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open banking

How does open banking work and what are the risks?

Open banking is gaining increased recognition, particularly for its significant impact on expediting tenant referencing in the private rental sector. Despite its efficiency, there may be concerns about its safety, especially from potential tenants. This guide provides an overview of what it entails and its implications for tenants, landlords, and letting agents.

What is open banking?

Essentially, open banking offers a secure method for tenants to directly share financial information from their bank accounts.

To initiate open banking, consent is paramount, as tenants must authorise the sharing of relevant financial information for the referencing process. This information is securely transmitted through application programming interfaces (APIs), ensuring a secure exchange between platforms.

Introduced by the Competition and Markets Authority (CMA) in 2017, open banking allows consumers to securely share their bank and credit card transaction data with trusted third parties, enabling applications and services that save time and money.

Tenants can engage in open banking if they have an online or mobile banking setup. This process is particularly beneficial for referencing, streamlining the traditionally cumbersome and time-consuming methods involving various documents such as payslips, bank statements, and credit checks.

Open banking and financial referencing:

Open banking simplifies financial referencing by providing a quick snapshot of a tenant’s financial behavior, including account details, income, regular payments, and rent payment history if applicable. This accelerates the referencing process, potentially being verified within a day or even hours.

Concerns about safety are addressed, assuring that letting agents have one-time access to minimal necessary information, following stringent security measures like Financial Grade API specifications and regulations by the Financial Conduct Authority (FCA). The account owner retains control, deciding when to grant access, and additional protection is provided by the Data Protection and Digital Information Bill and the Financial Ombudsman.

Fraud risks are minimised through the use of authorised providers, with applicants never required to share login details or passwords. Any suspicions of data misuse or fraud attempts can be reported to the Financial Ombudsman.

Importantly, open banking does not impact credit scores. It involves a snapshot of a bank account, with no influence on the factors contributing to a credit score. Therefore, it provides a secure and efficient means for tenant referencing without compromising creditworthiness.

The information in this post is valid to the best of our knowledge on the date of posting. It is advised that you seek independent advice based on your individual circumstances.

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