SMEs today have a host of funding options at their disposal beyond traditional banking. Often underserved by high street banks, SMEs are already turning to alternative financial service providers for payments and lending. Here we look at 5 common myths around Open Banking so you can get the most bang for your buck.
Did you know that Open Banking can actually help you access finance faster, more efficiently and allow you to manage your money better? Open Banking may help you make the most of the funding options available in the market.
What is Open Banking?
With your permission, Open Banking allows your financial data to be be shared with trusted third parties. It opens up finance products and services that traditional banks may not offer to a wider pool of customers who can then manage their money better. The regulatory changes introduced in 2018 were meant to encourage healthy competition among finance providers that can lead to greater innovation and technological adoption.
Open Banking can increase financial accessibility for individuals and small business owners to compare deals and make informed decisions using a single platform.
This means that the UK’s nine largest banks (the CMA9) are obliged to release their data securely and in a standardised way so that it can be easily shared online between authorised organisations.
In short, Open Banking allows a wider net of finance providers to access your company’s financial information safely so you can gain the best deals for your business. Lenders are already using Open Banking to understand their customers better and make more informed choices when it comes to affordability.
It’s also facilitating faster and more transparent payments by allowing individuals and businesses to make payments from one account to another directly.
In March 2021, the UK’s biggest lenders – known as the CMA9 - got together to set up a not-for-profit company to oversee the roll out of Open Banking. Lenders including Barclays, HSBC and NatWest set out to comply with requirements set by the Competition and Markets Authority (CMA) five years ago.
As well as allowing UK consumers, SMEs and corporates to leverage Open Banking in an efficient and safe way, the new company will enable the UK’s financial institutions to meet their Open Banking regulations and responsibilities.
According to finance experts, the report published by the CMA9 is a key step toward making Open Banking a staple in the sector.
Is Open Banking safe?
According to The Open Banking Implementation Entity, “every provider that uses Open Banking to offer products and services must be regulated by the FCA or European equivalent.”
At the moment, the nine biggest banks and building societies are enrolled on the Open Banking Directory, and others are coming soon. There’s a lot of information about Open Banking available but myths around its safety and security still abound. Funding Options addresses the five most common Open Banking myths, summarised below.
Myth #1: My data can be shared without consent
Financial institutions cannot share your data without your consent, so unless you opt-in for this, your information stays within just your original finance provider. By opting in, you can choose to share your data with a wide range of alternative companies that may give you more competitive products and rates. You can withdraw your consent whenever you want.
Banks share data via “Open Banking API”, an Application Programming Interface (API) that basically acts as a mediator between two different applications. The CMA9 banks use secure APIs to share their data with approved third parties.
Myth #2: My money could be compromised
Because of the nature of the Open Banking API, your data and finances will remain as secure as it would be at your bank. Information like passwords and account numbers are encrypted so that nobody but you can see the information shared with your finance providers.
Myth #3: I can’t recoup money lost to fraud
All of the financial services providers connected via Open Banking API are insured to protect you against any potential risks like fraud. If something should go wrong, your bank has an obligation to resolve the issue and return the money to you.
Myth #4: It’s bad for my bank
Open Banking provides customers with more choice and better, competitive rates. But this doesn’t mean that it’s all doom and gloom for banks, who have largely held a monopoly in the market. Most banks are ‘open’ to Open Banking and see the merit in increased competition and innovation. Banks have been preparing for Open Banking and the European regulation, PSD2, for years before it went live to customers, so they’re prepared.
Myth #5: It’s complicated to use
Open Banking is designed to simplify banking processes. For example, something as simple as a payment request is even more streamlined via Open Banking. You can use Request for Payment technology to send this request to your customers’ bank account instead of relying on debit and credit cards. The process becomes naturally more transparent and account balances are updated in real time giving you better control of your finances.
If you use online or mobile banking for your personal account you can begin exploring Open Banking for your business now. Read more about Open Banking on Funding Options’ blog.