Open Banking Explained: What It Is and How It Works
A guide to Open Banking in the UK - what it is, how it's regulated, what data is shared, and how apps like Lunar use it to give you a complete picture of your finances.
Open Banking is a secure way to share your financial data with authorised third-party apps and services. It’s built on the requirements of PSD2 (the Payment Services Directive 2) and requires the nine largest UK banks and building societies to participate, with smaller institutions able to join voluntarily.
Only firms regulated by the FCA or European equivalents can enrol in the Open Banking Directory.
How It Works
Before Open Banking, if you wanted an app to see your balances or transactions, you’d have to hand over your online banking login - which was insecure and against most banks’ terms of service.
Open Banking changed this by requiring banks to build secure APIs (Application Programming Interfaces) that let authorised apps access your data directly - with your explicit consent.
The process works like this:
- You connect your bank account through an app that supports Open Banking
- You’re redirected to your bank’s own website or app to log in and approve access
- Your bank shares the requested data directly with the app via a secure API
- You can revoke access at any time through the app or by contacting your bank
At no point does the third-party app see your banking login credentials.
What Open Banking Covers
Open Banking enables two types of service:
| Type | What it does |
|---|---|
| Account Information Services | Access your financial data - balances, transactions, scheduled payments |
| Payment Initiation Services | Make payments from your account on your behalf |
Both require your explicit consent. You control what information is accessible and for how long.
Is It Safe?
Open Banking uses Financial Grade API (FAPI) security standards - a highly secured OAuth profile developed by the OpenID Foundation - with bank-level encryption and rigorously tested security systems:
- No credential sharing - you authenticate directly with your bank, not through the third-party app
- Consent-based - you choose exactly which accounts to share and can revoke access at any time
- Bank-level encryption - all data is transmitted over secure, encrypted connections
- Regulatory protection - your bank will typically refund any unauthorised payments
- Data protection law - your data is covered by UK data protection legislation
- Financial Ombudsman - you can complain to the Financial Ombudsman Service if something goes wrong
Common Uses
Open Banking powers a range of financial services, including:
- Budgeting and spending insights - apps that categorise your transactions and track spending
- Savings - services that analyse your balances and help manage savings
- Bill management - tracking and managing regular payments
- Identity verification - businesses confirming your identity using bank data
- Consolidated views - seeing accounts from multiple providers in one place
Open Finance
Open Finance extends the same data-sharing principles beyond bank accounts to the broader financial sector - including savings, investments, pensions, and insurance. While Open Banking focuses on payment accounts, Open Finance aims to give a more complete picture of someone’s financial life.
How Lunar Uses Open Banking
Lunar uses Open Banking to connect to your bank accounts - specifically to read your bank balance and identify interest payouts - without sharing your banking login with anyone.
You stay in control - you choose which accounts to connect, and you can disconnect them at any time.
Sources
Join the waitlist to connect your accounts with Lunar.
This article is for informational purposes only and does not constitute financial advice. If you're unsure about your finances, consider speaking to a qualified financial adviser.