The idea of “open banking” has been receiving a lot of attention recently and we are bound to an evolution in our interactions with banking and other financial services due to it. This paradigm shift is fuelled by application programming interfaces (APIs) rendered by banks.
Management of customers’ confidential data by banks is significant because of the UK’s “open banking” initiative and the EU’s implementation of the Payment Services Directive 2 (PSD2). Using the application programming interfaces (API), we can authorise certain applications or services to access our data. Hence, Open banking with standardised APIs would reduce a lot of barriers between diverse kinds of banking services.
For instance, it improves our lives as we opt to share our personal financial data with a mobile app that displays such data in a consolidated view or to perform payment initiation directly from a checking account through an online accounting package.
Both traditional banks and new “Fintechs” stand to benefit from these developments, since they present an opportunity to transform the business model that has defined banking for decades.
Open Banking
Open banking is a drive that enables third-party financial service providers to access consumers’ banking data. The basic objective of open banking is to provide consumers with more control over their financial information by allowing them to safely use alternative financial services that tap into banking infrastructure.
Much of this new ecosystem is supported by Web API technologies. Using an API is a necessary part of Open Banking in this setting, as it offers more options to banking consumers.
Reasons for Adopting an API Approach to Open Banking
Many financial institutions are motivated to adopt Open banking in response to the implementation of the European Union’s Second Directive on Payment Services (PSD2).
There are numerous solid reasons in favour of open banking and numerous tangible financial incentives for financial institutions to make the transition. Let us look at the top reasons that follow.
Adhering to Compliance
Compliance is the main driving force for institutions to adopt open banking practises. PSD2, also known as X2SA (Access to Account), is the greatest example of a broad law that requires banks to disclose customer data with third parties.
The US Treasury has proposed new financial data sharing legislation, contradicting the country’s traditional market-driven strategy. Other major jurisdictions are also heading in this direction.
Obviously, the goal of compliance is not to increase income, but rather to maintain a viable firm. Compliance increases profitability by preventing pointless fines and fees.
Enhanced Digital Agility
Being able to share data rapidly, safely, and effectively is one of open banking’s biggest challenges. Many financial institutions are rethinking their data architectures as a result, opting for an API-first, microservices-based strategy to make information more readily available. Therefore, open banking is both necessary and beneficial in fostering more digital agility.
Open banking improves security and transparency and makes it easier for banks to use their own data internally, such as for service customisation or frontend applications.
An enhanced digital infrastructure enables data to be utilised more effectively internally to enhance the customer experience, thus improving customer lifetime value.
Superior API Packages
Open banking makes it easy to create new API offerings that generate remarkable revenue. Banks can generate more direct income if they design and market new API products. For other banking services (such as specific business accounts), these premium APIs can be utilised as up-sells or cross-sells.
Improvement in Customer Satisfaction
With open banking, customers have unparalleled choice in selecting from a wide range of banking options.
Customers are less likely to look elsewhere for their banking needs if their present financial institution offers a wider range of financial service integrations, regardless of whether such integrations are the bank’s own or not.
Customers are less inclined to switch banks if they are satisfied. As a result, the lifetime value of a customer rises, which boosts profits eventually.
Collaboration Prospects
Banks can offer enhanced features, personalised assistance, or even research and development partnerships to third-party companies in return for non-monetary benefits like cross-branding or product functionality for the bank in exchange.
Banks can attract new consumers by working with the third-party financial services industry to develop distinctive value propositions and innovative marketing approaches.
Broad Customer Base
With open banking, banks now have an immense opportunity to introduce new financial products and services based on its integration and can serve customers of other banks, potentially generating much more revenue and a progressive customer base.
Banking Made Accessible through Fintech APIs
There is a massive quantity of information that banks collect, from timestamps to transaction IDs. This data prompted the Fintech to think about how it could be utilised for better banking. “Better” means more open, transparent, and less corrupt.
FinTech services are reshaping the banking industry and the global financial system by eliminating traditional approaches such as paper checks, physical donations, paper currency, and investment businesses.
Technology is crucial to financial service industry advancement and thus APIs help banks improve speed and cost compared to outdated systems.
Banks and other financial institutions must upgrade to modern technologies to thrive in the years to come. And London prevails as an epicentre for the global fintech sector owing to a substantial number of investments in the fintech sector over there.
The meteoric growth of FinTech firms and open financial data initiatives worldwide is largely attributable to Application Programming Interfaces (API). The decision to construct the banking platform with an ecosystem of third-party developers in mind due to the following reasons:
- A bank API facilitates a faster onboarding experience for the end users.
- Banks can acquire partners that provide niche FinTech services with optimised front-end user interfaces by using APIs.
- Their APIs can be easily integrated with crowdfunding platforms, payment-splitting apps, and more.
- This is especially useful for startups with innovative financial-oriented products that may lack the resources to manage funds or set up their own bank.
- To help FinTech businesses succeed, particularly those who are developing their own APIs, banks can share this information through partnerships and APIs.
Banks require well-designed, standardised APIs and self-serving adoption processes with documentation, sandboxes, simulated account structures, and more to gain developer users quickly. A successful banking API requires more partnerships and lower startup costs for FinTech businesses.
Getting the bank programmable is a win-win situation on all fronts
- Developers can experiment with banks’ authority and expertise to produce cutting-edge services and resolve compliance difficulties.
- Customers now have access to a whole new class of services that operate in tandem with their existing accounts. Open banking could reduce political corruption.
- By capitalising on partner resources, banks may generate new revenue and boost client satisfaction.
What Experiences Can Customers Have With Open Banking?
Breaking through the technological barrier and emphasising solutions rather than technology is one of open banking’s biggest challenges. Although the heart of open banking is APIs, which enable users to safely share financial data with platforms and apps, the typical customer is more interested in knowing how this will benefit them. Simple use cases that provide perspective for end users are crucial for bridging this gap.
Consumers can better comprehend open banking’s advantages by highlighting screen scraping’s limitations while offering a user-focused approach.
Open banking’s proponents must evangelise the technology by refining the message in several ways to successfully put it on the consumer agenda:
User Control
The focus of open banking should shift away from its technological aspects and towards how consumers are at its core, managing access to their accounts according to their own conditions. Open banking becomes more enticing by emphasising consumers’ sovereignty over their financial data and account access.
Promote Amazing Use Cases
Open banking unlocks the prospects of several banking providers for consumers. Open banking advocates may excite customers by showing real-life use cases and how they can profit from accessing and using their account data.
Reduce Security Concerns
Security problems must be addressed to build trust in open banking. By adopting high-grade API security procedures and clearly communicating the robust security protections in place, users may feel secure in the safety of their financial data.
These techniques can turn open banking into a consumer-centric movement that enables people to manage their finances.
Control Matters
A common set of questions that arise when discussing open banking with customers is who can access their accounts and who is ultimately liable if anything goes wrong.
Open banking is decentralised like the Internet and APIs, which raises fundamental issues. Consumers don’t know what they consented to or who gets their financial information without centralised control.
To solve this issue and build trust in open banking, consumers need tools to observe and manage their consented activities. Open banking empowers consumers by giving them control and visibility.
Without blindly trusting other parties, consumers should understand their role in their financial environment.
Furthermore, building an open banking marketplace would organise and make available all the solutions that make use of open banking APIs. Providers could promote their products and consumers could search for and consume them in one spot. The marketplace lets regulators evaluate, monitor, and certify new products.
Open banking can boost customer trust and create a trustworthy financial services environment by introducing signage and creating an open banking marketplace.
Best-in-class API Protection for Financial Institutions
The necessity for top-notch API security for banks has become critical with the rise of open banking, in which financial institutions exchange customer information with third-party providers. To prevent cyber threats and data breaches, financial institutions must implement secure API systems.
Multi-layer Protection
Multi-layered security protections against hacking and data breaches are an integral part of any high-quality API security solution for financial institutions. API security relies heavily on authentication and authorisation.
Banks must authenticate and authorise API users before allowing access. Multi-factor authentication does this by demanding users validate their identities in more than one way. These ways can include providing additional passwords, biometrics, or tokens.
Robust Encryption Mechanisms
Banks should use robust encryption mechanisms to secure data at rest and in flight. Given this, even if an outsider intercepts the data, they will not be able to decode it or use it to their advantage.
Constant Monitoring
High-grade API security for financial institutions also involves constant monitoring and the discovery of threats. Strong monitoring systems should be in place at banks to immediately spot any unusual or fraudulent behaviour. To this end, advanced analytics and machine learning algorithms can look for obvious indications of a security attack.
To proactively resolve any vulnerabilities in their API systems, banks should not only monitor, but also undertake frequent vulnerability assessments and penetration testing.
Access control & Privilege Management
Further, financial institutions should adopt rigorous access controls and privilege management to ensure that only authorised people have access to personal data. Depending on one’s position and responsibilities inside an organisation, one may grant varying degrees of access. There will be less opportunity for theft or fraud with consumer data if banks follow the concept of least privilege.
Keep Tabs on Updates and Patches
Finally, banks should make maintaining their API systems with the latest updates and patches a top priority. This includes upgrading software on a regular basis and implementing security patches as soon as they are issued by vendors. If banks don’t keep up with upgrades, they risk having their application programming interfaces (APIs) hacked.
Regulatory Compliance Considerations
Data privacy and protection is an important aspect of regulatory compliance related to open banking API. Since APIs allow banks and third-party providers to exchange consumer information, keeping that information safe and in compliance with privacy laws is more important.
Financial institutions and their contracted service providers must take extreme precautions to guard against hacking, data breaches, and other forms of cybercrime. To further ensure consumer privacy and secure the necessary permission for data sharing, they must adhere to legislation such as the General Data Protection Regulation (GDPR).
Here are a few of the most frequent regulatory requirements that financial sector providers may encounter.
Basel II
Basel II is a set of international regulations that mandates the assessment and reduction of the operational risk losses of financial data by financial institutions. It specifically addresses issues with inadequate data security and system failures brought on by incorrect configuration or low expectations for system requirements. This makes it a useful reference for any system that has to start working with financial data.
PSD2
PSD2 is the European Union’s updated Payment Services Directive, written by the European Commission to standardise the industry across the European Union and the European Economic Area.
The regulations are meant to safeguard consumers and lay out clear parameters for how payment processors and banks should operate.
URSIT
A US government standard, the FFIEC Uniform Rating System for Information Technology (URSIT) evaluates an organization’s Auditing, Management, Development, Acquisition, Support, and Delivery procedures.
As a framework for establishing a procedure to detect security issues, URSIT is an invaluable resource.
The Gramm-Leach-Blilely Act
It is a federal law in the United States that mandates the protection of customers’ financial and personal data. The Federal Trade Commission’s Data Safeguards Rule, which mandates a comprehensive evaluation of a company’s security measures, has its origins in this law.
PCI-DSS
PCI-DSS is a regulatory standard that mandates vulnerability scanning and source code review to guarantee that payment card industry data and procedures meet the stringent security protocols required by providers and payment providers.
Many businesses operating online, especially those whose services include handling customer payments, consider PCI-DSS mandatory.
Any API that plans to accept card payments should be highly familiar with PCI-DSS because of the stringent standards it sets.
Sarbanes-Oxley
It mandates a reporting structure for internal controls to ensure that sensitive financial information is monitored and protected. It requires a thorough assessment of IT assets, software, and solutions for their resilience against data breaches and exposures and involves severe audit mechanisms for internal controls.
This is just a portion of the most prevalent and high-level regulatory standards. Regulations can be stiffer in certain parts of the world, and there can be even more noticeable differences amongst segments of an industry.
Yet, having a strong knowledge of these underlying frameworks for regulation could potentially guide in learning about open banking.
Tavas- Open Banking Product Suite
Macro Global’s Tavas is a comprehensive Open Banking solution that aims to revolutionize digital payments while ensuring compliance with the PSD2 regulations, including the UK Open Banking Specification, which allows banks to be exempt from contingency mechanisms for their dedicated API interface.
This open banking solution is highly secure and safe, utilizing a cloud-based SaaS platform to enable secure engagement with third-party providers.
With cutting-edge technology, including state-of-the-art Open Banking APIs, Tavas offers services such as Account Information, Payment Initiation, and Confirmation of Funds. And Tavas provides customizable Open APIs, allowing banks to manage their business processes effectively.
Additionally, their web-based administration portal provides valuable insights and management capabilities for TPP (third party providers) Onboarding, Transaction Status, and Consent management.
Tavas also offers a robust data flow and enhanced security features for the deployment of open APIs. With a focus on customer-centricity, it offers a range of compelling use cases that go beyond monetization, allowing banks to transform their portfolio and business model.
Remarkable & Competitive Features of Tavas
- Establishes trust with banks and TPPs (third party providers)
- Ensures compliance with Open Banking (PSD2) regulations
- Provides secure and strong customer authentication
- Customizable API Framework
- Monitors and implements changes in the regulatory environment
- Offers safe and intuitive end-user experience
- Builds trust and loyalty in payment services
- Provides a self-service developer portal with a sandbox environment for testing and integration
- Offers a suite of pre-built APIs ready for implementation
- Secured against database breaches, DDoS attacks, and man-in-the-middle attacks
As Open Banking continues to redefine the financial services landscape, Macro Global’s Tavas remains at the forefront of empowering financial institutions with its innovative API strategies to stay agile, competitive, and customer centric.
Tavas is a trusted ally for banking institutions looking to thrive in the digital age and unlock the full potential of Open Banking.
Final Thoughts
Banks may stay competitive in the face of a trend towards open banking practises with the support of an efficient API strategy. Since banks are using open banking APIs, they must provide customers with safe and reliable experiences. Customers’ personal data must be kept secure while meeting all applicable regulations.
Consumers benefit from the options provided by market-driven strategies, which also foster innovation and healthy competition. However, banks and third-party providers benefit from the transparency and efficiency provided by standardised frameworks.
Thus, financial institutions and banks who want to embrace open banking must have a well-executed API strategy. As the landscape of open banking continues to transform, it will be ever more vital for financial institutions to monitor developments across the sector and adjust their API strategy accordingly if they hope to maintain a competitive edge.
