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What Is an API in Open Banking?

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Last editedMar 20222 min read

Do you use multiple apps to keep track of your accounting and finances? Open banking allows financial institutions to share data for a more cohesive, consistent user experience. These services can’t function without APIs, but what is an API in open banking, and why is it important?

Understanding APIs in open banking

Let’s start with the basic open banking API definition. The acronym ‘API’ is short for application programming interface, a type of software that facilitates communication between different applications. In the case of open banking, these apps would be fintech-related using the open banking framework. Open banking APIs act as the middleman between different IT systems so that businesses and customers can access and share relevant data.

All of this is made possible with the Open Banking Project (OBP) which offers an open-source platform for financial institutions to share data with fintech companies. Open banking APIs serve an important role by acting as connecting links between databases and outside or third-party providers and apps. In a nutshell, you could look at the open banking API definition as a bridge for data to travel over. Banks might create their own unique APIs or choose an existing platform. All APIs in the UK must conform to the Open Banking Implementation Entity standards.

What are the benefits of an open banking API?

Using an open banking API offers benefits to banks, businesses, and customers alike. By facilitating the transfer of data in a controlled and secure format, open banking APIs allow financial institutions to provide more innovative and personalised products to their customers. Third-party providers can access data via the API, driving innovation forward and creating a more competitive financial market. All of this leads to a better online payment experience based on secure banking infrastructure.

Banks also have reason to work on open banking API testing to get their services just right. Benefits of using this type of API include:

  • Improved innovation

  • More detailed customer data and insights

  • Increase in revenue due to greater efficiency

  • Personalised offers based on customer needs

How does open banking API architecture work?

There are a few variations when it comes to how open banking platforms work. What open banking API architecture has in common is the ability to provide a secure link between two different IT systems or applications. The most common scenario is a link between a fintech service and a banking institution.

For example, imagine that a fintech company wants to create a budgeting app for customers. The app would need to access the user’s bank account details and transactions to provide more tailored and accurate budgeting recommendations. This is information that the customer’s bank would have stored in its own systems. The open banking API provides the link needed for these two systems to work together, using the open banking network system. Data is only provided with permission provided by the customer, who authorises the third-party app to access their banking data.

Can I use an open banking API?

Could this type of API be useful to your business? One thing to note is that there are strict rules in the UK regarding who can create their own open banking API from scratch. To protect user data, only authorised organisations can access open banking APIs as determined by the Financial Conduct Authority, or FCA. Here are the different types of providers that would qualify for FCA authorisation:

  • Account Information Service Providers (AISP) can access a bank’s API to read account transaction data.

  • Payment Initiation Service Providers (PISP) can initiate payments directly from a customer’s bank account with direct consent from the customer.

  • Account Servicing Payment Service Providers (ASPSP) are typically the banks themselves who maintain payment accounts and grant access to third-party services.

All aspects of open banking APIs hinge on customer consent. The benefit of open banking is that it puts control in the customer’s hands, granting access to better financial services overall. From streamlined payments to more competitive borrowing terms, there are multiple benefits to consumers and businesses alike.

A key example of open banking put to good use is GoCardless’s Instant Bank Pay feature, which offers a simple, streamlined way to collect one-off payments with full customer approval.

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