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What is an API in the context of open banking?

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Last editedMay 20232 min read

Does it feel like you constantly have several tabs open on your web browser when trying to take care of basic accounting? Open banking is a system that lets you join up your accounts and take greater control. This technology works with the assistance of APIs – but what is an API in open banking, and how does it all work?

What is open banking?

Before we can answer what an API is in the context of open banking, let’s start with the basics. Open banking is a concept that allows consumers to opt into sharing their financial data with third-party providers. Consumers can take control over their own data, enabling regulated financial institutions and providers to access details to provide better services. It’s designed to be a win-win proposition:

Financial service providers can work on offering more innovative, data-driven products.
Businesses can take advantage of a wider range of payment options and automated tools.
Customers enjoy more competitive financial products tailored to their needs.

The overall trend of open banking points to a financial system that’s more heavily automated, with the end goal of digitizing financial services for the benefit of all parties involved.

What is an API in open banking?

How do APIs factor into the equation? They provide the connecting links between financial institutions, third-party providers, businesses, and consumers. API stands for application programming interface, referring to any interface that connects a service’s database with an outside application. In a general sense, they act as a bridge for data to travel securely from point A to point B.

An Open Banking API is the interface that links a bank’s database with the outside program or application. This is what allows the bank to offer a wider selection of services, payment plans, and financial products tailored to each individual customer. Banks can develop their own unique APIs, linking them to outside APIs to create a unique financial ecosystem.

Standardized APIs in open banking

We’ve mentioned above that banks have the option of creating custom APIs to best serve their customers. However, there are also standardized APIs to help create a more uniform experience across multiple financial institutions. This makes it easier for multiple banks to link together and share customer data for the purposes of open banking. Typical APIs might focus on transaction history, transaction requests, and user account details.

There are many different organizations worldwide offering standardized APIs. Within the United States, Nacha (National Automated Clearing House Association) has created its own standards group known as Afinis. This offers nine APIs for use by US banks such as the following:

ACH account validation
ACH payment initiation
Account validation
Bank contact information
Bank contact version 2
Pay me
Payee profile
Real-time billing account validation
Transaction status

Banks with open APIs

You’ll find the most banks are now switching over to APIs and open banking. Currently, US banks with open APIs include:

Bank of America
Citibank
Wells Fargo
JP Morgan Chase

All of these banks use Nacha’s Afinis group of API standards for open banking. This ensures that the financial institutions can provide their customers with joined-up services for greater efficiency and control. Mastercard and Discover credit cards also use Afinis, as do numerous payment card processors. Still others use their own custom APIs.

The bottom line

Open banking offers multiple benefits to consumers and businesses alike. You can enjoy streamlined payments solutions, better borrowing terms, and more control over your financial management. One of the biggest benefits is account aggregation, which lets you log in once to view all of your various accounts from a central platform. None of this would be possible without APIs, the unique interface that allows one service to communicate with another.

We can help

With over 10 years of experience in payment APIs, GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.