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Open Banking APIs are the Bridge to Open Banking

January 11, 2024 | Blogs

Countries all over the world have started embracing open banking. Through certain regulatory and technology changes, the initiative makes (or will make) financial data stored by large financial institutions accessible to third parties for use in apps and services.

Open banking brings innovation to personal and business finances and gives customers efficient, insightful, and transparent ways to interact with their money, payments, insurance, and investments. Those changes widen the playing field in the financial services arena and promise to vastly improve the banking experience for business and retail banking customers.

The secret sauce: Open banking APIs

 

While legislation and policy strategy are cornerstones of open banking, the other necessity is technology. For open banking to work, third party payment and financial services providers need access to customer financial data. For that, they need APIs (Application Programming Interfaces) that manage transactions efficiently and securely.

API technical standards are generally set by a national regulatory body that must be observed by all third party providers (TPPs). Furthermore, all TPPs must be authorized to use open banking APIs.

What are open banking APIs?

 

Open banking APIs are the apps that third parties use to access customer financial data, such as balances, transaction details, and financial history. They form the software bridge between bank databases that hold customer accounts and the third party financial technology (fintech) company or financial services provider.

Like any software program, open banking APIs are a set of protocols and codes that manage data exchanges. Banks also use APIs for their own services and may combine these with third party services as part of their own offering.

How do open banking APIs work?

 

A critical feature of open banking APIs is security. Before open banking emerged, third parties accessed customer financial data, but did it by screen scraping. Account holders gave their private banking details to third parties, who would log into banking websites to copy that information to use in other  transactions. That method put all the parties at risk.

Open banking APIs institute a safer method which requires user consent. A micro-investment app called “Acorns,” for example, rounds up everyday purchases and transfers those amounts into an investment account. The open banking network provides a way for the Acorn app to request customer financial data from the bank that stores it, and then to move it to another account for investing.

In another example, a third party budget app might aggregate financial information from a retailer’s various accounts to provide a real-time glimpse of profits and losses. An open banking API forms the bridge between the retailer’s accounts and the third party app. With the retailer’s permission, the TPP can acquire the necessary data for display.

The open banking API connects those two systems, but only shares data that is required for the specific transaction or application. Obtaining customer consent is always a prerequisite to any open banking API request.

How are open banking APIs revolutionizing fintech?

 

In addition to enhanced security and privacy, open banking APIs are transforming fintech by making it easier to innovate new financial products and services. They’re spawning new partnerships between incumbent banks and tech startups, and bringing more competition to the sector.

Those innovations aren’t just opening new revenue streams to banks and third party fintechs. Open banking is giving customers a clearer perspective on financial potentials and possibilities. Armed with new insights, open banking APIs help merchants see where tailored services, specialized products, or added efficiencies might benefit their businesses.

The principles built into open banking – transparency, consent, and privacy – build trust and strengthen relationships across the financial services industry.

Learn more about open banking APIs

 

While open banking is still on the drawing board in many countries, regulatory bodies are taking cues from other jurisdictions as they draw up technical standards and specs for open banking APIs.

To talk to a fintech specialist about open banking trends and technologies, contact OTT Pay.