Open banking is the practice of letting third-party financial service providers access customer data from banks and other financial institutions. Customers have control over who can access their information and must agree to share their data with third parties. This shared data, accessed through application programming interfaces (APIs), allows for greater innovation and competition in the finance industry and has enabled the rise of fintech and new offerings in the financial services market. The total transaction value of global open banking payments is projected to rise from $57 billion in 2023 to over $330 billion by 2027.

Open banking, when done safely and legally, is built on a security foundation that protects the sensitive financial data that is shared between entities. Below, we’ll explain how open banking works and what measures keep customer data secure, including API security and identification and protection strategies.

What’s in this article?

• What is open banking used for?
  
• How does open banking work?
  
• What are open banking security challenges?
  
• How do APIs function with open banking?
  
• API security in open banking
  
• Using a risk-based security strategy
  
• Implementing zero trust policies
  
• Identification and protection against vulnerabilities
  

What is open banking used for?

Open banking has facilitated data sharing that enhances financial services for customers and businesses. Here are some financial tools and features that open banking has made possible:

• Budgeting and saving apps: Open banking has enabled the creation of third-party apps that aggregate information from a user’s bank accounts and offer budgeting and savings recommendations based on this comprehensive view.

• Better credit and loan decisions: Lenders can quickly access and analyze more financial data via open banking, which can lead to better credit decisions and faster loan approvals.

• Tailored banking services: Financial institutions can use the data accessed via open banking to offer personalized products and services that meet the needs of individual customers, such as custom interest rates.

• Direct account payments: Open banking APIs can be used to initiate payments directly from a bank account, bypassing traditional payment systems such as credit cards, and that can reduce transaction fees.

• Improved fraud detection: Access to real-time data lets financial institutions and service providers improve their fraud detection capabilities, reducing the risk of unauthorized transactions.

• Cash flow management: Businesses can use open banking solutions to integrate data from different accounts into one platform and gain a better understanding of their cash flow.

• Market insights: Businesses can analyze banking data made available by open banking to gain insights into customer behavior, market trends, and economic conditions.

How does open banking work?

Open banking uses APIs to share financial data between banks and authorized third-party providers. The data sharing is contingent on customer consent regulated under a variety of frameworks. Here’s how open banking functions:

• API development: Banks develop or adopt standardized APIs that let third-party providers access financial data. These APIs act as secure gateways for data requests and responses.

• Customer consent: A customer gives explicit consent to a third-party provider to access their financial data. Consent is typically managed through a secure interface and is required by law to be informed and explicit.

• Data access: Once consent is given, the third-party provider uses the APIs to request access to the customer’s financial data from the bank. The APIs handle these requests in a secure and standardized manner.

• Authentication and authorization: The bank verifies the identity of the customer and checks that the third-party provider has authorization to access the data. The process often involves authentication steps such as logging in through the bank’s portal or other security checks.

• Data sharing: After successful authentication and authorization, the bank shares the requested data with the third-party provider through the API. The data can include account balances, transaction histories, payment initiation capabilities, and more.

• Data usage: The third-party provider uses this data to offer services to the customer. That could include financial management, personalized financial advice, easier lending processes, or payment services.

• Ongoing consent and security: Customers can manage or withdraw their consent at any time. Banks and third-party providers must comply with strict security measures to protect the data and ensure privacy.

• Regulatory framework: Open banking is regulated by government agencies and national legislation, which dictate the security standards, customer consent procedures, and types of data that can be shared in open banking. Regulators continuously monitor banks and third-party providers to ensure they comply with open banking regulations.

What are open banking security challenges?

Open banking increases exposure for sensitive financial data and requires advanced security measures to protect that data from unauthorized access. The security challenges presented by open banking must be addressed with a mix of advanced technology, well-designed security processes, and ongoing vigilance. Here are the main security challenges in open banking:

Data privacy and consent

Personal financial data can be accessed only when customers have clearly agreed to it, and customers must be able to revoke that access at any time.

Solutions

• Implement state-of-the-art systems to manage consent.
  
• Give customers straightforward options to control their data.
  
• Maintain compliance with strict privacy laws such as the General Data Protection Regulation (GDPR).
  

API access

APIs open doors to data and must be well-guarded against unauthorized access and attacks.

Solutions

• Use modern authorization methods such as OAuth 2.0.
  
• Ensure APIs are fortified using tools such as mutual Transport Layer Security (TLS) for authentication.
  
• Monitor usage to prevent and detect unusual activities.
  

Third-party risks

Third-party services have varying levels of security.

Solutions

• Thoroughly evaluate the security measures of all external providers.
  
• Continuously monitor third-party providers.
  
• Insist on compliance with high security standards.
  

Data encryption and integrity

Data must be encrypted to protect it from being tampered with or read if intercepted.

Solutions

• Use strong encryption techniques for data at rest and in transit.
  
• Check data integrity regularly using techniques such as digital signatures.
  

Fraud detection

More data access can potentially lead to new types of fraud.

Solutions

• Use advanced machine learning to spot fraud as it happens.
  
• Set up a system to watch for and quickly react to suspicious actions.
  

Regulatory compliance

Regulations can vary by region and change over time, affecting how data must be handled.

Solutions

• Build a compliance strategy that can quickly adjust to new laws.
  
• Ensure your team stays informed about the latest requirements.
  

Managing identities and access

Individual users must be verified and have their access to data carefully managed.

Solutions

• Implement strong identity verification and multifactor authentication (MFA) systems.
  
• Set precise access controls.
  

Resilience and incident response

Services must run smoothly even when issues occur. Security breaches must be addressed quickly to minimize damage.

Solutions

• Prepare and regularly update incident response plans.
  
• Ensure backup systems are in place.
  
• Run regular security drills.
  

How do APIs function with open banking?

APIs are the backbone of open banking, providing a secure and standardized way for apps and services to integrate with banks and access financial data. Here’s how they work:

• Act as a secure messenger: APIs send requests for information (e.g., account balance, transaction history) from the app you’re using (e.g., a budgeting app) to your bank and carry the bank’s response back to the app. This lets you use a variety of financial services through third-party apps while keeping your banking details secure.

• Handle permissions: When you first use a new financial service or app, the API will ask whether the app can access your information. If you say yes, it will make sure the app gets only the data it needs. This keeps you in control of who sees your financial information and ensures apps don’t access more data than necessary.

• Provide real-time data: APIs let apps retrieve up-to-date data directly from your bank, whether it’s your latest transactions or verifying account ownership. This facilitates a wide variety of financial tech services, including budgeting apps and automated loan approvals.

• Standardize communication: Open banking APIs follow specific standards, meaning they speak a “common language” despite being used by different banks and apps, which ensures apps and services can work smoothly with different banks and financial institutions.

• Maintain security and privacy: APIs enforce security measures such as encryption during data transfers and ensure only authorized requests are processed. They act as gatekeepers, preventing unauthorized access, maintaining your privacy, and protecting your financial data from cyber threats.

API security in open banking

Improving API security in open banking requires a multilayered system to ensure all interactions among banks, third-party providers, and customers are secure and data integrity is maintained. Here are the security aspects that need to be addressed with APIs:

Authentication and authorization

Authentication and authorization protocols ensure APIs are accessible by only legitimate users and services.

• OAuth 2.0: OAuth 2.0 is an authorization method that uses tokens instead of credentials. Each token grants access to a specific set of resources for a limited period, reducing the risk of token theft.

• OAuth: OAuth provides methods for getting tokens for different scenarios, such as authorization codes for apps and client credentials for server-to-server interactions.

Encryption

Encryption is used to protect data as it moves between systems (in transit) and when it’s stored (at rest). Using strong, updated cryptographic protocols prevents interception by attackers.

• TLS: TLS protects data in transit, encrypting data exchanged between clients and servers.

• AES: Advanced encryption standards (AES) are applied to database entries and other data stores to protect data at rest.

API gateways

API gateways manage and secure the traffic toward the APIs. An API gateway acts as a reverse proxy to accept all API calls, aggregate the services required to fulfill them, and return the appropriate result. It handles rate limiting, IP whitelisting, and access control. Gateways can provide insights into traffic patterns and alert administrators to potential security threats.

Secure API development practices

APIs are secure by design. Developers should adhere to the Open Web Application Security Project (OWASP) API Security Top Ten, an awareness document for API security.

• Input validation: Input validation prevents SQL injection and cross-site scripting (XSS) attacks.

• API transaction logging: Detailed logging of API transactions ensures you’re prepared in the event of an audit.

• Regular code reviews: Regular code reviews identify vulnerabilities before they lead to security breaches.

Rate limiting and throttling

Rate limiting and throttling prevent abuse of APIs. The process involves limiting how many requests a user or service can make in a certain period. If the number exceeds the limit, additional requests are delayed or blocked. Throttling helps manage load and ensures services remain available even in high traffic or attack scenarios.

Regular security audits and penetration testing

Regular security audits and penetration testing continuously evaluate the security posture of API infrastructures. These practices should be part of a regular security protocol and meet industry standards and compliance requirements. Routine audits and penetration testing can find vulnerabilities before they are exploited.

Anomaly detection and response systems

These systems detect and respond to unusual activity that could indicate a security breach, using machine learning and other advanced analytics to monitor API traffic patterns and automatically flag activities that deviate from the norm. They’re often integrated with incident response mechanisms to quickly isolate and mitigate potential threats.

Using a risk-based security strategy

Using a risk-based security strategy involves prioritizing security efforts and resources based on the likelihood and potential impact of various threats. A risk-based security strategy lets an organization remain agile and responsive to new threats and ensures security resources are used efficiently and focus on areas of greatest need. This is particularly important in environments with limited security budgets or quickly changing technology landscapes.

Here’s how a risk-based security strategy typically works:

• Assess risks: Identify and evaluate risks based on their potential impact and the likelihood of occurrence. Map out the organization’s assets, and determine the threats each asset faces, assessing vulnerabilities and evaluating the potential impacts of those threats. Use techniques such as threat modeling and vulnerability scans.

• Prioritize risks: Determine which risks need immediate attention, which can be monitored, and which are acceptable. Rank risks based on their severity and likelihood, prioritizing high-impact, high-probability risks for immediate mitigation.

• Implement controls: Apply the most appropriate and cost-effective controls to manage and mitigate the highest priority risks. Implement different types of controls (e.g., preventative, detective, corrective) depending on the risk. Controls might include technological solutions (such as firewalls and encryption), policies and procedures, and training and awareness programs.

• Monitor security systems: Continuously monitor risk management measures to ensure they are effective. This process might involve regular security audits, the use of intrusion detection systems, and the monitoring of access logs and other security events.

• Learn and improve: Adjust measures in response to new threats, changes in the organization, or lessons learned from ongoing monitoring. Use feedback from the monitoring and review phase to make improvements to security practices and update risk assessments and controls as incidents occur and vulnerabilities are identified.

Implementing zero trust policies

While traditional security models assume everything inside an organization’s network can be trusted, zero trust policies never assume trust. Zero trust requires rigorous identity verification for anyone trying to access network resources, whether they are inside or outside the network perimeter. Here’s how zero trust policies are typically implemented:

• Verify explicitly: Every access request must be verified before access is granted, regardless of where the request originates or what resource it accesses. Use MFA, biometrics, and behavioral analytics to verify the identity of users, and employ context-based authentication that considers variables such as device health, location, and time of access.

• Use least privilege access: Minimize each user’s exposure to sensitive parts of the network by granting users and devices the minimum level of access necessary to perform their tasks. Manage this through strict access control policies and roles, which are reviewed and updated regularly.

• Segmentation: Divide the network into segments to reduce lateral movement within the network by attackers. This creates micro-perimeters around sensitive data and systems and makes it harder for an attacker to move through the network if they gain access.

• Layered defenses: Implement multiple defensive layers that an attacker must bypass to access resources. Use a combination of firewalls, intrusion detection and intrusion prevention systems (IDS/IPS), and data encryption in transit and at rest.

• Monitor and maintain security: Continuously monitor all network traffic and user activities to detect and respond to threats in real time. Use security information and event management (SIEM) systems to analyze and correlate logs for abnormal behavior. Machine learning can help recognize patterns that deviate from the norm.

• Security as an integrated process: Ensure security is a key consideration in every IT project and business operation from the start. Engage in regular security training for all employees, and integrate security into the software development lifecycle (DevSecOps).

Identification and protection against vulnerabilities

Identification and protection against vulnerabilities involves systematically discovering, categorizing, and addressing security holes or weaknesses in software and hardware that attackers could exploit. Here’s how it typically works:

• Vulnerability identification: Conduct regular vulnerability scans using automated tools that compare system configurations and installed software against known vulnerability databases. Penetration testing, where ethical hackers attempt to exploit vulnerabilities, also provides insights into system weaknesses.

• Vulnerability assessment: After vulnerabilities are identified, assess them based on factors such as the ease of exploitation, the potential impact of an exploit, and the extent of system exposure. That helps in prioritizing remediation efforts according to the nature and severity of the risk posed.

• Patch management: Software vendors provide patches or updates to fix vulnerabilities. Implement a systematic process for the timely application of security patches, updates, and hotfixes to ensure vulnerabilities are addressed as soon as fixes are available.

• Configuration management: Use configuration management tools to ensure systems are set up securely and maintained in a consistent state. Regularly review and harden configurations to minimize attack surfaces and prevent vulnerabilities due to misconfigurations or default settings.

• Zero-day threat protection: Employ advanced threat detection technologies such as behavior-based detection systems, which do not rely solely on known vulnerability signatures. Those can identify and mitigate unusual activity that might indicate an exploit in progress and defend against vulnerabilities that are not yet known or for which no patch exists.

• Education and awareness: Conduct ongoing cybersecurity training for all employees, focusing on recognizing phishing attempts, managing passwords securely, and understanding the importance of regular software updates. This helps minimize human error, which can introduce or exacerbate vulnerabilities.

• Regular audits and compliance checks: Perform regular security audits and compliance checks to evaluate how well security policies are being followed and to identify any gaps in the organization’s security posture. Doing so ensures security practices meet established standards and regulations.

• Incident response planning: Develop and routinely test an incident response plan that outlines what steps to take when a security breach occurs. The plan should include procedures for containment, eradication, recovery, and post-incident analysis.