What is open banking and how is it powering innovation in fintech services?

What is open banking and what are open banking APIs?

Open banking is a financial services framework that allows authorised third-party financial service providers and traditional banks to securely share customer data.

Open banking makes it possible for third-party financial service providers—typically, fintech companies such as Aspire—to offer a wide range of financial products and services such as bank accounts, payment solutions, fraud detection tools, financial management platforms, and account aggregation services, to name a few.

By developing financial solutions that cater specifically to users' needs, open banking enriches the customer experience, promotes innovation and competition in the banking industry, and encourages financial inclusion.

To access people's bank account information, transaction details, and other financial data, the third-party companies use APIs – software protocols that help applications communicate. Once they obtain this information, they analyse it to determine customer behaviour, such as spending habits. Using the insights gained, they create products and services targeted at these individuals.

For example, a fintech is developing a budgeting app. With the consent of its clients, it requests and receives access to their banking data through an open banking API. After studying the data, it comes up with smart spending advice that is personalised for each customer.

How does open banking work?

Here is how open banking APIs work in five steps:

1. The bank creates the API to allow authorised third-party providers to interact with its customer database.
2. A third-party payment provider uses the open banking API to seek access to the bank's customer data or to initiate a service (say, a fund transfer) from the individual's savings account.
3. The customer must have already authorised the payment provider's request for access, typically through a secure authentication process such as open authorisation (OAuth).
4. The API verifies the payment provider's request and approves (or rejects) it after checking its credentials and whether it fulfils open banking regulations.
5. Upon approval, the third-party firm uses the API to access the desired data. In the case of a service, the API executes it and relays a message back to the third party, which in turn informs the customer.

The success of open banking initiatives relies on strong security measures to keep sensitive financial data safe.

To make the process convenient, standardised APIs are used to enable interaction between multiple banks, other financial service providers, and third-party providers.

Benefits of open banking

By reducing error and inefficiencies through automation, enabling analysis and data-backed insights, and promoting innovation and customisation, open banking has benefits for all its stakeholders:

For businesses

• Open banking makes consumer financial data accessible, even for small businesses and non-financial companies.
• This valuable information and the insights derived from it allow businesses to come up with targeted products and services designed to attract customers and win their loyalty.
• Open banking makes it possible for even non-financial companies to embed financial services in their platforms. For example, an online retailer provides automated payment gateways for buyers to make faster, more secure financial transactions on its website.
• Open banking improves financial security. As open banking APIs access financial data in real time, businesses can use this information to perform real-time risk assessments about their financial products and monitor their financial health regularly.
• Open banking is synonymous with innovation. It drives companies to constantly improve their existing offerings or develop new ones. Some popular financial products and services fuelled by open banking include automated payment solutions, budgeting apps, personalised financial advice services, and virtual corporate cards.

For banks and financial service providers

• Open banking paves the way for established banks, other financial institutions, and third-party companies such as fintechs to collaborate and create an omnibus financial environment with a wider range of products and services.
• This empowers all the players involved to expand their reach and conquer new markets.
• Open banking APIs are driving financial innovation. Imagine a business model where a financial service provider issues a loan without asking the borrower to produce a single bank account detail. Instead, the lender verifies the borrower's credit history, spending habits, and income pattern with just a click of the button. Open banking makes such innovation and convenience possible.
• The data at their disposal gives financial institutions and third-party developers a clear picture of customers' requirements, enabling them to make individualised recommendations.
• Open banking allows forward-thinking businesses to gain a competitive advantage over their rivals by developing new and improved services.

For customers

• Open banking is designed to boost customer empowerment. Thanks to it, users manage multiple financial accounts across institutions with ease, get a consolidated view of all their finances in a single place, and enjoy full control over their financial data usage.
• This, in turn, allows them to make data-informed decisions about their finances, leading to better savings and smarter investment choices.
• Users gain access to a selection of products and services tailored to meet their specific needs and to add value to their transactions – for example, a third-party payment service that comes with special rewards and savings plans.
• Open banking has vastly improved financial inclusion. It's now easier for small businesses and underrepresented groups such as retirees and immigrants to access loans, lines of credit, and other financial solutions.

Open banking APIs and security risks

Open banking does come with considerable security risks due to the involvement of sensitive financial data. Businesses using open banking APIs are duty-bound to maintain strict protocols on security, leverage technology, and follow industry best practices to prevent data breaches and fraud.

If your business uses open banking APIs, here are the most important security measures to take:

• Use a secure authentication process such as open authorisation (OAuth) to give third-party apps secure access to customer data.
• Verify customers with the help of strict protocols such as multi-factor authentication.
• Make sure customers know their rights and responsibilities and understand what their data is being used for. Educate them about data ownership and the benefits and challenges of open banking.

• Ensure that all data is encrypted and use strong encryption techniques.

• Fortify open banking APIs with Transport Layer Security (TLS), a protocol that guarantees more secure communication lines.
• Use machine learning-enabled fraud detection systems to analyse data patterns and spot anomalies and suspicious activity. Be quick to respond to such activity.
• Set limits on the number of times an API can be accessed to prevent abuse.
• Regularly monitor third-party services for risks. Make sure that third-party developers have adequate security measures in place.
• Ensure regulatory requirements are fulfilled. Open banking regulations and standards cover areas such as user consent, data access, data privacy, and API standardisation. Regulations vary from place to place and change from time to time. Australia, the UK, and Europe have formal regulatory frameworks in place. In contrast, the US, Japan, and Singapore are among countries that use local regulations in the absence of a formal federal mandate. Here in Singapore, businesses can follow an API playbook published by the Monetary Authority of Singapore and Association of Banks. ²
• Conduct regular security audits, compliance checks, and assessments of third-party companies to avert security lapses.

How open banking APIs are shaping fintech innovations

Before the emergence of open banking, customer financial data was known only to established banks and financial institutions. But now, even fintechs can tap into this database and use it to come up with innovative products and services aimed at simplifying customers' finances.

Open banking APIs have revolutionised the fintech space, creating new tools every day, such as banking apps, digital wallets, automated investment services, and insurance platforms. Thanks to open banking, fintech offerings are getting more and more sophisticated, from financial apps offering multi-currency business accounts and trade finance solutions to third-party apps with in-built payment initiation services. The result: simpler and faster transactions, lower costs, bespoke products and services, enhanced personal finance management, greater access to credit, and more investment opportunities.

Due to the growing influence of fintechs, traditional banks are keen to form partnerships with them, collaborating on a wide variety of products and services and working together to improve financial inclusion. The use of advanced technologies is fuelling more fintech innovation. For example, fintech companies are using AI and machine learning to make highly personalised recommendations, detect fraud, and predict market trends correctly.

While fintechs have enhanced customer satisfaction and loyalty, they themselves are reaping the rewards of creating new revenue streams with every innovation.

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Frequently asked questions (FAQs)

What is the concept of open banking?

Open banking is a concept that involves the secure sharing of customer financial data between banks, other financial institutions, and third-party players such as fintech companies. It promotes innovation around financial products and services in the banking and finance industry.

What are open banking APIs?

Open banking APIs are application programming interfaces that facilitate the secure exchange of consumer data between financial institutions and third-party service providers. Open banking APIs work by ensuring that only authorised parties have access to the sensitive financial information and that the data exchange meets all relevant regulatory requirements.

Are open banking APIs free?

The open banking APIs created by banks are free. However, third-party firms incur expenses – securing the necessary licenses, making security arrangements, etc – on their open banking initiatives. They might pass these costs on to their customers in the form of service fees.