Are data protection and open banking compatible?

In 2018 the EU's Payment Services Directive II (PSD2) initiated open banking to increase innovation and competition in the banking sector.

However, Articles 64-66 of the directive also emphasised that customers? account data can only be used by a third party with their consent. In addition, the regulatory environment has since seen data protection rights bolstered by GDPR.

Just as there is a tension in the media landscape between the competing rights of privacy and freedom of expression, so there is tension in the finance sector between open banking and the protection of customer data.

Open banking means that customers? data can be held by several parties, with more opportunity for things to go wrong.

American Banker's piece on the collision between privacy and open banking expressed the view that ?data is likely to become a tool for success, and a source of risk?.

Proponents, such as fintechs, argue that the risks have been exaggerated and that open banking and data protection legislation have similar goals - giving citizens and businesses greater control over their data.

Fintechs themselves have the most to gain from PSD2, and have been active in the open banking space, but the banking sector itself has arguably been slower to respond.

That is the view of Neonomics? CTO Kenneth Wageniusc, who believes that banks reacted to PSD2 by seeing it first as a threat and then just as a compliance issue. He adds however that ?over the last year, the banks? tone has shifted. Now, they are talking about it more as an opportunity?.

Our argument seems to be a very widespread view. For example, from Fintech Futures (December 2019): "Despite the risks, many European banks have continued to drag their heels on their PSD2 implementation, causing huge frustration across the fintech community which has been holding its breath for the quality APIs they need for their cutting-edge open banking innovations to work." I'm sure there are plenty of others saying the same thing.

What benefits can the UK's business customers expect from this opportunity, benefits that will outweigh the perceived risks to data security?

  • Making and receiving payments in near real time, at minimal expense.
  • Aggregating their accounts and managing their cashflow more efficiently. (For example, there are 20 regulated financial management apps for SMEs on
  • Enjoying increased access to financing - at reasonable rates, based on up-to-date income and expenditure.

Yet according to a Federation of Small Businesses survey, members remain unconvinced: ?65 percent of small firms say they would not consider sharing their banking data with other financial services providers electronically?.

Evidently, if Open Banking's potential is to be fully achieved, all actors will need to take action. Banks must work with tech suppliers to invest in their infrastructure, standardised APIs, and online cybersecurity tools to protect customers? data.

Account providers and fintechs need to collaborate in creating inventive, productive apps for business users.

Above all, they have to cultivate relationships of trust with their customers and communicate clearly the benefits of open banking and the recent advances in data security.

Gavin Littlejohn, chairman of not-for-profit FDATA Global, emphasises that open banking participants in the UK ?have had great success working together as a community?.

By collaborating with industry regulators, business customers and third-party providers, UK banks can enable openness and privacy to coexist in the open banking world - to the benefit of all.


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Caroline has contributed a session - The Future of Banking: Fraud Mitigation in an era of Uncertainty - to the Pioneer Zone at the Digital Innovation Summit which is now available on demand. You can register now to access all on demand content until Friday 20 November.

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