What is Open banking API?

August 1, 2022by Bankingly

The Open Application Programming Interface (or API) is a technological revolution in the finance and banking sector. One problem, however, preventing this revolution from taking the next step – is they use specific custom, private, closed or proprietary interfaces and backends for their data. But today, consumers expect new technology and a better digital experience across platforms, which must interface with legacy systems. Unfortunately, replacing legacy code is expensive, risky, and time-consuming, and many are reluctant or holding back.

To be clear, an Open API should not be confused with OpenAPI. An Open API, also called a public API, provides developers programmatic access to proprietary software or web service. Though an Open API may be free to use, its publisher may restrict how the API is used. OpenAPI, on the other hand, is for machine-readable interface files for describing, producing, consuming, and visualizing RESTful web services.

Banks must provide these vital customer services, and they are turning to Open Banking’s Open APIs to solve this. It creates a link between old and new, increasing the lifespan of existing systems. Think of an API as a translator for an application – it transforms incoming and outgoing data into a format that other applications and compatible APIs can understand.

Benefits of Open Banking API

An Open banking API seeks to change this by establishing a standard API layer, which ensures a secure and consistent way to exchange and manage information throughout the industry.

The shared financial data comprises, for example, statements and transaction records of the bank’s customers. This financial data cannot be made available openly, but it is only shared at the customer’s request. Open banking provides the legal frameworks and technological infrastructure to make such content-driven sharing happen. In addition, keeping it easy to implement and secure will allow for rapid and effortless expansion of services.

For banking, some API standards and data protocols developed over the last 20 years, some of which have been updated and improved. These include Open Financial Exchange, FinTS, EBICS, ISO 20022, and FIX. Banks can develop new apps and services by opening their APIs to third parties. Open banking APIs offer incumbent banks the opportunity to partner with fintech rather than compete.

These open banking APIs have been used to connect developers to payment networks, display billing details on a bank’s website, and issue commands to third-party providers. APIs are also necessary for functioning Banking-as-a-Service (BaaS). This end-to-end process directly connects third parties and fintech to banks’ systems.

By sharing customer information via open banking APIs, financial institutions can understand customers’ needs more accurately, aggregate data from many sources, create customer profiles and forecast the services they will most likely use. It will also accelerate member, customer, or partner onboarding, as they will not be required to authenticate each institution they deal with.

Open Banking API Examples

Banks with open APIs are getting ahead, while those who are not are missing out on new customers, revenue, and market influence. As a result, many banks have adopted Open Banking APIs, such as BBVA, which launched its own BaaS platform, called Open Platform, in the US. Open Platform uses APIs to allow third parties to offer customers financial products without a full suite of banking services.

Latin America is slowly embracing this trend. For example, Chile, Peru, and Argentina are in the early stages, while Brazil is leading, followed by Mexico. In Brazil, many are eager to seize Open Banking‘s benefits and are ahead of the regulator’s requirements. Beyond compliance, they plan to open APIs related to account opening, account information, FX transactions, rewards, etc. Brazil has launched PIX, a system for the next generation of digital wallets with interoperable QR Codes and instant payments.

However, Mexico became the first country in Latin America to have a regulation for Open Banking. The Fintech Law of 2018 enforces over 2,300 entities to share data. Soon, API specifications on aggregate and transactional data are expected.

Open banking API also allows banks to commercialize their infrastructure by moving into the BaaS space and providing core services to fintech and third parties. It can increase their revenue streams while expanding customer reaches for all financial institutions, from SMEs to large – an opportunity they shouldn’t ignore.

Sources:

https://www.yodlee.com/open-banking/open-banking-api

https://www.insiderintelligence.com/insights/open-banking-api-trends-explained (Monetization of Open Banking Report)

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