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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 are interfaces for open application programming. The main purpose of this new technology is to connect different systems, trying to exchange and collect as much data as possible. In other words, the API is the tool that makes it possible to collect information within open banking.

These interfaces allow connections between banks and suppliers, guaranteeing the security and reliability of the information at all times. As long as the regulations established by the Bank of Spain are followed, any financial institution can offer its APIs to suppliers. Let’s look at two examples of the use of APIs in open banking:

  1. Wave accounting software uses the APIs of banking entities to offer a total and integral control of the company’s financial situation, showing all the existing information within the program itself.
  2. Telefónica Deutschland, on the platform of Fidor bank, has an exclusive bank account for cell phones, where all transactions, plans, and loans are managed on this device.

What is a PSD2 API?

Among the wide range of APIs offered by entities and providers, we can highlight PSD2 as one of the most innovative and useful. Its main objective is to improve security in Internet payment systems, promoting innovation in this area and increasing protection against fraud for all customers and users.

What open banking APIs are for and how they apply to digital banking

Many banks, especially the largest ones, already have their open banking departments. They are committed to this modality as an excellent way to enable and promote business growth, as it increases efficiency, improves the user experience, and brings more value to customers.

Through open banking APIs, both banks and third-party companies can gather more information on each customer, to create a portfolio of offers that is much more personalized and tailored to individual needs. From the offer of financial products and services, to access to basic services such as credit rating or the possibility of accessing credit, APIs are key within the open banking ecosystem.

Officially, there is no single API that all institutions are required to use. It is up to the banks and service providers to develop their applications, to apply them in their processes as they deem necessary and optimal.

Advantages of using this system

The implementation of APIs and open banking has brought benefits for all parties. Providers, banks, and customers gain from the use of these applications, in which we can highlight the following advantages:

  1. Increased revenues for financial institutions, which will have a greater capacity to implement more product and service offerings, in addition to developing new projects within this framework.
  2. Much more detailed, complete, and decisive information is obtained about clients, to identify market trends and offer personalized products and services.
  3. Customers can access a larger portfolio of offers, which will be much more tailored to their needs, thus increasing their overall satisfaction.
  4. The system makes it possible to innovate and develop new functionalities with greater agility and speed so that the value-added is proportionally greater than that provided by traditional methods.

Are there any security risks using APIs?

Although it is a fairly reliable and useful system, there are certain security-related risks, especially in terms of fraud and scams. There are three main types of problems in this area:

Third-party providers (TPP) can put the integrity of the banking institution at risk since the latter’s IT infrastructure contains that of the TPP.

  • Financial institutions share consumer data with TPPs. Therefore, financial institutions must conduct a thorough and thorough security review before they begin working with any third party, as the third party will have access to a lot of sensitive information about the bank’s customers.
  • If authentication processes are not incorporated into the applications provided by the TPPs, unauthorized access to the bank’s account could occur, with all the risks and problems that this entails.

Open banking APIs are a revolutionary innovation in the financial world. Thanks to them, institutions can significantly increase the value of their products and services, as well as their quality, which positively affects customer satisfaction.

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