Open banking (OB) is the process of enabling third-party payment service and financial service providers to access consumer banking information such as transactions and payment history. This is possible through the use of application programming interfaces (APIs).
OB promotes interoperability and networking between banking information and service providers, creating a smoother user experience and promoting the creation of better products and services.
In case you want to dive deeper into this concept, you can find more detailed information about what exactly open banking is in our comprehensive guide.
What is an API in open banking?
To put it simply, APIs (an acronym for Application Programming Interfaces) are a set of codes and protocols that dictate interactions between software components and allow different applications to communicate with each other.
In open banking, they allow third-party providers (TPP) to access financial institutions’ data in a safer and more efficient manner.
- Accounting information
Banks, on the other hand, can use APIs to combine the digital services offered by other companies with their own platforms, and by doing so improve their portfolio and customer experience. This is why APIs in banking are essential for Banking-as-a-Service (BaaS).
How are APIs used in open banking?
In open banking, APIs act as a secure channel through which financial institutions can share customer datawith authorised TPPs. This data sharing allows TPPs to develop new products and services that can be used by bank customers to manage their finances in new and innovative ways. For example, a TPP may develop a mobile app that helps users track their spending across multiple accounts or create a budget based on their income and expenditures.
Are open banking APIs free of charge?
This is a question that doesn't have an 100% right answer. In Europe, due to PSD2, banks are required not only to develop their own open banking APIs, but also to make them available free of charge.
But that doesn't mean these APIs will be available for free to end users or companies that are creating business strategies to leverage OB capabilities. Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) need to comply with multiple requisites to be able to access and use these APIs, with the majority charging their customers to access their own API.
Currently, Nordigen is the only OB provider that offers free access to its API, with the belief that it should be available to everyone, so the banking industry can make the most out of OB.
Benefits of using open banking APIs
Open banking APIsbenefit every party involved, be it new customers, businesses, or banking institutions.
Why? Easy, because transferring data in a more secure way allows for a better platform for developing and implementing better products and services, a lot of times tailored to specific needs. This is very important if we consider that everyone has different financial backgrounds and goals.
Better yet, in today’s landscape, people can largely benefit from improved online payment experiences.
This brainstorming of better ways to serve the general publicdirectly impacts innovation in a positive fashion, and can also bring added revenue streams to the table.
Contrary to what people might think, banks are not on the losing side of the open banking equation. Quite the contrary, legacy financial institutions have a lot to gainfrom this new technology.
Open banking APIs also serve as a great platform to access more detailed customer data, resulting in relevant insights that can drive the development of new business offerings. This will allow them to cater to the real needs of today’s customers, which in turn will yield added earnings.
Are open banking APIs safe to use?
This one’s easy: absolutely! Open banking relies on a European Union (EU) regulatory framework known as PSD2which, amongst other things, mandates the use of Strong Customer Authentication (SCA). This means that in the EU, extra authentication steps must be taken in order to complete online transactions.
In the past, it was common to resort to screen scraping, in which a third party would log in to a bank’s website to gather information or even initiate payments on behalf of the customer. This technique is known to be the source of several data leaks that compromise user safety.
Open banking APIs, however, are regulated and provide a safer and more streamlined data gathering that shares only what's strictly necessary for the TPP to complete a given operation.
Furthermore, users are in absolute control of their financial information, granting and revoking access as they deem fit, with the added advantage of never having to share their login credentials.
Open banking APIs are revolutionising the FinTech industry
It’s safe to agree that open banking can enhance FinTechs’ services, and the same can be said for banks that plan to invest in OB for their commercial customers. It is now clear that OB APIs are revolutionising the entire banking, financial services, lending, and insurance sectors, allowing for business strategies to be developed.
Let’s find out how:
- A newfound focus on innovation: this is happening in a clear way, by making products and banking services safe, profitable, and innovative.
- Customers control their financial data: this enables them to better understand their data and how it is shared. Not only that, but open banking is at the core of improved relationships between incumbent institutions and their customers, by giving customers back the ownership of their data.
- Single services for multiple accounts: FinTechs can provide easy and instant money transfers, increased safety, enhanced availability, personalised experience, and the best financial solutions.
- Great potential for increased revenue streams: OB encourages partnerships between banks and third-parties, it can create revenue-sharing ecosystems, where incumbents provide customer access to third-party developed services while profiting from the referral.
All this places pressure on incumbents to keep up and improve their offerings or partner with FinTechs.
Overall, OB drives innovation and competition, meaning the industry is constantly evolving, with clear benefits for all parties.
Why are APIs in banking important?
APIs can provide a way for banks to open up their data and services to third-party developers, who can then build new applications and services on top of them. This can help banks to improve their customer experience, reach new markets, and boost innovation.
There are some risks associated with APIs, but if they are properly managed, they can be a powerful tool for banks.
Do banks have APIs?
Banks have had APIs for some time now, but PSD2 has made them more important than ever. PSD2 requires banks to provide APIs that allow TTPs to access customer account data. This has created a whole new ecosystem of banking apps and services that can be used by consumers.
Banks are still figuring out how to best take advantage of this new requirement, but it is clear that APIs are here to stay. This is good news for consumers, who will benefit from the increased competition and innovation that PSD2 is sure to bring.