What are open banking APIs and how are they applied?

Within the world of banking and fintech, open banking is a growing trend led by the main global institutions. To go in-depth into such a complex and important topic, we must know open banking APIs, their implications, functions, and characteristics.

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What is an API and examples of open banking APIs

APIs (Application Programming Interfaces) are protocols for open application programming. The purpose of this technology is to connect various software modules in order to exchange and collect information. In other words, an API is a tool that enables communication between various structures within what is known as open banking.

These interfaces enable connections between banks and their partners or suppliers, guaranteeing the security and reliability of information at all times. Any financial institution can offer its APIs to third parties, as long as the rules established by the Bank of Spain are observed. Below are two examples of the use of open banking APIs:

  1. Wave accounting software: uses the APIs of banking institutions to offer comprehensive control of the company’s financial situation, displaying all existing information within the programme itself.

  1. Telefónica Deutschland: on the Fidor bank platform, it has an exclusive bank account for mobile phones, where all banking transactions, plans and loans can be managed.

Payment Services Directive: What is a PSD2 API?

Another revolution brought about by APIs was the development of a single market for payments. The European Union gave it the final push with its revised Payment Services Directive (PSD2). This standard encourages innovative developments based on open data and has as its main objective the creation of new online payment methods from all electronic devices.

By allowing external providers to access customer account information (with the customer’s permission, of course), a wide range of possibilities for consumers to manage their money is opened up. With PSD2 APIs, consumers can decide with which company they want to manage their banking products and services, conveniently and from the palm of their hand.

This makes the PSD2 API one of the most innovative and useful APIs for end users. In addition, it has introduced important improvements in the security of online payment systems, promotes innovation and increases protection against fraud for all online banking users. Here is an article from the Bank of Spain to find out more.

What are APIs for and how do they apply to digital banking?

The world’s most powerful banks have their own open banking departments. For years they have been committed to promoting business growth, efficiency and improving the user experience. They have found that APIs bring value to their customers and help them retain them, which is very important in an industry that is constantly changing.

Thanks to the API system, both banks and third-party companies know their users better, improve their range of products and services and are able to adapt earlier to changes in the preferences and needs of the end consumer. From the proposal of financial instruments to access to an agile credit rating, APIs are key within the open banking ecosystem.

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Advantages of integrating an open banking API system

As a result, the implementation of this technology has brought benefits for all parties involved. Banks, fintechs, third-party companies and users all stand to gain from its use. These are some of its main advantages:

Increased revenues for financial institutions

For example, by increasing their ability to launch innovative products and services in less time, they are ahead of the competition and position themselves as technology leaders. This translates into an improved bottom line.

Much more detailed, complete and decisive information about customers

The ability to identify market trends is boosted, while the possibility of enriching transactional data to hyper-personalise the catalogue of products and services emerges.

Users regain control of their personal finances

By showing them a complete overview of their financial situation in one place, banks are helping them to become aware of areas for improvement, opportunities and potential risks.

A free hand for innovation in the financial sector

The speed with which new APIs are emerging is a sign that technological advances in the world of banking are unstoppable. It is no longer just a question of adding value, but of burying traditional methods.

How do APIs affect data security?

Increased connectivity poses certain security challenges that need to be highlighted. Due to the exchange of data over the internet, there is the potential for cyber threats such as theft of personal data, fraud or scams. To avoid these risks, open banking APIs are constantly updated and shielded from new attacks.

Financial institutions share consumer data with third party providers (TPPs). It is therefore essential to carry out a thorough and thorough security review before starting to work with any provider, as they will be able to access a lot of sensitive information about the bank’s users.

In fact, it is vital to build authentication processes into the applications provided by TPPs to avoid unauthorised access and unnecessary risks. Ongoing security testing is another key requirement of an API security checklist. It is also important to expose only the amount of data necessary to fulfil its purpose, no more and no less.

We have devoted an entire article to the processing and protection of bank customer data.

The monetisation opportunities of the API open banking system

If they want to remain competitive, banks must continuously and decisively evolve towards a business model based on APIs. Adopting this technology ensures new areas of growth for banks (and fintechs). How can its enormous potential be harnessed? Quite simply, by implementing tools that anticipate changes in consumer behaviour, enable analysis of the enormous amount of data generated through daily banking transactions and improve engagement with digital platforms.

Entering this playing field means there is an immediate payoff. Let’s take a quick summary: by integrating APIs, you can help your company advance in its goal to implement a competitive technological business model; in addition, you generate greater customer satisfaction by meeting all their expectations in terms of financial health; not to mention that the security of the information will be 100% guaranteed.

Want to jump on the Banking-as-a-Service bandwagon with open banking APIs? We can help you! Tell us what you need.

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