The Open Banking Revolution: What it Means for Consumers and Businesses

Open Banking is the process of banks and financial institutions giving customers access to their data so that they can then share it with third parties (with the customer’s permission, of course). 

Also known as the “open bank data” initiative, Open Banking was developed to promote greater financial transparency for consumers and account holders as well as foster an innovative financial ecosystem.

Open banking can include the sharing of balances, transactions, and payments. With access to this data, financial institutions and third parties can create new financial products or offerings, including:

• Personal financial management platforms that provide users an aggregate view of their finances across various accounts and banks, 

• Payment initiation services that allow third parties to initiate bank-to-bank payment on behalf of the user where usually a credit card or other traditional payments would be used

• Credit and lending platforms that can offer loans and quickly assess credit risk by accessing customers’ financial data across accounts and banks.

Third parties can tap into this financial data thanks to APIs (application programming interfaces) — or pieces of software that let applications talk to each other through a defined set of rules. Open banking is made possible thanks to APIs, which make financial data sharing possible.

While we’re on the subject of Open Banking acronyms, these third parties are sometimes referred to as third-party providers — or TPPs. (Because is it even a thing if there isn’t an abbreviation for it?)

Banking as a service (BaaS) is making a financial institution’s digital banking services available through a third party’s products. These third parties can then offer customers things like payment services and loans without having to acquire a banking license and meet the regulatory requirements that banks must. BaaS allows these third parties to pick and choose the digital banking services they wish to use and embed these banking services into their products. 

The communications needed to handle BaaS are done securely via APIs. The third party using the bank's services never directly has access to a customer’s finances — they only act as an intermediary. Banking as a service is sometimes also called white-label banking or private-label financial services.

Like Open Banking, BaaS can create new sources of revenue and deliver a better customer experience. And the connections that make this possible are done via financial APIs. But banking as a service is NOT the same as Open Banking. Open banking is about access to a bank’s data while banking as a service is about third parties using complete banking services in their own products.

Banking APIs are proving to be the currency of exchange of data between applications and systems, as well as between banks and their customers. This puts the right financial product or service in the hands of consumers exactly when they need it. And it enables the customer's dream of being able to live more, bank less, and focus on bright and prosperous financial outcomes.

• For banks and other financial institutions, Open Banking allows for the development of new services and capabilities, and even new business models.

• For customers, Open Banking can allow for automated payments via a third party on your behalf, easy sharing of financial info with others like a lender or accountant, and a big-picture, dashboard-like view of finances across multiple institutions.

The end result of the Open Banking revolution will essentially be the decoupling of financial products and services from the underlying systems on which they run. Just as people don’t need to care about the servers powering their Facebook sessions, they also won’t need to be concerned about which underlying bank is actually powering their financial services.

For traditional financial institutions, APIs are providing access to core banking systems and data in order to fuel these new digital banking experiences, as well as allowing them to expose and offer banking products to an audience beyond the four walls of a bank branch, or even its brand. 

For many, APIs form the backbone of Open Banking initiatives starting to take shape in economies around the globe. When it comes to the FinTech movement, APIs (and the wider API economy) represent a brand-new business model, allowing completely new businesses to be created, almost instantly. 

APIs are challenging and disrupting a centuries-old industry. The use of APIs has skyrocketed so much over the last 10 years that API calls are now 83% of web traffic, according to Akamai. Financial APIs make up a growing percentage of that traffic as traditional banks look to digitize more offerings and neobanks grab more market share.

Open Banking is a fundamental transformation that allows financial institutions to securely share customer data and access new services through open APIs. This innovation leads to greater competition, improved customer experiences, and the development of new financial products and services. Major benefits of for businesses and consumers with Open Banking include:

• Enhanced customer experience
• Compliance with regulations
• Unlocking new revenue streams and models
• Boosting innovation 
• Ensuring security

Benefits for Consumers

The focus of Open Banking is to give consumers more control and choice over their financial data and be able to compare services and user experience easily across financial organizations.

The obvious benefit of Open Banking to the customer is rather like financing being sold to a new car buyer. If the customer is offered an “ideal” banking product, in this case, financing for the new purchase, in that same moment of proceeding to purchase the new car in the showroom, at a significantly better interest rate, being able to seamlessly take up that offer clearly has a positive impact on the overall customer experience. 

Other benefits of Open Banking for consumers can include simplifying the process of obtaining new credit debit cards, allowing budgeting tools to more easily track and manage to spend and making switching between banks a (relatively) joyful experience.

Payment APIs

Open Banking’s payment APIs present many advantages over other payment methods for businesses, including better conversion rates and acceptance rates, and overall ease of experience. 

Payment APIs also unlock lower fees for merchants — who are regularly stuck with fees and costs when accepting credit cards. Payment APIs also eliminate chargebacks (which can hurt companies) and see funds settled instantly (not over days). 

A rather recent addition to the payment experience comes in the form of “Buy Now, Pay Later” offerings, which seem to be a real hit with the younger demographic. Wiring these newer payment methods into existing product purchasing journeys helps provide a modern, more relevant experience across a broader range of customers and their payment preferences

Data APIs

Data that can be shared in open Banking might include phone number, email and address, balance information, product rates, fees, features, and transaction details.

Data gathered through open Banking data APIs brings many benefits to businesses, including getting a better picture of customer needs to deliver a better customer experience, improved customer onboarding, and reduced administrative work required around compliance processes. Secure, governed access to data like this goes a long way to streamlining the onboarding of new offerings for customers.

It can seem like a win-win for businesses and customers, but there are some challenges around Open Banking.

Developers creating Open Banking applications can come across some challenges, including issues around API reliability and identity management, and the enduring concerns around privacy and trust.

API Reliability

Just because a banking API exists doesn’t mean it will work reliably. This can especially rear its head across third-party applications and configurations. These API performance issues can impair the seamless digital experiences Open Banking is supposed to offer.

Digital Identity Management

A lack of universality to identity management can also be a problem for developers working on Open Banking applications — who lack a tried and true way to keep tabs on users across applications. This means developers may have to create their own identity management solutions and make them play well with banking APIs.

FinTech compliance and governance standards

With Open Banking picking up pace across the world, albeit in different shapes and forms, government mandates around compliance and timeframes vary. 

• In Australia, it’s focused initially around implementing the Consumer Data Right (CDR). 
• In the UK, it’s the PSD2 initiative. 
• In the US, it’s the Durable Data API initiative, which adheres to PSD2 requirements. 
• Across Europe, it’s more broadly the European Banking Authority.

Regardless of the geography — and taking into account all of the benefits that Open Banking brings to an industry already struggling in the face of disruption from FinTech upstarts (more on those Open Banking benefits in a moment) — the requirements needed to be in place to make Open Banking a reality appear to be common: opening data with APIs, governance, consent, and security. Get those things right and the final requirement; “demand”, comes naturally. If you build it (API), secure it and respect privacy (CDR), and make it easy, they will come.

All of this is made possible by the ongoing development of APIs. APIs are being used to evolve financial institutions into platforms, and they do this by allowing systems that were never designed to be linked to efficiently and securely share data. Banking as a service is driving a whole new era of active participation in the broader API economy.

While the idea of sharing sensitive information with TPPs may sound like a security risk, Open Banking is a safe way to process data and payments — protecting both customers and the businesses themselves. In fact, Open Banking is more secure than cards or other payment methods thanks to customer authentication around each transaction.

Open Banking is widespread across continents, and many countries have established regulations around open banking to ensure consumer rights are protected and data is securely shared. And it’s kept secure thanks to regulations such as PSD2.

In Europe, the Second Payment Service Directive (PSD2) was established in 2015 and required to be implemented by January 2018. Its function is to enhance consumer protection, promote innovation and competition — giving consumer choices for their banking needs — and create a single market for payment services in the EU.  

PSD2 helped pave the way for Open Banking, positing that TTPS should be able to handle transactions and access data on behalf of customers.

Regulations similar to the European Union's PSD2 and soon PSD3 and PSR (Payment Services Regulation) have been emerging around the globe as different regions recognize the benefits of Open Banking.  

In the United States, the CFBP (Consumer Financial Protection Bureau) released in late 2023 a proposed Open Banking rule that, if adopted, would give consumers control over the ability to share their financial data with third parties like fintech apps, helping the US to catch up to the rest of the world.

APIs have existed for far longer than most people recognize. They’ve long been the programmers’ tool of choice for inter-application communication — built by programmers, for programmers — providing an interface and means by which to call each other’s code. 

More recently APIs have put on their business attire and become boardroom discussions. APIs are now well-defined “products” that represent core business capabilities and access to valuable data across the enterprise.  These modern APIs are well documented, easy to discover and consume, and sufficiently abstracted away from their implementation to be practical and resilient to underlying change. They also became tangible and far more business relevant. 

Financial organizations use modern APIs today to modernize access to legacy systems, liberate siloed data, and break down monolithic applications into smaller, easier-to-manage, easier-to-scale components to rapidly increase their pace of innovation. Living up to the promise of abstraction and simplification, APIs now provide a fantastic means by which to establish a beautiful front door to what is likely to be a not-so-tidy room. The alluring simplicity of modern API design does a wonderful job of sharing the API’s worth to the business, in the language of the business, and in a way that is relevant to the business. (All whilst keeping the complexity of its service implementation necessarily hidden and protected.)

APIs are a bank’s “enterprise LEGO bricks.” They can be assembled and reassembled at pace and at scale, taking advantage of more business-oriented tooling to compose new applications and deliver new digital experiences much faster than they ever could before. 

API success is ultimately what will determine a bank’s (or any company’s) ability to compete and remain relevant in today’s modern digital world.

Unlock the benefits of Open Banking with Kong. Kong technologies are designed to empower financial institutions, fintech startups, and enterprises with the tools they need to thrive in this new era of banking.

With Kong’s Open Banking solution, you can:

Enhance customer experience: Provide your customers with the ability to access their financial data from various sources, enabling enhanced personalized services.

Comply with regulations: Meet regulatory requirements such as PSD2, GDPR, and more while ensuring data security and privacy.

Unlock new revenue streams and models: Collaborate with third-party providers and monetize data and services through APIs. Onboard customers, merchants, and suppliers quickly through APIs.

Boost innovation: Rapidly develop and deploy new banking products and services in a highly agile environment.

Ensure security: Safeguard customer data and transactions through advanced security protocols while maintaining regulatory compliance.
Learn more about Kong’s Open Banking capabilities. Or set up a personalized demo today to talk with the team at Kong about building your Open Banking API strategy.