According to Statista forecasts, by 2024, the number of online banking users worldwide is expected to surpass 2.6 billion. In other words, every third person will use online banking services regularly. It is an excellent chance for the banking institutions…
Open Banking API: Your Complete Guide to a Fintech Game-Changer
Open banking is a relatively young concept. You can consider 2016 its birth year. That was when the UK government required the nine biggest banks in the country to open their data to licensed startups via open banking API.
Despite its age, open banking is getting adopted at an exponential rate. In the United Kingdom, the pioneer in the field, the number of active open banking users increased by one million in just four months (between September 2021 and January 2022).
Worldwide, the number of open banking users is projected to grow at an almost 50 percent annual rate between 2020 and 2024. The European market is likely to become the fastest-growing.
Devox Software is no stranger to this topic, thanks to our team’s rich experience in Fintech development. Today, let us share this experience with you by breaking down what open bank APIs are, how they work, how they’re used in Fintech, and more.
What Does Open API in Banking Mean?
Open banking means banks and other financial institutions allow third-party access to the financial data they hold, including clients’ personal account information. This enables, for example, a personal finance app to sync up users’ bank transactions within the app.
To this end, financial institutions create and publish APIs – application programming interfaces. These are pieces of software that allow two programs to exchange data without exposing the underlying logic. Think of them as the middlemen – or, in more technical terms, middleware.
These middlemen make developers’ lives much easier, as we can attest ourselves based on our experience in finance app development.
Depending on the regulations and financial institutions’ choice, open banking APIs can come in two flavors:
- Public – anyone can gain access to the API.
- Partner – financial institutions screen and approve third parties before sharing the APIs with them.
How Does Open API in Banking Work in Practice?
Imagine you’re developing a neobank mobile app. You want it to automatically add users’ other bank account transactions to the app.
If open bank APIs didn’t exist, you’d have no idea how to make your program communicate with other banks’ databases. And even if you did, you’d have to code every integration from scratch for every bank you want to support.
Now, imagine you’re using a neobank app with this sync feature. Here’s what banks’ API would do if you tapped the “Add a bank account” button:
- The mobile app sends the request to the bank’s API over the internet.
- The API receives it and asks you to authenticate yourself for security reasons.
- You provide all the details required, and they get sent to the bank’s servers.
- There, they are compared against the database. If you pass the test, the command allowing the data sync gets executed.
How Can Banks’ API Be Used in Fintech?
Speaking from Devox Software’s experience in developing Fintech products, open banking APIs can serve three purposes within Fintech products:
How Is Open Banking API Regulated?
The European Union’s Second Payment Services Directive (PSD 2) turned open banking into a Europe-wide regulation in 2018. Now, banks registered in the EU have to allow their customers to securely share their financial data through banks’ APIs.
To this day, PSD 2 remains the primary regulation for open banking APIs in the EU. It also requires all APIs to be public and free of charge.
Outside of the EU, Australia and Hong Kong are two other major players in the regulation-driven adoption of open banking:
- Australia’s Consumer Data Right Act (CDR) mirrors PSD 2 in requiring banks to allow their customers to share their data with third parties.
- Hong Kong authorities introduced the Open API Framework in 2018. Unlike PSD 2, under it, banks can choose to release their APIs under a partner policy.
The United States, along with India, Japan, South Korea, and Singapore, have chosen a market-driven approach to open banking. Ergo, there’s no concrete regulation for open banking in these jurisdictions yet.
3 Reasons Why Open Banking API Is a Fintech Game-Changer
What’s behind such a rapid growth of open banking APIs? Well, using them in a Fintech product comes with these three benefits for both Fintech businesses and end users.
Upgraded Customer Experience
According to McKinsey, both consumers and SMEs agree: open banking improves their lives by consolidating data from multiple sources in one place.
But that’s not the only way open banking APIs improve the customer experience. They also allow:
- Authorizing access to personal financial data to apply for a loan in a couple of clicks
- Gaining personalized AI-driven insights into personal or business financial performance
- Making online payments faster and more affordable thanks to account-to-account payments
More Room for Innovation
Open banking standards have made new Fintech products possible. Take automated accounting software as an example. It syncs business transactions from several sources, categorizes them for bookkeeping, and even generates financial statements. And without banks’ API, it wouldn’t exist.
The same goes for any product whose key value proposition is bringing everything to one place. This includes personal finance and wealth management apps, for example.
Beyond that, open banking has also made brand-new features in existing products possible. These features include instant payment services, generating virtual credit cards, or syncing bank account transactions.
Lower Transaction Fees
Open bank APIs enable businesses to benefit from account-to-account payments. This means a user can authorize a business to initiate bank payments on their behalf. (The business should be registered as a Payment Initiation Service Provider, or PISP, under PSD 2.)
As a result, businesses don’t have to go through debit or credit card companies to process payments. Thus, they don’t have to pay fees either. This brings down the overall payment fees and allows attracting customers through lower prices.
Are There Any Risks Associated with Using Open Banking API?
By definition, open banking APIs handle highly sensitive user data. If not secured properly, this data can end up stolen and used for identity theft or fraud.
But that’s not to say all open banking APIs are dangerous to use, of course. It only means that developers on both sides have to be extra careful to ensure the data is safe.
In our Fintech development experience, if data security is a common thread throughout the development process, there’s little to worry about.
So, Is It Safe to Use API in Open Banking?
In one word, yes. Here are three reasons why:
4 Open Banking API Use Cases
Here’s an overview of four use cases of open banking APIs in wealth management, lending, online payment, and accounting Fintech products.
All of your finances – checking accounts, savings accounts, and investments – can be brought to one dashboard. Made possible thanks to open banking APIs, this sync feature is a cornerstone of some personal wealth management applications.
Case in point: Mint, Personal Capital
Open banking APIs allow users to apply for loans in a couple of clicks instead of collecting dozens of documents across multiple financial institutions. All they need to do is give access to their financial information to the lender. According to HES, 26% of lenders already use open banking, with the number expected to rise to 70% by 2024.
Case in point: Freedom Finance, Zopa
Open banking APIs power account-to-account payment initiation. Challenger banks like Revolut use it to allow users to hide their payment details online. Peer-to-peer payment services like Wise (formerly TransferWise), in turn, take advantage of open banking to offer low-cost international payments to its customers.
Case in point: Revolut, Wise
Accounting & ERP
Similar to personal wealth management, open banking APIs allow businesses to aggregate all corporate financial data in one dashboard. They can also power automated accounting and deliver data for AI-powered resource management insights.
Case in point: Xero, Wave Accounting
What Does the Future Hold for Open Banking?
According to IMARC Group, the global open banking market will grow from $16.35 billion in 2021 to $56.36 in 2027. That, along with the rising number of open banking users, means that open banking API won’t go anywhere.
Here are two other open banking trends you can expect to see in the nearest future:
- Open banking may expand to other sectors. The current usual suspects are government, utilities, and telecommunications. Australia is already on track to introduce open banking in the energy industry, for example.
- ISO may establish a global standard for open banking APIs. For now, regulations and approaches to open banking depend on the jurisdiction. A common standard similar to ISO 20022 can be a unifying set of requirements for Fintech businesses worldwide.
The Fintech industry’s history had a tipping point with open banking. Thanks to these APIs, third-party providers can offer innovative, brand-new features and products. At the same time, users benefit from faster transactions, consolidated financial information, and automated accounting.
However, since open banking APIs deal with sensitive user data, implementing them requires attention to detail – and a great deal of Fintech expertise.
If you’re looking for the right development team to help you harness the potential of open banking APIs in your Fintech product, Devox Software has you covered. Reach out to us, and we’ll discuss your project in detail.