Open banking application programming interfaces (APIs) are digital gateways that allow third-party developers to build applications and services around financial institutions’ systems. This technology is central to open banking, a model that promotes greater transparency and accessibility in the financial sector by sharing data in a safe, standardised way with customers’ permission. The value of global open banking transactions reached $57 billion USD in 2023, highlighting the importance of these APIs and the payments they make possible.

Below, we’ll cover how open banking APIs work, what developers can do with them, their importance, their benefits, and how to protect personal information and financial data with them.

What’s in this article?

• How do open banking APIs work?
  
• What can developers do with open banking APIs?
  
• Why are open banking APIs important?
  
• Open banking APIs’ benefits
  
• How to protect personal information and financial data with open banking APIs
  

How do open banking APIs work?

Open banking APIs create a standardised, secure channel for data exchange between banks and third-party providers (TPPs). This process ensures that only authorised parties can access the data and that the exchange complies with regulatory frameworks such as the revised Payment Services Directive (PSD2) in Europe and the Consumer Data Right in Australia. Here’s how these APIs function.

• Standardisation: Open banking APIs use a standardised set of protocols and data formats across the banking industry. This makes it easier for developers to build applications that can interact with multiple banks without needing to customise the integration for each one.

• Authorisation and authentication: The customer must first authorise the TPP to access their data. They typically do so through an open authorisation (OAuth) process, logging in to their bank account and granting the TPP permission to access their information. This process ensures that the TPP has consent to access the data, maintaining the customer’s privacy and security.

• Data retrieval: With authorisation, TPPs can use the APIs as a bridge to the bank’s servers, retrieving information such as account balances and transaction histories from the bank’s databases.

• Data usage: TPPs can use the retrieved data to provide various services such as financial management tools, personalised financial advice, and payment services. For instance, a budgeting app might use transaction data to help users track their spending and find savings opportunities.

• Security measures: The strong security protocols of open banking APIs protect sensitive financial data. These measures include encryption, secure coding practices, and regular security audits. They reduce the risk of data breaches and protect customer data.

What can developers do with open banking APIs?

Developers can use open banking APIs to create a wide range of financial applications and services that power innovative financial solutions, improve user experiences, and simplify business operations. Here are some of the products and services made possible by these APIs.

• Personal financial management tools: With open banking APIs, developers can create apps that help users manage their finances more effectively. These tools can aggregate data from multiple accounts to analyse spending habits, set budgeting goals, and provide insight on how to save money.

• Payment initiating services: Open banking APIs enable developers to create apps that can initiate payments directly from a user’s bank account. These apps bypass traditional payment systems such as credit cards, facilitating faster, cheaper, and more secure transactions.

• Credit scoring and lending services: With access to detailed financial data from open banking APIs, developers can build more accurate credit scoring models and personalised lending services. This can lead to faster loan approvals and more customised rates.

• Account aggregation services: Developers can use open banking APIs to build services that consolidate information from various banking and financial accounts into a single platform. This can provide users with a holistic view of their financial status, informing their decisions.

• Fraud detection: By analysing transaction data from open banking APIs, developers can create sophisticated algorithms to detect unusual activities and potential fraud. This can improve the security of financial transactions.

• Investment and savings platforms: Automated investment platforms or robo-advisers, developed through open banking APIs, can provide users with customised investment advice based on users’ financial data and risk tolerance.

• Marketplace banking: Developers can create platforms where various financial service providers offer their products directly to users. These users can then compare and choose services such as insurance, loans, and savings accounts.

• Regulatory compliance solutions: Developers can use open banking APIs to help financial institutions comply with regulatory requirements such as Anti-Money Laundering (AML) and Know Your Customer (KYC) checks.

Why are open banking APIs important?

Open banking APIs have transformed user experience and backend functionality in banking. Here are some of the changes and implications these APIs have introduced.

• Competition: APIs allow banks to share their systems and data with third-party developers, fintech companies, and other financial institutions – allowing a wider range of players to build new financial products and services on top of existing banking infrastructure. This increased competition ultimately benefits customers by giving them more choices with more customisation.

• Customer experience: APIs create a more convenient customer experience by integrating bank services with other platforms and applications. For example, a customer can view their bank balances and make payments directly from a budgeting app or financial management platform, rather than switching between the banking app and third-party provider.

• Reach and accessibility: By partnering with fintech companies and other organisations, banks can use APIs to deliver financial services to new markets and demographics. These include underserved populations and businesses that lack access to traditional banking services.

• Automation: APIs can automate and simplify various banking processes such as loan applications, account opening, and payment processing. This reduces manual effort and errors, and lowers banks’ operational costs.

• Revenue streams: By charging third-party developers or businesses for access to banking data and services, banks can monetise APIs. This can open up new revenue streams for banks, and it can create opportunities for collaboration and partnerships.

• Data-driven insight: APIs can provide banks valuable insight into customer behaviour and preferences by analysing their data. Banks can then use this insight to develop personalised products and services, improve risk management, and increase customer satisfaction.

Open banking APIs’ benefits

Here’s how open banking APIs can benefit customers, businesses, and financial institutions.

Customers

• Customisation: Open banking APIs facilitate detailed analysis of financial data. This allows service providers to offer targeted financial advice, product recommendations, and customised loan terms based on an individual’s spending habits, income patterns, and financial goals.

• Data-driven financial literacy: By providing insights into spending trends and financial behaviours, open banking can inform customers’ decisions and improve their financial literacy.

• Transparency and control: Open banking APIs give customers a clearer view of their financial health and allow them to control how their data is used.

• Subscription management: Open banking APIs can automatically track and manage subscriptions, identify potential savings, and even negotiate better deals for customers.

Businesses

• Alternative credit scoring models: Developers can use open banking data to develop alternative credit scoring models that consider more factors than traditional models do – potentially expanding access to credit for underserved populations.

• Real-time risk assessment: Businesses can continually monitor financial health using open banking data to proactively identify and manage risks associated with lending, payments, and investments.

• Embedded finance: Open banking APIs allow businesses to embed financial services directly into their existing products and platforms, creating better customer experiences and new revenue streams.

• Data monetisation: Businesses can use aggregated and anonymised open banking data to develop valuable insight and analytics for internal use or for sale to other companies.

Financial institutions

• Environment orchestration: Banks using open banking APIs can develop from traditional service providers to orchestrators of a broader financial environment, partnering with fintech companies to deliver a wider range of services.

• API-driven business models: Banks can use their APIs to create new business models such as banking-as-a-service (BaaS), where they provide financial infrastructure and services to other businesses through APIs.

• Competitive advantage: By embracing open banking and developing strong API tactics, banks can differentiate themselves in the market, attract new customers, and retain existing ones.

• Fraud: Open banking APIs often incorporate advanced security measures such as Strong Customer Authentication (SCA) and encryption, which can help reduce fraud and improve financial security.

How to protect personal information and financial data with open banking APIs

Businesses using open banking APIs must use strict protocols, advanced technologies, and best practices to protect the integrity, confidentiality, and availability of personal information and financial data. They can do so using these tactics and techniques.

Authentication and authorisation

• SCA: Require multifactor authentication (MFA) for users to access their data. This often involves something the user knows (password), something the user has (a mobile device), and something the user is (biometrics).

• OAuth 2.0 and OpenID Connect: Use these protocols for secure, delegated access. OAuth 2.0 allows third-party services to access user data without exposing user credentials, while OpenID Connect adds an authentication layer to verify the user’s identity.

Data encryption

• Encryption at rest and in transit: Encrypt all data while it’s transmitted over networks using Transport Layer Security (TLS), and do so when it’s stored in databases or persistent storage systems.

• Strong encryption standards: Use encryption standards such as Advanced Encryption Standard (AES) with a sufficiently long key length to protect sensitive data.

API security

• API gateways: Deploy API gateways to manage API traffic. Gateways can help prevent attacks such as distributed denial of service (DDoS), enforce security policies, and add a security layer.

• Rate limiting: Prevent abuse and potential denial-of-service (DoS) attacks by limiting how frequently a user or service can access an API within a time period.

• API versioning: Maintain older versions of APIs to ensure backward compatibility, while implementing and enforcing newer security standards in the latest versions.

Security audits and compliance checks

• Penetration testing: Regularly perform penetration tests to identify and fix security vulnerabilities.

• Compliance with legal standards: Adhere to regulatory requirements such as the General Data Protection Regulation (GDPR), PSD2, and other local regulations that mandate specific security and data protection measures.

• Third-party security assessments: Consult external security firms to assess the APIs’ security posture.

Data access

• Role-based access control (RBAC): Implement RBAC so that users and systems can access only necessary data.

• Least privilege principle: Apply the least privilege principle to all systems and services, minimising access rights to reduce the impact of a security breach.

Monitoring and anomaly detection

• Real-time monitoring: Use security monitoring tools to track unusual activities that could indicate a breach, such as unusual API access patterns or unapproved API calls.

• Anomaly detection: Implement machine learning–based anomaly detection systems to identify and respond to abnormal behaviour in real time.