Application programming interfaces (APIs) allow Third Party Providers (TPPs) to access financial data directly, which promotes the development of new and innovative services. Under open banking, banks allow access to customers’ personal and financial data and control of financial transactions to third-parties, such as online financial service providers, vendors, as well as for customers to more easily manage their own finances.
By means of APIs, third-party service providers can use the customer’s open data, and data about the other parties in a transaction to offer a range of financial service options, utilizing data in all participating financial institutions for dealing with new transactions and account changes on the customer’s behalf.
Open Banking Definition
The definition of Open banking is the practice of sharing financial information electronically, securely, and under conditions of customer approval. Application programming interfaces (APIs) allow Third Party Providers (TPPs) to access financial information efficiently, which results in better experience for consumers.
Open banking allows financial services customers to securely share their financial data with other financial institutions. The APIs can introduce advanced tools such as artificial intelligence (AI) to analyse consumers’ transaction data and to identify the best financial products and services for them, such as a different credit card with a lower interest rate or a savings account that would earn a higher interest rate than the current account offers.
For banks, the use of networked accounts helps lenders get a more accurate picture of a consumer’s financial situation and risk level in order to offer more profitable loan terms. It could also help consumers get a more accurate picture of their own finances before undertaking transactions. Open banking can also help small businesses save time through online accounting and helps better monitor customer accounts and identify security breaches sooner.
Banks can take advantage of this new technology to strengthen customer relationships and customer retention by better helping customers to manage their finances instead of simply facilitating transactions.
Open banking regulation in Europe
Open banking B2B is already a significant component of European banking regulation. Under the European Commission’s Second Payment Services Directive (PSD2), banks must allow third-parties to initiate payments on behalf of their customers.
With the customer’s permission, the open banking framework gives third-party providers access to financial data, allowing them to develop fresh, cutting-edge financial products and services. The European Banking Authority (EBA) and the Second Payment Services Directive are principally in charge of overseeing open banking regulations in Europe (PSD2).
The PSD2 mandates that European banks give third-party providers access to account information about clients and payment initiation services via APIs as of January 1, 2018, when it went into force. This promotes competition and innovation in the banking industry by enabling fintech firms and other non-bank organizations to create new goods and services using the information and capabilities of the banks.
To improve the security of open banking transactions, the EBA has also released guidelines on strong customer authentication (SCA) and common and secure communication (CSC). These regulations state that banks must provide a secure communication route for third-party providers to access customer data and that all payment service providers must employ two-factor authentication for all transactions.
A regulatory framework for the registration and oversight of third-party service providers, known as Account Information Service Providers (AISPs) and Payment Initiation Service Providers, has also been established by the EBA (PISPs). This framework strives to guarantee that these providers have adequate capitalization, proper governance, risk management, and security protocols in place.
Other than the EBA and the PSD2, other nations in the European Union have their own regulatory organizations that keep an eye on the rollout of open banking in their regions. The EBA and PSD2 laws must be followed by open banking providers, and this is the responsibility of the national competent authorities (NCAs).
Open banking has been implemented across Europe, but there are still some issues that need to be resolved. Making sure that clients are fully aware of the risks and advantages of open banking and that their data is protected is one of the primary issues. In order to assure the interoperability and lower barriers to entry for new players, there is also a need for increased standardization of the technologies and protocols used for open banking.
In conclusion, the EBA and the PSD2 are primarily in charge of open banking regulation in Europe. In order to promote competition and innovation in the banking industry, the PSD2 mandates that European banks grant access to client account information and payment initiation services to third-party suppliers. To safeguard the security of open banking transactions, the EBA has also released standards on strong customer authentication and standard, secure communication. However, there are still issues to be resolved to guarantee that customers are informed of the risks and benefits and that their data is protected, as well as to improve interoperability and lower barriers to the adoption of open banking. Additionally, different countries in the European Union have their own regulatory bodies that oversee the implementation of open banking in their jurisdictions.
In the European Union, responsibility for supervision and also for registering and authorizing open banking service providers rests with each member country, through their National Competent Authorities (NCAs), They publish registers that will be used by Qualified Trust Service Providers (QTSPs) to make decisions on issuing certificates, and by financial institutions to check whether other parties are authorised.
Open banking regulation in UK
In the U.K., regulations issued by the Financial Conduct Authority (FCA) already require the major commercial banks to cooperate with authorized TPPs. At the moment, only the UK’s nine largest banks and building societies are required to make data available through open banking. About 50 other smaller banks and building societies have chosen to take part in open banking regulation.
The FCA regulations specify two types of service providers:
- Account Information Services Provider (AISP) lets the account holder see all the account information from different bank accounts in one place online or in a mobile app. AISPs can include budgeting apps and price comparison websites offering budgeting help and product recommendations.
- Payment Initiation Service Provider (PISP) lets account holders pay companies directly from their bank account rather than using a third-party debit or credit card such as Visa or MasterCard.
Both PISPs and AISPs need explicit consent to provide these services.
Open banking market size and open banking statistics
As of January 2020, there were 202 regulated providers in Europe who are engaged in open banking B2B, including about 60 in the UK alone. They provide financial apps that help manage finances and also consumer credit firms who use open banking to access account information for affordability checks and verification.
Open banking examples
In 2018, Banco Bilbao Vizcaya Argentaria launched its BaaS platform, Open Platform, in the USA. Open Platform utilizes APIs that allow third parties to offer customers financial products without needing to provide a full suite of banking services.
HSBC launched its Connected Money app in May 2018 in response to the UK’s open banking regulations in their attempt to place more control of financial data into the hands of consumers.
Connected Money allows customers to view various bank accounts as well as loans, mortgages, and credit cards, all in one place.
Barclays claims to be the first UK bank to enable account aggregation inside its mobile banking app. Its open banking feature even allows customers to view their account with other banks within Barclays’ mobile app.
PayPal and Valyuz are both products that exemplify how open banking serves the demands of modern banking.
What is an open banking API?
An API is a way for two computer applications to talk to each other over a network, using a common language they both understand. Open banking allows third parties to develop better personal finance management applications, by means of a banking API. An API is a set of codes and protocols that determine how different software components should interact – they essentially allow different computer applications to communicate with one another.
How do APIs work in banking?
APIs are essential to open banking services.
APIs are used to connect banking systems through payment networks as well as to display customers’ information on a bank’s website and via mobile apps. Through open banking, APIs are now being used to issue commands to third party providers.
APIs are also necessary for the functionality of Banking-as-a-Service (BaaS) – a key component of open banking. BaaS is an end-to-end process that connects fintechs and other third parties to banks’ systems directly through the use of APIs. It helps to build up banks’ offerings on top of financial providers’ regulated infrastructure.