4.6 Open Banking

4.6 Open banking

What is open banking?

Traditionally, customer data was kept securely within the closed systems of each bank. This information is used by each bank in order to better serve its individual customer, or to provide insights on customers at an aggregate level. Individuals would, under this approach, monitor, or engage with financial products on a bank by bank basis. There was no joined-up view of all the accounts used by a single consumer, either by the bank or by the customer.

Open banking is a paradigm shift from this previous approach where, if individual customers so decide, they can share their data between banks and non-bank third party entities[1] securely though application programming interfaces (APIs). Open banking seeks to

• Empower consumers to better manage their entire financial activities from a range of bank/providers in a unified and more consumer orientated manner.
• Allows technology orientated companies to enter the financial landscape and provide FinTech offering to consumers. Allows consumers to both share account information and make payments through these solutions.
• Help people in vulnerable circumstances to understand their financial situation better. A recent UK study, commissioned by Urban Impact on Health[2] showed users of open banking apps reported greater clarity, reduced stress and feeling more ‘grounded’ compared to without open banking apps.

Open banking in the EU was enabled by the PSD2, which required banks to open up access to customer payment accounts to two new categories of third party payment services providers[3]:

• Payment Initiation Service Providers (PISPs) that typically help consumers to make online credit transfers and inform the merchant immediately of the payment initiation. This allows for the immediate dispatch of goods or immediate access to services purchased online. For online payments, they constitute an alternative to credit card payments as they offer an easily accessible payment service because the consumer only needs to possess an online payment account, examples include Western Union Payment Services, First Merchant Processing (Ireland), TrueLayer (Ireland) Limited or FexCo Financial Services.
• Account Information Service Providers (AISPs) which allow consumers and businesses to have a global view on their financial situation. For instance, by enabling consumers to consolidate the different current accounts they may have with one or more banks and to categorise their spending according to different typologies (food, energy, rent, leisure, etc.), thus helping them with budgeting and financial planning - examples include Experian Ireland Ltd.

Access to these services is via an API, younger age profile and greater digital penetration Interface), with the user interface typically being an application on the user’s mobile phone that requires the customer to consent to the third party accessing their details and which is not automatic. PSD2 requires that all such third-party payment services providers be authorised and regulated by the relevant authorities including a requirement that users must provide consent to their bank every 90 days if their bank is to continue providing up-to-date data to their open banking apps.

What is the usage of open banking in Ireland?

As of November 2022, there were five AISPs and 11 PISPs[4] registered with the Central Bank[5]. While this gives an indication of the number of entities providing open banking services in Ireland. This does not provide any information about the amount of payments or the quantity of money transferred. There is no way to currently know the uptake of open banking in Ireland. Indicators that relate to amount and quantity would provide a more holistic picture but this data is not currently collected domestically. There is a need for greater data collection to better understand, and then promote open banking in Ireland.

The RBR Report, which did not specifically ask about open banking, and based on submissions and its own analysis, did conclude that the uptake of open banking in Ireland has been slow due to a number of factors. These factors include: the impact of legacy systems, which could not cope with the volume of API requests; challenges around harmonising of APIs; and the relatively low number of third-party providers operating here. Submissions to the RBR consultation process noted that many banks in Ireland took different approaches to historical transactions, including different time periods and varying levels of detail. Issues were also reported on the consistency in the speed of retrieval of historic transaction data leading to service timeout issues, as well as varied response times to service requests across banks. Measures to improve consistency by firms in the provision of information, and an enhanced focus on the user experience, combined with efforts to reduce friction consumers are likely to realise greater consumer benefits of open banking.

Therefore, the potential of open banking still remains largely untapped in Ireland.

What is the European Commission doing to promote Open Banking?

The recently published PSR by the European Commission proposes a range of enhanced measures around open banking, including granting better access to third party providers and, therefore, services to consumers. Some of the key provisions in the proposal include a requirement that banks must have a dedicated open banking interface in place, which offers all the same provisions that the direct customer interface currently provided by banks offer to consumers. Additionally, a permissions dashboard must be in place to increase consumer awareness of who has access to their data while also allowing users to manage this access. Banks must also ensure that their dedicated interface does not create obstacles to the provision of payment initiation and account information services to customers. The European Commission has also proposed a framework for financial data access[6] to enable that consumers and businesses have better control access to their financial data.

Open finance, while similar to open banking, is broader and it goes beyond the scope of payments account data. In relation to open finance, the European Commission’s Digital Finance Strategy noted that open finance has the potential to lead to better financial products, better targeted advice and improved access for customers, in addition to greater efficiency in business-to-business transactions. However, open finance is not within the scope of the NPS.