What are open banking APIs and how do they work?

Introduction

There has been a noticeable shift in recent years that has greatly expanded consumer access to financial services. With the exponential growth of open banking APIs within the finance technology (aka fintech) ecosystem, consumers have a vast array of innovative financial services and applications at their disposal to quickly and securely share their data.

Open Banking APIs have enabled strong industry disruption - opening the door for thousands of new financial apps and services that have changed the way millions of people interact with their finances every day.

What is open banking API

Open banking refers to the use of APIs to share financial data and services with third parties. Third parties typically provide technology, a service or an app to the bank’s customers that makes use of the shared financial data and services. The shared financial data comprises e.g. the statements and transaction records belonging to the bank's customers. This data cannot be made openly available, but it is only shared at explicit request of the customer. Open banking provides the technological infrastructure and the legal frameworks to make such consent-driven sharing happen.

How open banking APIs work

With open banking APIs, banks build dedicated endpoints to enable third-party applications such as app developers or data aggregators to access consumer-permissioned data. Financial institutions give encrypted access to the third party in order to keep customer data secure and ensure that it’s accessed only with their customers’ permission. These connections allow applications to carry out vital customer functions such as account balance checks, transaction history lookups, and account and routing number verification.

Data aggregators act as an “API bridge” between fintech applications and financial institutions. Because data aggregators connect with a plethora of financial institutions, fintech applications have less work and maintenance to worry about. Instead, they leverage the data aggregator as a direct integration, seamlessly enabling customers to connect accounts from any financial institution to do things like create a budget, buy a car, or fund a brokerage account.

Following are the step by which open banking APIs work

1. A financial institution establishes dedicated FDX (fixed data exchange) API endpoints for other parties to call in order to obtain specific types of consumer-permissioned information. This allows data aggregators to integrate with the bank's APIs to access financial account data such as account numbers, balances, and transaction history.

2. Developers then integrate with the data aggregator’s API. This gives them the ability to allow customers to link accounts through any financial institution that’s also connected through the aggregator’s network.

3. When a customer wants to connect their bank account to fund their account on the app, their bank will authenticate them by prompting them to enter their bank account’s credentials (username and password). If successful, their bank will create an encrypted API token between themselves and the data aggregator which includes a unique identifier—which means the aggregator doesn’t have to store the credentials. This token creates an ongoing connection between the bank account and the aggregator.

4. Once a token has been created between the bank and the aggregator to establish a new customer’s credentials, the aggregator creates another token. The trading app will use this new token to make API calls to the data aggregator. When these API calls are made, the aggregator uses the bank API to fetch the financial data needed to perform the requested customer action, such as funding the app or moving money from the app to their bank account.

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Benefits of open banking APIs

Open banking accelerates the integration of more modern digital financial services with many established banking institutions. It offers numerous benefits to consumers, with the potential to transform the financial services landscape, making it more customer-centric, efficient, and inclusive. Following are the benefits of open banking APIs.

Enhanced Customer Experience

Open banking allows customers to access a broader array of financial products and services beyond those that a single bank can typically offer. Presenting a range of services in a single, unified dashboard means that customers can view and manage multiple accounts from different banks or financial institutions in one place, often through a single mobile app or platform. This simplifies the management of finances and provides a comprehensive overview of the customer’s financial situation. Services that enable frictionless authentication can further streamline the customer experience by eliminating the use of security questions such as CAPTCHA or MFA mechanisms while maintaining rigorous access security.

Increased Competition and Innovation

By breaking down traditional barriers and enabling entrants to offer new financial products and services, open banking promotes increased competition and innovation in the financial industry. These newcomers can challenge established banks and financial institutions by providing fresh approaches to banking and finance, and offer more customized financial products and services that better align with customer’s financial needs and goals. In addition, increased competition among banks can lead to lower pricing for financial products and services, with customers benefiting from lower fees, better interest rates, and improved terms and conditions.

Financial Inclusion and Accessibility

Open banking can also help extend financial services to underserved populations who do not have a traditional credit history. By assessing non-traditional financial sources, such as utility payments and rent history, individuals may be able to access loans and financial products they might otherwise be denied.

Role of APIs in digital banking transformation

Open banking has evolved. It was initially an almost revolutionary or certainly disruptive movement. Now it is an established practice, offering opportunities that many banks now acknowledge and seek to capitalize on. Indeed, open banking initiatives are popping up all over the world. Open banking may in fact be accelerating a more fundamental digital transformation of the banks by providing a network for the digital banking to step into the fintech world and provide a wide plethora of extended services to the customers.

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Conclusion

As we have seen, banks not only have the possibility to change the structure of their value chain but also find value in doing so. Thanks to open banking and API technology, banks have more choice than ever to change the structure of their value chain, and this helps them to adapt to changing customer needs and to keep their customers happy. 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.

Frequently asked questions (FAQs)

What is an open banking API?

Open banking APIs help users connect their bank accounts to various financial services. These APIs have unlocked a new realm of data access by enabling thousands of apps and disruptive financial services to be built using safe and secure connections to consumer-permissioned data. Financial Institutions are increasingly using open banking APIs to share consumer data with applications and aggregators in a secure manner.

How to integrate open banking APIs in your app?

Understand regulations
Choose between direct integration and integration via an aggregator (e.g Transfi)
Secure authentication
API setup to retrieve data or initiate payment
Combat error
Ensure security

How does an open banking API work?

Permission based setting up with the user
Safe digital link
Info communicated in standardised data
Verification
Service provision
Security measures along the line

What are the benefits of an open banking API?

Enhanced Customer Experience
Increased Competition and Innovation
Financial inclusion and accessibility

Why is Transfi one of the best tools for API integrations?

For easy open banking API integration and to avail the benefits of the dedicated API technology, Transfi provides an accessible and easy to operate API integrations for your business with accountable customer support and secured operations on the backend as well as the frontend.

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