Open banking has taken the financial industry by storm and many FinTech companies are capitalizing on this growing trend. But what exactly is open banking and how does it work? If you are in the business of offering financial solutions and have yet to take advantage of open banking, now is the time to do so.
In this post, we dive deep into the FinTech revolution that is open banking, exploring its benefits and how it works to help you either improve your existing finance application or build an entirely new one using open-source APIs.
What Is Open Banking?
If you’ve ever used a mobile or web app to transfer payments from multiple bank accounts, check your credit history, or apply for a loan, you’ve already had firsthand experience with open banking.
Open banking is a financial technology (FinTech) practice whereby banks and other financial institutions allow third-party financial service providers to access consumer data, such as bank account information, transaction history, spending habits, and credit reports, via open-source application programming interfaces (APIs). The third-party providers then use this information to build their own unique finance-related applications, perform credit checks or ID verification, or customize their services according to consumer trends.
How Do Open Banking APIs Work?
Like all other apps, finance-related apps are configured using specific application programming interfaces (APIs). An API is the set of codes, protocols, functions, and commands that enables an application to communicate with other applications or software components for the purpose of exchanging data. You can think of it as the bridge between different software programs.
Previously, banks and other financial institutions (often referred to as incumbents), kept their APIs private. However, open banking has called for these institutions to share their APIs with FinTechs and other third-party providers, essentially allowing them to obtain key details about consumer accounts and their financial profiles in order to provide better, more customized solutions.
APIs are also responsible for Banking as a Service (BaaS), an essential component of open banking that enables the transfer of information between bank systems and other apps. Think of BaaS as the middleman between incumbent banks and the FinTech apps that provide other financial services.
Open Banking vs Online Banking
Open banking is not to be confused with online banking. Open banking refers to the sharing of open-source APIs among banks, investment companies, FinTechs, and other third-party app developers whereas online banking (also referred to as digital banking) is the term used when referring to the ability of an account holder to access their financial information and perform online transactions like paying a bill or fund transfers directly through their financial institution’s mobile or web apps.
Benefits of Open Banking
The open innovation and open data movements have torn down many barriers that previously restricted the sharing of information between banking industry giants and FinTech service providers. As a subset of these movements, open banking has paved the way for banks and financial institutions to work with FinTech and third-party companies instead of competing against them.
The partnership between banks and FinTechs is a mutually beneficial one. For one, it allows financial institutions and FinTechs to easily share data regarding consumer banking trends as well as individual account holder information. This data helps both financial institutions and third-party FinTechs to obtain a more well-rounded snapshot of the consumer’s financial profile. They can then use this information to mitigate risks, offer better, more personalized products and services, and build apps around specific consumer needs.
Since open banking has leveled the playing field for FinTechs to compete with incumbent banks for business and consumer loyalty, it also incentivizes each party to improve their individual operational models and services in order to stay relevant and both attract and retain customers.
Furthermore, both FinTechs and financial institutions actually stand to gain more customers. By working together, FinTechs can promote specific banks and their financial services, like investing and wealth management, within their apps. If their systems are accessed through a third-party app, banks can also specifically ask the FinTech company for referrals or a portion of the revenue generated from app usage.
Are There Security Risks Associated with Open Banking?
Many consumers and financial institutions have doubts about open banking, which is understandable. After all, in an age when even the IRS can be hacked, it’s natural for people to worry about how their private financial information is being shared and whether it will fall into the wrong hands. However, while any application can run the risk of getting hacked, it’s important to understand that open banking platforms use the highest security systems to encrypt and protect user data. Third-party financial service providers are also highly regulated.
Additionally, open-source APIs are actually safer because app users don’t have to input account credentials across multiple platforms. This is accomplished through screen scraping, a technique that enables a website or app to automate the extraction of data that would otherwise have to be imputed manually.
Furthermore, security risks with open banking are also largely diminished because consumers have full control over what information (if any) they wish to make available to third-party companies. Privacy and data sharing settings are typically set when a user (consumer) enrolls in a traditional banking or third-party FinTech service. However, users can simply view their account settings on the respective app and modify them if and when they choose to.
That being said, the more data that becomes available via open-source APIs, the greater the potential for hackers to access it. FinTech companies can take precautions to ensure their apps are built with the latest security systems by working with experienced app developers who are aware of compliance rules and regulations. Having DevOps best practices helps ensure strong security protocols.
Interested in Developing a FinTech App with Open Banking APIs?
Open banking is disrupting FinTech and the banking industry as we know it. There are many reasons why FinTech companies should explore their options regarding open banking applications. However, even though open banking applications are based on open-source API, the process of developing a FinTech application is complex and requires extensive knowledge of financial regulations and security protocols.
If you are interested in building a FinTech app that incorporates open banking APIs, Koombea can help. Our experienced developers have successfully built apps for both mobile and desktop users since 2007 and will work with you to determine the optimal features for your app based on your brand goals and target audience so you can deliver a great User Experience (UX). Contact us today to explore the open banking application options that work best for your FinTech company.