Open Banking
Financial Services
March 7, 2023
8 Min

Open Banking API

Alyssa Cuda

Open Banking Expert

As technology changes, so does how we utilize it to make routine tasks more manageable. The banking industry is not immune to these innovations, which have led to the development of Open Banking APIs. This new and rapidly changing technology within the world of digital banking leverages Open Banking opportunities so traditional banks can partner with fintechs and other third-party institutions instead of competing. What exactly is an Open Banking API, and how can you best implement it in your space? Read on to find out.

What Is Open Banking API?

Open Banking API allows clients to exchange their data conveniently and safely between FinTechs and financial institutions. We define Open Banking as a secure way for consumers to make payments and share financial information directly from their bank accounts with third parties. An application programming interface (API) refers to a set of functions and procedures that allows the creation of applications that use data from an operating system or application. Therefore, Open Banking APIs refer to the APIs that facilitate the exchange of financial data that is necessary for Open Banking. With a set of codes and protocols, the software and applications from banks and fintech institutions can communicate. Simply put, one system can request data from the other system through the API. 

So how do Open Banking APIs differ from API banking? While banking APIs are utilized by third parties to build solutions for customers, Open Banking APIs facilitate the exchange of financial data and banking information of banking customers. This can include account number, routing number, transaction history, account type, and more.

Open Banking APIs are great because they encourage the development of better personal finance management applications and enhanced financial services that enable consumers to take control of their financial data and enjoy greater financial transparency. Third parties can develop new apps and services that modernize traditional financial solutions, making them more seamless, convenient, and interoperable. 

Challenges of Traditional Banking

The rise of Open Banking APIs developed in response to the challenges of traditional banking. As the digital transformation shifts every industry, banks are no exception. Software was used backend for banks but users historically did not have to interact with software. Here are some reasons why Open Banking APIs have risen in the face of traditional banking challenges:

  1. Limited Innovation: Traditional banks often operate on legacy systems that are slow to adapt to technological advancements. This limits their ability to innovate and offer customers the latest digital banking solutions.
  2. High Costs: Maintaining physical branches and a large workforce can be expensive, and these costs are often passed on to customers in the form of fees and lower interest rates on savings accounts.
  3. Slow Transactions: Traditional banking processes can be slow, particularly for cross-border or international transactions. Customers often face delays, higher fees, and unfavorable exchange rates.
  4. Limited Access: Many Americans, especially those in rural areas, have limited access to traditional banking services due to the scarcity of physical branches. This lack of access can hinder financial inclusion.
  5. Data Fragmentation: Customer financial data is often siloed within individual banks, making it difficult for customers to access and manage their financial information in one place.
  6. Limited Choice: Traditional banks traditionally offer a limited range of financial products, which may not meet the diverse needs of customers.
  7. Security Concerns: Traditional banks are not immune to security breaches and fraud, and these incidents erode customer trust.

What Does an Open Banking API Do?

Purpose drives innovation, and Open Banking APIs are no different. It has been changing the banking industry for the better by allowing a smoother flow of financial information, easier payments between accounts, and linking bank databases to applications. 

Banking open APIs offer a kind of software bridge between the two parties for the convenient transfer of payment-related data. They also provide a method for direct account-to-account money transfers, so consumers can make payments to merchants, directly from their bank account. 

Open Banking APIs can face the challenges of traditional banking in several ways:

  1. Enhanced Customer Services: Open banking APIs enable banks to collaborate with fintech firms to provide a wider array of customer-centric services, such as financial management apps, personal finance tools, and quicker loan approvals. This enhances customer satisfaction and loyalty.
  2. Streamlined Payments: Banks can utilize open banking APIs to simplify and accelerate payment processes. APIs allow for instant transfers, making payments more efficient and cost-effective.
  3. Access to New Markets: Banks can expand their reach by collaborating with third-party providers, tapping into previously underserved markets. This fosters financial inclusion and widens the customer base.
  4. Data Aggregation: Open banking APIs facilitate the aggregation of financial data from various sources, enabling customers to access a comprehensive view of their financial health in one place. This promotes transparency and empowers better financial decision-making.
  5. Compliance and Security: Banks can use APIs to ensure regulatory compliance and enhance security by adopting standardized authentication protocols and encryption methods.

The Benefits of Open Banking APIs

The benefits are vast and varied when it comes to Open Banking APIs. From facilitating a better understanding of consumer needs to an increase in security, there are plenty of reasons to utilize open APIs in banking, including:

  1. Increased innovation
  2. Enhanced security
  3. Improved experimentation
  4. Simplified integration
  5. Dedicated compliance

This new tool has been pivotal in driving innovation and scaling partnership efforts between financial institutions. Open Banking APIs create a global community that is ready to collaborate with you on developing new solutions that improve user experience and access to the necessary tools.  

While you may think that opening the APIs to access from third parties results in a less secure system, the opposite is true. In fact, the security is just as good, if not better, than current systems since the solutions are behind the bank’s firewall. Banks also have complete control over what third parties have access to and can monitor, authenticate, or revoke access at any time.

There are also options like the Open Banking Project that allow for experimentation with test data that is not connected to the bank’s systems. This means that you can discover what will work best for your requirements and build an API that perfectly accommodates that. 

Solutions like those from the Open Banking Project can provide you with a set of pre-built connectors and adapters that are ready to go and easily integrate within your banking system. Pick the options that best suit your needs for the optimal experience. 

As with any data-sharing platform, there are regulations that change over time. You can implement a system that tracks these changes and adapts accordingly to ensure that your Open Banking API is always compliant.

Trustly Open Banking

Since 2008, Trustly has remained committed to the global expansion and adoption of Open Banking, and the opportunity Open Banking affords merchants and consumers. Our direct API connections with financial institutions (FIs) are continuously monitored and optimized to maintain at or close to 100% connection quality. In doing so, Trustly can maintain a partner-like relationship with FIs and improve consumer conversion metrics. Trustly has been a driving force for Open Banking in Europe and is continuing the momentum in the United States. For more information on all things Open Banking, download our eBook.

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