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What Is an API in open banking?

Abílio Rodrigues
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Last editedSep 20235 min read

Open banking (OB) enables third-party payment services and financial service providers to access consumer banking information such as transactions and payment history. This is possible through the use of application programming interfaces (APIs).

OB promotes networking between banking information and service providers, creating a smoother user experience and promoting better products and services.

If you want to dive deeper into this concept, you can find more detailed information about open banking in our comprehensive guide.

What is an API?

API is an acronym for Application Programming Interface, which is a software bridge, a channel for data transfer that allows two applications to communicate. Every time you are online using an application like Instagram, you are essentially using an API.

In the case of open banking, these apps would be FinTech-related. Open banking APIs act as the middleman between different IT systems so 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 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 (OBIE) standards.

What is an API in open banking?

APIs are a set of codes and protocols that dictate interactions between software components and allow different applications to communicate with each other.

In open banking, they allow third-party providers (TPPs) to access financial institutions’ data in a safe and efficient manner.

Open banking resorts to APIs in order to enable third-party providers’ products and services. Using an OB login, bank APIs act as a way of giving FinTechs access to relevant financial information, such as:

  • Balances

  • Accounting information

  • Cashflow

  • Transactions

Banks, on the other hand, can use APIs to combine the digital services offered by other companies with their own platforms, improving their portfolio and customer experience. This is why APIs in banking are essential for Banking-as-a-Service (BaaS). 

How does open banking API architecture work?

There are a few variations when it comes to how open banking platforms work. Open banking API architecture has in common 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.

A prime example of this is Nude. Its users can choose to make regular or one-off payments – which Nude calls contributions – to their savings pot. That means Nude receives money in a variety of ways, from regular monthly payday contributions to single payments when people can afford them.

GoCardless has introduced Nude to instant one-off payments, powered by open banking. “Instant Bank Pay has been amazing for us because the payments credit our customers’ accounts more quickly and give them a much clearer understanding of where they stand.” 

Benefits of using open banking APIs

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

Are open banking APIs free of charge?

There is no definitive answer to this question. In Europe, due to regulations like the PSD2, banks are required not only to develop their own open banking APIs but also to make them available free of charge.

But that doesn't mean these APIs will be free to end users or companies creating business strategies to leverage OB capabilities. Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs) need to comply with multiple requirements to be able to access and use these APIs, with the majority charging their customers to access their own API.

Are open banking APIs safe to use?

Absolutely! Open banking relies on a European Union (EU) regulatory framework known as PSD2, which, amongst other things, mandates the use of Strong Customer Authentication (SCA). This means that in the EU, extra authentication steps must be taken in order to complete online transactions. 

In the past, it was common to resort to screen scraping, in which a third party would log in to a bank’s website to gather information or even initiate payments on behalf of the customer. However, this technique is known to be the source of several data leaks that compromise user safety.

Open banking APIs, on the other hand, are regulated and provide safe and streamlined data gathering that shares only what's strictly necessary for the TPP to complete a given operation. Users have absolute control over their financial information, granting and revoking access as they deem fit, with the added advantage of never having to share their login credentials. 

Why are APIs in banking important?

APIs can provide a way for banks to open up their data and services to third-party developers, who can then build new applications and services on top of them. This can help banks improve their customer experience, reach new markets, and boost innovation.

High-level data security is also one of the main reasons why APIs improve the banking experience. The implementation of additional layers of authorisation keeps your private data and financial information safe from bad actors, reducing the probability of fraud or leaks. 

If properly managed, APIs can be a very powerful tool for banks.

Banks have had APIs for some time now, but PSD2 has made them more indispensable than ever. PSD2 requires banks to provide APIs that allow TTPs to access customer account data. This has created a whole new ecosystem of banking apps and services that can benefit and be used by consumers.

Banks are still figuring out how to best take advantage of this new requirement, but it is clear that APIs are the key to an improved banking experience. This is good news for consumers, who will benefit from the increased competition and innovation that PSD2 is sure to bring.

Open banking APIs are revolutionising the FinTech industry

Open banking can enhance FinTechs’ services, and the same can be said for banks that plan to invest in OB for their commercial customers. It is now clear that OB APIs are revolutionising the entire banking, financial services, lending, and insurance sectors, allowing for the development of adjusted business strategies. This is achieved through

  • A newfound focus on innovation: products and banking services are now safer, more profitable, and more innovative.

  • Customers control their financial data: this enables them to better understand their data and how it is shared. Open banking is at the core of improved relationships between incumbent institutions and their customers by returning data ownership to them.

  • Single services for multiple accounts: FinTechs can provide easy and instant money transfers, increased safety, enhanced availability, personalised experiences, and the best financial solutions. 

  • Great potential for increased revenue streams: OB encourages partnerships between banks and third parties, it can create revenue-sharing ecosystems, where incumbents provide customer access to third-party developed services while profiting from the referral.

All this places pressure on traditional financial institutions to keep up and improve their offerings or partner with FinTechs. Overall, OB drives innovation and competition, meaning the industry is constantly evolving, with clear benefits for all parties.

Can businesses 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 the 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 the GoCardless Instant Bank Pay product, which offers a simple, streamlined way to collect one-off payments instantly with full customer approval.

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