Banking used by lenders?
Open Banking is utilized by lenders to ascertain and assess the financial status of a person that applies for a loan. Historically, lenders would simply carry out a credit check without accessing any additional information.
This would lead to an unfair representation of a person’s financial situation, particularly if they were first-time borrowers or new to the country.
Lenders like Koyo Loans make use of Open Banking through TrueLayer, which is a provider regulated by the FCA. Truelayer makes Open Banking transactional data available to lenders, which ultimately is used to validate the financial situation of the person applying for a loan.
Koyo Loans offer personal loans based upon data received from Open Banking, which provides them with a much better idea of the financial circumstances of the applicant. 27.9% APR Representative.
Is Open Banking Secure?
Understandably, customers are often concerned about the safety and security of Open Banking, as it’s a relatively new process. But to allay your fears, Open Banking is 100% safe. The FCA places extremely strict regulations on Open Banking, which all stakeholders must adhere to.
Open Banking was designed to provide customers with more insight and to enable them to take control of their data. As such, you’re not required to use Open Banking if you don’t want to. You can always change your mind if it’s not something you’re interested in. The bottom line is that your data is now in your hands, and you can do as you please.
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