Open Banking APIs in 2024: Definition, Benefits & Applications
Open APIs have enabled the creation of open banking. In May 2022, Open Banking Implementation Entity (OBIE) reported more than 1 billion successful API calls were made by account servicing payment service providers (ASPSP); this number was 410 million in May 2020.
Open banking has provided considerable benefits to its users.
- 40% indicate that open banking has improved their financial decision-making
- 31% indicate an increase in payment option
- 23% indicate better borrowing opportunities.
In this article, we will explore open banking while explaining the benefits, opportunities, and applications of open banking APIs to inform finance sector professionals regarding the latest trends.
What is open banking?
Open banking APIs are open-source software and network protocol for integrating financial services and personal data across devices. The mission of open banking is to make it easier for people to access their money and other information (e.g. …) via a simple, secure, stable, and regulated digital marketplace (see Figure 1).
Figure 1: Open banking vs. traditional banking
Open banking allows financial institutions such as banks to open their APIs to third parties, like software companies and other businesses. As seen in Figure 2, thus third parties can use that data to create new services for their customers, such as:
- Budget management tools
- Bank accounts aggregation tools
- Digital lending
In the UK, 64% of open banking services are used for data sharing, 30% for payment, and 6% for both.
Figure 2. Open Banking flow
Open banking regulatory landscape
Banking is a highly regulated industry, and open banking is no exception. Major open banking regulations and standards have been passed in different countries. The most notable ones are:
- EU revised Payment Services Directive (PSD2)
- UK’s Open Banking Standard
Security is a crucial part of banking as they store sensitive information. In a 2022 survey, 95% of responders indicated they had suffered an API security incident in the last 12 months. Moreover, 40% of API users have indicated that they have experienced API malfunctioning. Given the importance of security and the high level of competition in open banking, API providers should test their APIs rigorously to ensure a high level of security and functionality.
Testifi offers CAST, a low-code test automation tool that aims to support businesses in providing high-quality software via a test-first strategy. Major well-known companies such as BMW, Amazon, and Vodafone use Testifi services.
If you are interested in learning more about API testing, read API Testing: 3 Benefits & 8 Different Types & API Security Testing: Importance, Automation & Common Issues.
Benefits of APIs in Open Banking
APIs have enabled banks and financial institutions to :
Benefits for customers
- Open APIs allow integration between banks and other apps, giving customers more options, such as instant payment services.
- Giving customers more control over 3rd party access to their data.
- Increased competition will provide better services at a lower price point for customers. (see Figure 3)
Figure 3. Open banking effect on competition
Benefits for banks
- APIs help banks in their digital transformation path.
- Increase the bank’s value chain by providing services from other applications and companies by reducing the need for developing or spending resources. For example, ABN Amaro provides a recurring payment management system in partnership with a fintech company.
- Increase operational efficiency by removing redundant banking procedures
- Provide personalized products as more personal data will be available.
Benefits for SMEs
- Providing access to various services such as virtual expense management and integrated accounting and tax management.
- Fintech companies can use customers’ financial information to make their products tailor-made. Open banking has enabled fintech companies to provide more value to customers (see Figure 4).
Figure 4. Proposition created by fintech or non-banks from 2018 to 2021
Functionalities of banking APIs
Core banking APIs
They are used for core banking activities such as opening bank accounts and making cross-border transactions.
They are used for facilitating the lending and loan collection process by providing information to the related parties. Examples of Lending APIs are:
- Onboarding APIs
- Credit underwriting APIs
- Loan fulfillment APIs
- Loan collection APIs
Card Issuance APIs
Businesses may use the APIs to generate and manage real and virtual cards by making an API call. This reduces entrance barriers and shortens the time it takes for firms to create their own cards.
Acquiring APIs connects your business’ checkout process to payment acquiring networks like VISA, making it simple and secure for your consumers to buy your products.
Open Banking API Specifications
The open banking API specification is a set of frameworks used by API providers such as banks and other financial institutions to create API endpoints that provide data access to developers. It has 4 pillars:
- Read/write API: It’s a set of RESTful APIs that allow 3rd party providers to gain access to data and conduct payment for customers by connecting to account servicing payment service providers.
- Open data API: Mobile and web applications can be created by developers using API endpoints developed by account providers.
- Directory: Technical details on the Open Banking Directory’s operation and each Directory participant’s responsibilities.
- Dynamic client registration: Third parties can dynamically register as clients with the Account Services Payment Services Providers (ASPSP) through a Software Statement Assertion.
- Management information (MI) reporting: It includes detailed data dictionaries and MI reporting templates. Regulators can use MI reporting to understand the performance and operation of open banking.
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Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.
Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.
Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.
He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.
Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.
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