Open Banking: what it is, why it matters and how Zopa uses it
Open Banking is all about giving you better control over your banking data. Rather than your bank hoarding the information about your transactions and account, you get to decide how and when you want to share this with other providers, apps and services.
But why would you do that?
There are lots of benefits, but here are the main three:
It can enable you to see all your accounts in one place. If you have a couple of bank accounts, a credit card and a loan with different providers, Open Banking allows you to collate all these in one place so you can get a better idea of your overall financial picture. Now, I hear you cry, this has been around for years. And that’s kind of true, but the sort of aggregators that existed before 2018 (when Open Banking launched) would only be able to use alternative methods of doing this, like screen scraping, which just copies data from the public source code of a website. They couldn’t do anything much with the data, which leads us to our next point…
Sharing your data gives other finance companies more information to work with, so they may be able to offer you more personalised products - like showing you the guaranteed rate you’ll get and give you more certainty of being accepted - all before you even apply. This is particularly helpful for lending products like loans and credit cards, as you can be certain of this information with no risk to your credit score.
It can also speed up some of the fiddlier, time-consuming processes that cause eye rolling and teeth gnashing when you’re managing your money online. By giving providers direct access to your account, companies can get the information they need without you having to download statements or put in bank details every single time.
An important thing: if you don’t want to share your information via Open Banking, you don’t have to do any of this. You are in control of your data, so you can decide who it’s shared with, and when and how that happens.
How does it work?
This gets a little technical.
Open Banking launched on January 13 2018, when nine major banks in the UK were meant to provide application programming interfaces (APIs) for current accounts to any third-party providers that request them. Using these APIs, third-party companies can retrieve a customer’s financial information directly from their bank (if given consent to do so).
Essentially, it introduces a safe and standardised way for customers to share their banking data with regulated third parties.
If you’re knocking around the Open Banking literature, you might also come across PSD2. This isn’t the same as Open Banking, but they are complementary and came into force on the same day.
PSD2, or the Payment Services Directive 2, is an EU directive that introduced the obligation for payment service providers to make it easier for you to do what you want with your banking data. It imposes a lot of requirements on companies that you might share your data with - things like the need for proper controls and audits, dedicated processes around sensitive payment data and much more. Broadly speaking, Open Banking is the UK’s implementation of this.
How Zopa uses Open Banking
Here’s some of the ways we use it as Zopa to make your life a little bit easier:
1. Verifying income
When we lend to people, we need to make sure they can afford it and we do that by checking their income. Sometimes this happens automatically through the credit bureaus (for example Equifax), especially with people who’ve been borrowing a lot. However, if you’ve got less of a borrowing history or your finances are a little more complicated, we’ll need to check more details to make a decision. In the past, you’d have to send us a PDF or scan of your bank statement via our secure portal. With Open Banking, the whole process is much simpler, especially if you’re on your phone – you might only have access to a bank statement that’s out-of-date, for example, or not have all the information we need to hand. When prompted during your application, you just click that you want to use Open Banking, get sent to your bank, unlock with your fingerprint or other biometric ID, and confirm you’re happy to share your details. Then you’re sent back to Zopa and then we look at that to work out your income. So there’s much less back and forth.
2. Offering credit where other providers can’t
We’re using our Open Banking capabilities in a partnership with ClearScore to give even more people access to our credit card. Credit files alone only provide a restricted view of someone’s individual financial situation, especially in light of the last 14 months, resulting in consumers being declined for products that they can actually comfortably afford. We don’t think that’s fair. So, by using Open Banking, we’re taking a holistic view of a customer’s financial situation to responsibly provide a pre-approved Zopa credit card, with a guaranteed rate, to those who would be locked out of our products based on what’s on their credit file. Want to know more? Our CCO, Tim Waterman, spoke exclusively to AltFi alongside ClearScore’s Andy Sleigh about the partnership.
Is it safe?
In a nutshell, yes, but only if you’ve shared your data with an authorised provider. You can check if a company’s authorised on the FCA Register or the Open Banking Directory (our Open Banking partner, TrueLayer, is listed here).
If you do see fraudulent payments coming out of your bank account after allowing an authorised third-party access using Open Banking, then you should receive the same levels of compensation from your bank as you would with other fraud. If your bank thinks it’s the third party’s fault, then they can take it up with them. If you’ve used an unauthorised provider, then your case is less clear as your bank could claim you’d been negligent in sharing your details with them, and so you could be liable for your loss.
The other area that might be a concern is around the safety of your data, but again if you use an authorised provider, they should be following strict data regulations, including GDPR.
But the important thing to remember here, is that it’s your choice who to share your data with and when.
Open Banking is there if you want to use it, but if you don’t want to, you don’t have to.