The importance of regulated firms embracing Open Banking

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Open Banking is now available through most major UK banks, but what exactly is it, how does it work, and what role can it play within compliance and anti-money laundering?

What is Open Banking?

Open Banking is technology that enables consumers to share financial information held by their bank -  such as their balance and transaction history - with other authorised product and service providers. Access is granted on a read-only basis, and the idea is to make it easier for organisations to work together to offer slicker services and personalised products.

For example, if a consumer gave permission for a savings app to access their banking data, it could use the information to help them work out how much they can afford to save, and then automatically move that money into a savings or investment account.

Another key benefit of Open Banking is within online payments – it can allow retailers to connect to your bank and take a payment so that they don’t need to fill out card details.

How does Open Banking work?

Open Banking works by securely sharing information via application programming interfaces (APIs). APIs allow information to be exchanged between two providers and have been in widespread use for many years. For example, sites like use APIs to access airline and hotel availability from suppliers so that you can access options from a whole range of different travel operators via one site. Similarly, comparison sites like use APIs to pull policy information to enable customers to compare deals from multiple insurance providers.

A well-known example of how Open Banking is used to enable online payments is PayPal. One of the most popular payment service providers, PayPal uses an API to not only simplify the payment process, but also, to make the transaction more secure. Your payment card information is registered with PayPal, and you can use PayPal to purchase products from online retailers, but PayPal does not share your credit card info with the retailer, meaning it remains secure, while making it quicker and easier to pay online.

Open Banking is simply making use of a well-known and highly useful piece of technology to improve financial transactions, however, because Open Banking is using related to personal, financial information, many people have concerns, specifically around security and privacy. But to access any information through Open Banking, each provider has to ask for consent from the account holder. If granted, a request is sent to the account holder’s bank, which processes it and shares the required information.

How can Opening Banking be used within compliance?

All regulated firms have an obligation to prove that their client's money comes from a legitimate source. Open Banking technology can help provide regulated businesses with a quick and easy way for their customers to share their financial data securely.

This means that instead of asking for physical bank statements, or digital copies of financial transactions, regulated firms can harness Open Banking to instantly access digital bank statements and create full picture of their clients’ Source of Funds. The main benefits of using Open Banking over manual financial checks are:

· Faster - SOF checks can be run in a matter of seconds with the results available instantly, creating a slicker customer onboarding process.

· More accurate - Open Banking can access data in real time, whereas the information within a physical bank statement is generally a few days – if not weeks – old.

· More secure – Open Banking is secure method of accessing sensitive information – with statements, there is always a risk that they can get lost or intercepted through email or post.

· Impossible to fake - Bank statements, particularly PDFs and printed copies – can be altered to show forged information i.e. inflated affordability, false source of funds etc, but this cannot happen when Open Banking is utilised.

· Spots red flags – The information provided by Open Banking can be used to identify patterns and anomalies in financial transactions, making it easier to detect potential money laundering or other illegal activities.

SmartSearch recently launched a new Source of Funds service, which uses Open Banking to help clients determine the legitimacy of the funds being used in a financial transaction as part of their anti-money laundering checks.

Being able to access bank statements to gather key financial evidence is absolutely vital for regulated firms, and when combined with verification and screening checks, will help firms identify and prevent money laundering and fraud.

Speaking about the new SOF service, SmartSearch managing director Martin Cheek said: “There are widely held misconceptions amongst regulated firms that, if they have verified their customer’s ID and are happy that they are who they say they are, that they don’t need to run any Source of Funds checks.

“But this is a really dangerous assumption. Not only is it entirely possible that an individual with no previous record of being involved in financial crime may attempt to introduce illegitimate funds, but it is also possible that a customer is inadvertently accepting or dealing with dirty money. Either way, relying solely on an ID check is not going to pick it up. You need both verification and an accurate SOF check to get a full picture of what is going on.”

“Furthermore, regulated businesses will often assume that if their clients’ funds are coming from a legitimate bank account, that the funds themselves are legitimate too. But according to Transparency International, in 2019, 86 UK banks and financial institutions* - unwittingly or otherwise - helped money launderers obtain, move and defend corrupt or suspicious wealth, so just because funds are coming from a bank, does not mean they are clean.

“It is therefore imperative that regulated firms dealing with customer funds investigate the source of those funds for themselves, which may well include how they got into a legitimate bank account in the first place – because, without this level of due diligence, money launderers and other criminals are going to continue to get away with cleaning their dirty money through the UK economy.”

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