What Is Open Banking API And Why Does Your Business Need It?

What is open banking?

At the heart of open banking lies the use of application programming interfaces (APIs). These APIs facilitate the secure exchange of financial data between banks and authorized third-party providers. By providing a standardized interface for data sharing, APIs enable seamless integration and interoperability between different systems and platforms.

This technical foundation ensures that financial data can be accessed and utilized in a secure and efficient manner, driving the development of new financial services and products. Let's take Aspire as an example, by leveraging open banking, we creates innovative financial products optimized for targetted industry needs, thus addressing their specific pain points and improving the customer experience.

How does open banking work?

Here’s a typical scenario: the financial institution (say, a bank) grants the third-party provider (a fintech start-up) access to a customer’s personal and financial data. The customer has to consent to sharing the data, perhaps by filling up a consent form and ticking a box on an app. Once the fintech receives the data, it may use it to perform a transaction or create a business account as requested by the customer. From the data shared to the service performed, the entire process takes way less time than it would in a traditional banking setting.

Open banking differs around the world

While API in banking is universally hailed as the future of financial services, its implementation varies from country to country. Some countries and regions, such as Australia and Europe, have made open banking mandatory and have formal regulatory frameworks in place, with agreements between regulatory bodies and the banking industry to ensure effective ecosystems. Europe’s Second Payment Services Directive (PSD2) and Australia’s Consumer Data Rights Rules are leading standards in the regulatory-driven banking circle API space. In contrast, some countries – such as Singapore, Japan, South Korea, India – have taken a market-driven approach to open banking, taking policy decisions to promote open banking without making it compulsory.

For example, initiatives for open banking in Singapore include the creation of APIX, a collaborative platform for financial service providers to find innovative solutions. Furthermore, the Monetary Authority of Singapore and Association of Banks have come up with the API playbook, a set of guidelines on data exchange and communication. While open banking Singapore remains voluntary, banks and fintechs have openly embraced it, making the country a leader in the Asia Pacific region's API open banking space.

Open banking vs open finance

Open banking has taken core banking products and services to a much wider audience – that’s what the ‘open’ in open banking symbolises. Traditionally, open banking focuses on accounts and payment services. However, it is gradually evolving and expanding to include more products (credit card accounts, for instance).

Open banking has an extension – open finance. The term open finance is used when additional API-powered financial services – loans, pensions, mortgages, insurance, etc – come into the picture, expanding beyond traditional banking products to encompass a broader range of financial accounts.

What are open banking APIs?

Like any other API, a banking API is a set of codes and rules that facilitates communication between various IT systems so that businesses and individuals can access financial data and exchange services. A fintech company can use open banking APIs to acquire accounting data and cash flow records, check balances, and perform transactions online. Financial institutions use banking APIs to merge their products and services with those of other companies, gaining a larger audience and improving their customer offerings.

There are three categories of APIs in banking based on their functions:  

• Data APIs, which are used to access account information such as transactions and balances.
• Transaction APIs, which are payments-focused and facilitate fund transfers.
• Product APIs, which are used by businesses to list their products and services, pricing, and terms of use.

An open banking process typically begins with banks creating API endpoints. An API endpoint is a URL that connects the client (say, a fintech) requesting information to the server (bank) providing the response. An API endpoint is the location where the API request or API call made by the fintech lands. If the API call is accepted after authentication, the bank gives the fintech access to the requested data. This access is encrypted to keep the sensitive data secure and to ensure that it is being released with the data owner’s consent.       

What are the business benefits of using open banking APIs?

Three key advantages of using open banking APIs for businesses are:

Access to comprehensive financial data

Open banking APIs have created a space for financial institutions and tech companies to team up. This not only allows them to reach wider audiences and expand their products and services, it also grants them access to huge databases of valuable information. The ready availability of such highly detailed data – with the owners’ permission, of course – and the insights that can be drawn from it are the driving force behind the innovations shaping the digital financial services sector.

Enhanced customer experience

Due to the rich data resources now within their reach, businesses can offer customers personalised products and services – for instance, a customised app that aggregates data from the customer’s various bank accounts and wallets and has none of the pain points associated with traditional bank apps. Customers can also take advantage of the partnership between businesses and banks to find financial services that are tailored to meet their specific requirements – perhaps favourable loan terms or budget management facilities. Banking circle APIs empower people to take full control of their finances and gain insights from multiple bank accounts, significantly enhancing their journey and experience as customers. This, in turn, increases the pool of loyal customers for the service providers.

Operational efficiency

Open banking helps businesses expand their offerings with greater speed and agility than usual. It improves in-house accounting practices through instant transactions and reconciliations, budgeting and spend management features, and so on. Furthermore, banking APIs streamline operations and simplify workflow by integrating internal systems, automating repetitive tasks, and breaking down silos. This allows employees to work smarter and frees up company resources so that they can be used more effectively. What's more, with access to comprehensive data, businesses are better equipped to make informed decisions and strategic choices with a greater chance of success. And, let's not forget, a boost in efficiency translates to cost savings and a jump in revenue. Additionally, open banking APIs can open up new revenue streams as businesses monetise their data resources and services and charge a fee for use of their APIs.

How businesses use open banking APIs

Open banking APIs serve a wide range of functions, the most popular use cases being:

Payment processing

One of the largest growth areas in open banking is payment processing. Open banking APIs have brought convenience in payments, allowing businesses to initiate payments directly from customers’ bank accounts securely and transparently. The result is faster settlement. With open banking APIs, companies can also offer multiple payment methods and be mindful of customer preferences. That’s not all. They can collect and make cross-border payments with ease in multiple currencies and take advantage of lower transaction fees and competitive exchange rates.

Financial management

Apart from payments, open banking APIs have improved the way businesses manage other aspects of their finances. With API-powered automated invoice reconciliation, companies can check paid invoices against corresponding transactions, which contributes to accurate record-keeping. They can create budgets and track expenses and cash flow all on a single dashboard, vastly improving financial visibility. E-retailers can use open banking APIs to verify the financial credentials of customers, which serves as a deterrent to fraud and identity theft. These are just some of the ways in which open banking has refined financial management.

Credit scoring

Open banking has a positive impact on a business’ ability to borrow funds or acquire investment. Banks and other lenders use the data they have access to via open banking APIs to rate the creditworthiness of a business, or its ability to receive and repay a loan. The quality and quantity of data available helps the lender make an informed decision. Similarly, open banking APIs can help businesses maintain a healthy credit score with solutions that promote timely payment of bills and efficient use of resources.

Verification and due diligence

Open banking APIs are an effective verification tool. With access to detailed and up-to-date data of customers and suppliers, businesses can make accurate assessments. Furthermore, open banking APIs greatly simplify verification processes. Take the case of a rental services company. An integral function it performs is income verification of clients, which can be tedious and time-consuming if done the old-fashioned way. The company would have to request and verify multiple documents such as bank statements, tax statements, and payslips, which might not even give an accurate picture of the client’s finances. However, with open banking, the client can simply authorise the sharing of their financial data and consent to linking their bank accounts, dramatically cutting down verification time and simplifying the process.

Accounting integrations

One of the biggest internal benefits of open banking APIs is accounting integrations, whereby multiple data resources and financial accounts can be aggregated on a single platform to achieve financial clarity. This creates a seamless, cohesive flow between diverse accounting arms (billing, payroll, budgeting, etc). Additionally, bank APIs – such as leading European open banking platform Yapily – can automate simple as well as complex accounting tasks, which saves time, reduces errors, and boosts efficiency. This allows accounting staff to focus on more meaningful work, such as offering personalised services to customers.

Considerations when using open banking APIs

Open banking APIs overcome the limitations of traditional banking services by enabling seamless data exchange and fostering interoperability with third-party providers. However, they also come with challenges and limitations, which must be dealt with effectively for successful implementation. 

Data privacy and security

Open banking is rooted in data exchange, which makes data leaks, unauthorised access, and fraud associated risks. A security breach could have repercussions beyond financial damage, resulting in loss of trust and reputation. It is, therefore, imperative to check that the banking APIs you wish to engage with have strong security measures and powerful encryption.

Integration and interoperability

Technical challenges during integration cannot be ruled out. For instance, the absence of a standardised format for APIs can create incompatibility. Businesses must ensure the availability of round-the-clock technical support and sandbox testing environments before integration. They might even need a specialist or two if complex troubleshooting is required. Apart from integration challenges, businesses might face interoperability issues that prevent them from exchanging data with other organisations, again perhaps due to API incompatibility. Many businesses that trade across borders have come across a lack of global interoperability, which has discouraged them from adopting open banking practices.

Regulatory compliance

As previously mentioned, open banking regulations are often region-specific while some countries don’t have any formal regulations at all. Also, as open banking evolves, so are the regulations that govern its use. This presents businesses with a knotty compliance landscape that is always shifting with time and requires constant monitoring. A tiny slip and your company could find itself afoul of data protection laws in one country or in violation of consumer rights in another.

Loss of control 

Open banking requires businesses to put their data and trust in the hands of others. There is a very real risk of a business partner misusing your data, which makes it imperative to have certain checks in place from the get go. There is also the risk of a business partner changing their service terms without notice and, in the process, disrupting your operations. This makes an iron-clad contract a prerequisite for any open banking collaboration.            

How can you leverage open banking APIs effectively?

Following these best practices can elevate your experience with open banking APIs:

1. Assess your business needs

The first step is to ask yourself what you need an open banking API for. Do you want to offer your customers more personalised services or do you need to streamline your accounting practices? If your objective is to give your financial management system an overhaul, you might want to pick something like QuickBooks or Xero, both of which leverage open banking APIs to integrate accounting systems.

2. Choose the right open banking API provider

Looking for the right choice requires research. It hekps to make a shortlist using criteria such as reliability, technical support, pricing, and documentation. Security is of paramount importance during the selection process. Thoroughly check customer reviews before making your final choice.

3. Follow best practices for seamless integration

Integration can be challenging, especially if you don’t have a dedicated team to take care of it. Integration best practices include thoroughly reading the documentation provided by the banking API provider beforehand. The next step is to set the stage for integration by making sure that the necessary software is installed and the required infrastructure is in place. Next, a sandbox test before the real integration will allow you and your API provider to iron out any issues that might arise. Once testing is completed to your satisfaction, it is safe to proceed with the actual rollout. A small start with gradual expansion is recommended for a smooth integration experience.

4. Evaluate and measure success

Once the rollout is over, it’s important to evaluate the opening banking API’s success periodically. Select key performance areas and monitor if and how open banking has achieved results. It’s also important to carry out regular maintenance of the API, such as conducting security audits to spot weaknesses and routinely checking API configurations and access controls.

Open banking benefits with Aspire

From innovation to integrations, Aspire’s API offerings are built to ramp up your financial operations. Our powerful payout APIs come with automated payments, well-defined spend management, and best-in-class support. They also integrate effortlessly with your accounting software.