Back to glossary

What is open banking?

Table of contents

Open Banking is a financial services concept where banks and financial institutions open their APIs so that FinTechs and other third party services can partner directly with them to access data.

Under an Open Banking model, customers consent to allow their bank to provide access to their personal and financial data, which can then to be shared with third-party service providers and used to offer suitable services, aggregate information, or help customers with financial management.

How does open banking work?

Application Programming Interfaces (APIs) are the key to Open Banking. Developers from the bank in question will connect to the third party’s open API, which could be another bank, a FinTech company, or any other provider. Then, when a customer requests a service from the third party, the data is requested using this open API, automatically triggering the action from the initial host.

This could be used for tasks such as quickly switching from one bank to another, opening a secondary account elsewhere, or comparing data on financial products and services. Open Banking could help insurance companies, fraud monitoring services, or lenders to get a better understanding of a customer’s financial status, or make the process of applying for loans such as mortgages far quicker and easier.

How does open banking work around the world?

Open Banking is at different stages of maturity across different regions. For example, in the U.S, Open Banking was mandated after the 2008 recession, but has been slow to gain traction or adoption.

In 2022, the Consumer Financial Protection Bureau (CFPB) proposed a rule to require financial institutions set up secure methods for data sharing to facilitate Open Banking more widely. Currently, open banking is more of an informal term in the US than a structured regulation or standard.

However, 87% of countries already have some form of open APIs in the financial and banking industry. Europe leads the way, thanks to 2013’s PSD2 proposal – there are more than 400 third-party providers who are authorized to use open banking frameworks to access data. India has its Unified Payments Interface, Hong Kong has an Open API framework, and Australia has the NPP, the New Payments Platform, as well as the Consumer Data Right (CDR).

What are the benefits and risks of open banking?

Open Banking is intended to drive innovation in financial services, and provides consumers with the ability to get a more complete view for financial planning and management. Being able to securely share financial information is an important step in the digital transformation of the Finance industry overall.

Open Banking also creates a more competitive landscape for smaller players and emerging FinTechs and start-up companies, which should level the playing field to offer more affordable and technologically advanced services, with the same level of security, as this method is fully secured.

The disadvantages of open banking

While APIs are generally a secure solution as they allow for data to be shared without specific account credentials, there is still the potential for security risk. For example, poor security hygiene of the third parties who are accessing payroll data could result in misuse of financial information or payroll leakage.

As the models, regulations and processes for Open Banking are still emerging, it may take some time before customers feel confident to trust the new systems being put in place.

Lady in green Lady in green

Benefits of unified payroll payments

Free report: how Papaya streamlines the complexities of global workforce payments

Download Here