Banks are considered by many to be some of the most conservative companies in the world. They rarely, if ever, take risks. This isn’t necessarily a bad thing but over time, customers have an attitude towards banks that’s very hard to shake. In general, almost everyone thinks that banks are shying away from innovation for the sake of profits and retaining thorough control of the market. That is why a lot of users are choosing modern e-wallets and innovative fintech apps instead of opening a traditional account at the bank. But, with the open banking concept now already active in over 35 countries, it seems that these financial behemoths are finding ways to innovate and not get lost in the shuffle. The open banking APIseems to be the driving force behind this. But what is it and how it’s doing it? Let’s find out!
What is Open Banking API?
API is a three-letter acronym that denotes an application programming interface. The easiest way to explain it is by comparing it with a median for communication between two or more computer systems. In open banking, APIs are used by banks and third parties in order for the latter to gain access from financial institutions. API ensures the authenticity of the request and is compatible with the thorough verification processes that are in place.
The open banking API is currently a very trending topic due to the fact that open banking is being implemented in more and more countries. You can also say that open banking APIs allow open banking to be relevant and useful to the market because as of now, it is the only viable way to ensure that financial data is transferred securely.
Why are APIs Important for Open Banking?
In the context of open banking, there are a lot of significant legislative and regulatory documents. They describe and cover how developers of APIs, software creators, and banks themselves should handle financial transactions in the digital market.
The most important regulatory act in open banking is the PSD2 (Payment Services Directive No.2). It covers the digital payments processes and their rules for more than 30 countries in the EEA. The directive discloses that every financial institution must make at least 3 APIs available to third parties, wishing to access relevant financial information regarding customers who showed consent for the third party to do so.
As of now, APIs are considered the best and safest transporting vehicle for personal financial information.
How do APIs for Open Banking Work?
For the most part, each API works the same. It can look different and have different codes, but since the regulations are very clear, there is actually just very little in terms of improvisation, that developers can do.
Open APIs regulate the data transfer between the user, the TPP (Third Party Provider), and their financial institution (usually – the bank). First off, the customer requests a service from the TPP. The service can be anything. From paying bills, all the way to requesting approval for a loan, after expressing consent, users send out a request, via the API, to the relevant parties. Then, a connection is established with the TPPs open banking API. The TPP can be anyone with an appropriate license for managing financial information digitally. After verification of the user’s identity and the approval of the transaction via the API, the system grants the request and automatically transfers back the data via the API.
All that usually happens is a simple data exchange between the user and a third party that could provide services (for example, make a payment) or verify a reference/status via access to relevant financial information.
Laila Azzahra is a professional writer and blogger that loves to write about technology, business, entertainment, science, and health.