Open banking is the practice of sharing customer data between banks and third-party providers (TPPs). This process requires customer consent and uses application programming interfaces (APIs) to transmit authorized data electronically. Open banking has powered the rise of the fintech industry and a long list of new financial services. It also saves businesses time on tasks such as processing financial data.

This guide will explain who regulates open banking, what open banking standards exist, and how open banking regulations impact innovation.

What’s in this article?

• What is open banking used for?
  
• What are open banking regulations?
  
• Who regulates open banking?
  
• Open banking standards
  
• Consumer rights and protections under open banking
  
• How open banking impacts financial innovation
  

What is open banking used for?

Open banking creates a more competitive and innovative financial landscape by enabling the development of new financial products and services. Open banking is an evolving concept, and new applications and uses emerge regularly. Some popular applications of open banking are outlined below.

For consumers

• Financial management: Open banking allows businesses to collect and aggregate a customer’s data from multiple accounts into a single platform, which means consumers can better track their spending, budgeting, and saving. These services can also offer tailored recommendations on products and services such as loans, insurance, or investments.

• Improved access to credit: Open banking allows lenders to gain a more comprehensive view of a borrower’s financial situation, potentially leading to better loan terms.

• Payment solutions: Open banking has enabled users to make payments directly from their bank account, eliminating the need for traditional card networks.

For businesses

• Cash flow management: Open banking allows businesses to integrate banking data with accounting software, simplifying financial operations and improving cash flow visibility.

• Invoicing and payment automation: Open banking has facilitated automated invoicing and payment collection services that reduce administrative overhead.

• Alternative lending: Open banking facilitates the integration of financial data from a wider range of sources, allowing businesses to potentially negotiate better loan terms and expanding access to credit for small and medium-sized enterprises.

• Targeted financial products: Fintech companies use open banking to develop new financial products and services.

What are open banking regulations?

Open banking regulations are rules and guidelines that regulatory bodies establish to govern how banks and third-party providers share financial data. The purpose of these regulations is to increase market competition, promote innovation, and improve consumer choice in the financial services industry while ensuring consumer data remains private and secure. Here are the key elements of open banking regulations.

• Consumer consent: The principle that consumers own their financial data governs open banking regulation. Regulations require that banks can share customer data with TPPs only after obtaining explicit consent.

• API standardization: Open banking regulations often require the standardization of APIs, which makes it easier and safer to share and access data across different systems and platforms.

• Access rights and responsibilities: Regulations define the rights and responsibilities of all parties involved in open banking, including the conditions under which TPPs are allowed to access bank data, what they can do with the data, and the data security and integrity standards they must meet.

• Security protocols: Open banking regulations require rigorous security requirements to prevent data breaches and fraud. This includes the use of strong encryption, authentication methods, and regular security audits.

• Regulatory oversight: Open banking regulations often require businesses to practice regular reporting, adhere to operational standards, and participate in security audits.

Who regulates open banking?

Open banking regulation varies depending on the country and region, with different approaches and regulatory bodies overseeing its implementation.

• Europe: The European Union’s revised Payment Services Directive (PSD2) mandates open banking across member states. PSD2 also dictates customer rights and protections (including Strong Customer Authentication) and security requirements for electronic payments. The European Banking Authority (EBA) develops technical standards and guidelines for open banking, while national competent authorities (NCAs) in each country are responsible for enforcing the regulations.

• United Kingdom: Following Brexit, the UK has retained the stipulations of the PSD2, adding specifications for the standardization of APIs, and established the Open Banking Implementation Entity (OBIE) to oversee the implementation and development of open banking standards. The Financial Conduct Authority (FCA) regulates the financial services industry, including open banking activities, and emphasizes consumer rights to data access and privacy as well as detailed guidelines on how financial institutions should handle consumer data.

• Australia: The Consumer Data Right (CDR) guidelines enable consumers to share their data with accredited third parties, and emphasizes the consumer’s right to access personal data and their right to control who can have access to it. The Australian Competition and Consumer Commission (ACCC) is the primary regulator for CDR, while the Office of the Australian Information Commissioner (OAIC) oversees data privacy aspects.

• United States: Currently, there is no comprehensive federal regulation for open banking in the US. In October 2023, the Consumer Financial Protection Bureau (CFPB) proposed a rule to implement Section 1033 of the Consumer Financial Protection Act, which would give consumers the right to access and share their financial data. This rule, if finalized, will establish a federal framework for open banking, and the CFPB will oversee its implementation. Meanwhile, several states have introduced or are considering their own open banking legislation, and industry-led organizations such as the Financial Data Exchange (FDX) have established voluntary data-sharing standards.

• Other regions: Some countries have adopted or are developing their own open banking regulations. Notable examples include Singapore (regulated by the Monetary Authority of Singapore), Japan (regulated by the Financial Services Agency), and Hong Kong (regulated by the Hong Kong Monetary Authority).

Open banking standards

Open banking standards are a set of technical specifications and guidelines that enable safe and effective data sharing between banks and authorized TPPs. These standards ensure interoperability, security, and consumer protection in the open banking process.

Key components of open banking standards

• APIs: APIs provide a standardized way for different software systems to communicate with each other. In open banking, open data API specifications allow TPPs to access customer financial data from banks.

• Data formats: Open banking standards define the structure and format of the data that banks and TPPs exchange, so different applications can easily interpret and use the data.

• Security protocols: Open banking standards require strong security measures such as encryption, authentication, and authorization to protect consumer data from unauthorized access and misuse.

• Customer authentication: Open banking standards also specify the methods for customer authentication so that only authorized individuals can access and share their financial data.

• Error handling and reporting: Open banking standards provide mechanisms for error handling and reporting issues that might arise during data exchange.

Global and regional open banking standards

• UK Open Banking Standard: The Open Banking Implementation Entity (OBIE) developed a comprehensive set of standards that have been widely adopted by banks and TPPs in the UK. These standards cover topics including APIs, data formats, security, and customer authentication.

• NextGenPSD2 framework: The Berlin Group, a pan-European payments industry association, has developed the NextGenPSD2 framework to coordinate open banking standards across Europe. This builds upon the PSD2 directive and provides additional specifications for APIs and data formats.

• Financial Data Exchange (FDX) API: The FDX API standard has been widely adopted in the US. It was developed by an industry-led consortium to standardize and boost the security of data sharing in open banking.

• Other regional standards: Other regions have also developed their own open banking standards, such as Australia’s Consumer Data Right and the Singapore Financial Data Exchange (SGFinDex), tailored to their specific regulatory and market requirements.

The importance of open banking standards

Open banking standards provide the following benefits.

• Interoperability: Standardized APIs and data formats allow different systems to communicate and exchange data, promoting development and competition.

• Security: Strong security protocols protect consumer data and maintain trust in open banking.

• Consumer protection: Clear guidelines for customer authentication and consent give consumers control over their financial data.

• Regulatory compliance: Standards help banks and TPPs comply with open banking regulations, minimizing legal and operational risks.

Consumer rights and protections under open banking

Consumer rights and protections are key to open banking’s success. These rights give consumers control over their financial data while protecting their privacy and security. Here are the key consumer rights and protections that open banking regulations typically address.

• Right to data access: Consumers have the right to access their financial data held by banks, including information on their transactions, balances, and other financial details. This access must be provided in a convenient, secure, and timely manner.

• Right to data portability: Consumers have the right to take their financial data from one service provider and give it to another. This makes it easier for consumers to switch providers or use multiple services.

• Right to privacy: Service providers and banks must use consumers’ financial data appropriately and only with the explicit consent of the consumer. Regulations such as the GDPR in the EU and similar privacy laws in other regions enforce strict guidelines on data usage, storage, and sharing.

• Consent management: Consumers must give explicit consent for data sharing, and they must understand what data will be shared, with whom, and for what purposes. Consumers must be able to withdraw their consent at any time, effectively stopping any further data sharing.

• Error handling and redress: Open banking regulations provide mechanisms for consumers to report errors or unauthorized transactions and to receive timely responses. Consumers have the right to redress, including corrections of errors, compensation, and, in some cases, apologies.

• Security: Businesses must handle consumers’ financial data securely. This includes the use of strong encryption, authentication, and regular security audits by all parties involved in handling the data.

• Nondiscrimination: Consumers cannot be discriminated against based on the data they choose to share or not share. Their rights to access financial services should not be diminished if they decide not to participate in data-sharing under open banking.

How open banking impacts financial innovation

Open banking requires banks to share financial data with authorized TPPs. This data is a valuable tool in developing innovative financial products, from budgeting tools and investment apps to entirely new banking services. Here’s how open banking contributes to financial innovation.

• Encouraging competition: Traditionally, the financial sector has been dominated by large, established banks that wield full control over their customers’ financial data. Open banking allows smaller companies and new entrants access to this data, giving them an opportunity to compete with big banks. Additionally, open banking encourages competition because it allows consumers to take their data to another business if they’re unhappy with the service they receive. This pressures financial institutions to improve their offerings and invent solutions to retain and attract customers.

• Facilitating collaboration: Open banking helps banks and fintech companies collaborate more effectively. Instead of seeing each other purely as competitors, these entities can partner to combine their strengths. Such partnerships can lead to the development of new services that might not have been possible if each party worked alone.

• Improving consumer experience: With open banking, companies can use access to financial data to better understand consumer needs and behaviors, leading to more personalized services. For instance, an app might analyze a user’s spending patterns and offer advice about saving money, or alert the user to relevant financial products.

• Driving technological advancements: Open banking’s use of financial data sharing has pushed the technology sector to develop better security measures, such as advanced encryption techniques and secure authentication methods. The requirement to handle large volumes of data has also improved data processing and management technologies.