• Mon. May 20th, 2024

Open Banking and APIs: What IT Leaders Need to Know


May 1, 2024 #APIs, #banking, #leaders, #open


What Is Open Banking?

Open banking is a system in which third-party financial service providers access consumer transactions and other financial data from banks and nonbank financial institutions through the use of APIs. Most people use open API systems on a regular basis, even if they don’t realize it.

Have you used CashApp or Venmo to pay friends back for picking up a dinner check? That’s open banking. People also use open banking when they transfer money from their checking accounts to their Robinhood accounts, or if they use budgeting apps that connect with their banks or credit card providers. According to Visa, 87 percent of U.S. consumers use open banking, but only 34 percent know that open banking drives their connected financial services.

But what truly distinguishes open banking from any other financial process? The answer is APIs.

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What Are Open Banking APIs?

IBM defines an API as “a set of rules or protocols that enables software applications to communicate with each other to exchange data, features and functionality.” This allows previously siloed data to exist across many applications.

There are several different types of APIs:

  • Data APIs: These provide read-only access to financial data such as account information, balances and transaction history.
  • Transaction APIs: These enable everything from transferring funds to making direct deposits and sending payments.
  • Product APIs: These enable third parties to list financial products, rates and terms. They are often used by comparison websites or marketplaces.

APIs are the backbone of open banking. They essentially act as bridges, allowing secure and standardized methods for third parties to access financial data with the consumer’s consent.

“While the sharing of customer-permissioned banking data with third parties is common in traditional banking, open banking differs in that it relies on APIs and advanced data aggregation techniques to systematically access and share this data,” notes CB Insights

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How Do Open Banking and APIs Work?

The open banking process generally involves four parties: the end customer, the financial institution, the data aggregator and the third-party app. While the specifics of each step in the process may vary depending on what third party is being connected to (a brokerage app versus a budgeting tool, for example), there’s typically a three-step process.

  1. The bank builds dedicated endpoints. These endpoints are what third parties call to obtain the specific financial data that consumers have given permission to be shared.
  2. The data aggregator serves as an API bridge. The data aggregator serves as the middleman, accessing consumer-permissioned data from the bank and then sending it securely to the third-party service.
  3. Banks give encrypted access to the third party. When end consumers successfully sign in to their financial institutions to allow third-party access, their banks create encrypted API tokens. These tokens work between the banks and the data aggregator. They create an ongoing connection so that the aggregator doesn’t have to store the consumer bank’s account credentials.


The percentage of U.S. consumers who use open banking

Source: Visa, “The U.S. Open Banking Movement,” May 2023

How Are APIs Changing Financial Services?

The biggest value that APIs bring to the table is that they reduce IT complexity and simplify financial transactions, according to McKinsey.

Recently, “the goal of deploying APIs has changed from cost savings to monetization,” McKinsey notes. This is why large banks now allocate roughly 14 percent of their IT budgets to APIs on average, and why many IT leaders believe that APIs are a priority for streamlining business and IT operations.

McKinsey notes that 31 percent of banks expect API efforts to increase their revenues by 10 percent. This steady increase in “the monetization of open banking in the coming years” will focus most on payment.

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Beyond revenues, open banking and APIs are helping financial institutions expand customer engagement, improve operational efficiency and create more secure access to consumer banking data. This leads to more accurate credit assessments, personalized investment advice and proactive fraud detection.

In the future, these technologies are expected to drive more innovative financial products, enhancing real-time decision-making and making financial services more accessible. This would essentially mean a more responsive and user-centered financial landscape.


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