The Open Banking initiative ensures that banks provide secure and controlled access to customers’ financial data via Open Banking API, given the customers’ consent. This allows fintech businesses to build feature-rich offerings atop bank infrastructures and ecosystems.
While this sounds promising, there are many challenges connected with Open Banking API integration. Knowing how to overcome them will help you succeed in your fintech endeavor. This article will provide you with a clear Open Banking definition, as well as some tips and best practices on building and managing a successful product using the Open Banking capabilities.
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As a company that has built dozens of high-grade fintech software solutions, Relevant has ample experience with Open Banking API integration. And we know exactly what information managers need to lead the fintech development team, so keep reading!
Table of Contents
Let’s start with an Open Banking definition to ensure we all stay on the same page.
Open Banking is an initiative backed by the UK government to allow better collaboration between banks and fintech service providers using Open Banking APIs. It improves the user experience but requires explicit consent from bank customers.
By providing a secure way for banks to share their customer’s financial information with third-party providers (TPPs), Open Banking offers a wide range of opportunities for small-to-medium businesses, helping them deliver value to customers.
The data Open Banking provides access to includes transaction history, bank account details, credit statements, and other information from banks and non-bank financial institutions, accessible via Application Programming Interfaces.
As far as users are concerned, Open Banking allows them to conveniently use products and services from banks, fintech companies, and other entities regulated by the Financial Conduct Authority (FCA) and its EU analogs.
The Open Banking initiative is supported by the Payment Services Directive 2nd edition (PSD2) enacted as of 2016 across the EU. This fundamental piece of regulation outlines the specifications and best practices to follow when providing financial services to customers and processing their data. Relevant has already covered how this affects the financial landscape in the UK.
If you feel overwhelmed with all these industry-specific terms, here’s a little glossary to help you get everything sorted out.
We will use these terms extensively throughout the article. You will also encounter them once you dive into the documentation necessary to implement Open Banking for your product. But first, let’s really consider its advantages and disadvantages.
Open Banking APIs help form an ecosystem of interconnected apps that simplifies the financial activities for customers and creates more value delivery lines for businesses. Imagine using a centralized Open Banking app for budgeting and managing all your bank accounts. In addition to that, you can have a single dashboard for uniformed identity verification and credibility checks for obtaining mortgage or loan approvals. The range of Open Banking API use cases is vast and grows daily.
But, of course, Open Banking is not all roses, so we’ll discuss its shortcomings too.
Every party involved in Open Banking benefits from:
In general, Open Banking advantages vastly outweigh the downsides when implemented correctly. Still, we must mention the shortcomings to give you the full picture.
Most challenges with Open Banking stem from the complexity of its implementation. There are many moving parts and parties involved, so everything has to run like clockwork to work correctly:
Despite that, the Open Banking community grows stronger as more service providers operating in different domains are joining the initiative. The reason is simple: the robust Open Banking API capabilities provide immense business opportunities.
Open Banking API has a lot to offer. Here’s a list of API calls TPPs can make to banks thanks to it:
This is just the tip of the Open Banking API specification iceberg, but these API calls demonstrate the enormous range of possibilities offered by bank API integration.
First of all, to get access to a customer’s financial data, TPPs have to comply with the GDPR (General Data Protection Regulation) and PSD2 directives and be authorized by the Open Banking Implementation Entity in the UK or its analogs in the EU.
Next, the TPPs should get express consent and permission from users to act on their behalf, the so-called consent access token. Only then will the banks share the user’s data with TPPs. Let’s take a look at this process in more detail.
Compared to traditional API interactions, the key challenge with Open Banking data security is that TPPs don’t access their own data during a transaction. They need to access the financial data belonging to customers on the behalf of the latter. That’s why traditional API keys don’t work. Instead, there needs to be a token that serves as proof of the customer’s consent for TPPs to access the data.
The workflow looks like this:
Here’s what happens along that journey:
There are multiple ways to implement every step of the Open Banking API security flow, so you will be able to select the one that fits you best.
We’ve covered the theory, and now it’s time to dig into some use cases.
Banking information is an important part of digital identity management and verification. Open Banking allows gathering, securely storing, and transparently processing customer data for businesses, governments, and public organizations. It is also important because digital identity services allow banks to validate customer identity when a TPP requests data on their behalf.
Know Your Customer (KYC) identity checks are required to prevent fraud. Whenever a customer performs a transaction, a business must ensure the person behind the request is actually the one they claim to be and not a criminal. KYC automation using Open Banking APIs helps quickly gather relevant financial information associated with the customer for verification.
It’s a part of anti-money laundering (AML) procedures used by financial organizations to prevent fraud. Transaction monitoring helps detect abnormal or fraudulent activities and prevent them in time. Using AI algorithms to detect normal transaction patterns allows to quickly identify and alert the user and the bank if there’s an attempt to make an unusual transaction.
Centralized financial management of funds in disparate banking accounts can help businesses and individuals get more value with less effort. For example, this removes the need to export all data in a specific format like MT940 because the data is transmitted directly over the API.
Automation of paperwork and workflows associated with corporate banking customer onboarding is a relief for everyone. Using aggregated data instead of finding hard-to-obtain financial documents allows customers to apply for banking account registration quickly and easily.
Wouldn’t it be great to offer centralized management of funds and transactions for all the customer’s bank accounts in a single platform? Open Banking API helps you implement this. Multi-banking apps like Tink, Zuper, Outbank, or Isabel are among the most popular real-world Open Banking API examples.
This use case includes the support of direct payments between bank accounts, omitting the Visa/Mastercard credit/debit card fees. This allows businesses and individuals to optimize and speed up their cash flows and funds turnover. Open Banking is the foundational element in the niche.
These algorithms are part of risk management processes in debt management, retail, gambling, mortgage, healthcare, insurance, and other industries. Applying this kind of algorithm via API helps to dramatically reduce the time needed for loan application processing.
Transaction reconciliation is rapidly gaining popularity. Checking customer transaction logs for discrepancies and rectifying any issues helps in chargeback mitigation, fraud prevention, and other personal and business financing areas.
Product comparisons include aggregation of data regardless of the industry and niche, be it online retail or banking services. This information can help banks prepare personalized offerings to convince customers to switch from a competitor to them.
Income verification is a part of anti-money laundering workflows. Besides, it is useful in validating a customer’s eligibility for certain financial services and preparing personalized banking offers.
Credit scoring is a part of risk management workflows responsible for loan application processing. By providing clear and transparent access to the entirety of their financial statements, the customers can support their claims and prove they can pay the loan in time.
The COVID-19 pandemic resulted in a skyrocketing number of subscriptions to various online entertainment services. Using the Open Banking API to centralize subscription management is a trend that quickly gains popularity.
Payment initiation covers direct transfers of funds from and to any banking accounts and from any device. This use case is booming with the growing digital economy as customers value mobility and streamlined financial transactions.
Open Banking seems promising, but people will only use it if they feel comfortable sharing their data and know it’s secure. Thus, creating a positive customer experience is one of the pillars of Open Banking implementation. The UK government prepared detailed guidelines for this, and we’ll just cover the key points here.
Open Banking services and digital products must enable the following:
The principles listed above create an atmosphere of trust, a comfortable digital environment where people are not afraid to share their data via an Open Banking mobile app of their choice. This will result in green light for creating even more excellent products.
If you are going to enter the Open Banking arena and reap the benefits it provides, you will have to answer a series of important questions regarding regulatory compliance, cost structure, and speed to market:
Answering them will help you understand whether you want to create your own Online Banking API platform or partner with the existing provider and build your offerings on top of their infrastructure.
If you do decide to work with another provider, here are some TPP/TSP partners you might want to consider:
Choose the one that fits your goals best based on the Open Banking API architecture and the range of services they provide.
If you’re ready to release your product and want to become a part of the Open Banking ecosystem, here are the four steps you need to make:
One of the key concerns to address during this journey is ensuring Open Banking security, which we covered previously.
As you can see, the Open Banking initiative allows delivering value and growing revenues across multiple industries. However, you will have to make several important decisions regarding the way you want to structure your product and build your offering before you dive into the development. One of those decisions includes gaining access to a reliable TSP partner to build your APIs from scratch or integrate the ready TSP packages with your product.
Relevant can become such a partner thanks to our extensive expertise in API integration, as well as front-end, back-end development, cloud, and cybersecurity services. We can help you every step along the way. If you have any questions or want to talk about your idea, reach out to us, we’re always open for a business conversation!