Open Banking and Fintech API: Ample Opportunities and Hidden Risks

Open Banking and fintech APIs serve as a bridge of win-win cooperation between the two sides. APIs stormed the financial sector and are not going to leave it — more than 200 banks have already made use of APIs. There are over 1,400 API products that can be integrated and embedded into other apps from accredited companies. In this article, we'll talk about Open Banking and APIs, their impact on the Fintech and banking sector, describe their benefits and risks for businesses, Fintech startups, and banks, as well as investigate use cases.

Explaining Open Banking

Open Banking is a concept that is aimed at improving competition in the market, stimulating innovation, and offering customers more personalized and more profitable financial services. For this purpose, the Second Payment Directive, also known as PSD2, was adopted in January 2018. It is a legal framework that obliges banks to exchange data with third-party service providers (e.g. Fintech companies, developers, or startups) at the request of customers via various APIs.

In other words, it allows Fintech companies or other third-party services to gain access to the financial or account information of bank's customers or conduct financial transactions. The more participants there are in this system, the higher the competition is. This means that the quality of financial services in the market will increase, while the prices for banking products and services will decrease. Developers will have a chance to create new applications for financial institutions and integrate them into the existing systems. Finally, all parties will be the winners in the future. Talking about this, 90% of market players expect Open Banking to facilitate a 10% growth in the financial sector.

Exploring Fintech API

API stands for an Application Programming Interface that allows users to exchange data between various services and apps. In technical terms, it is a set of programming codes that enable data transmission between software products. To make it clearer, imagine that the API is a waiter who acts as an intermediary between a guest who orders food and the kitchen that cooks this food. The waiter should deliver the order to the kitchen, and then bring the finished dish to the visitor. The more guests will visit this restaurant, the more APIs it will need.

You meet and make use of APIs every day when you open your mobile or desktop applications and buy tickets, book a hotel room, order pizza, make a payment, and so on. Another good example of the use of APIs is Uber whose market cap is higher than that of BMW, Honda, and Ford. The company applies a great number of API services provided by third parties:

• Payment processing is done via Braintree;
• Receipts are sent through Mandrill;
• Maps and route calculation are provided by Google Maps and MapKit;
• Real-time text messages are sent to the customers via Twilio;
• The service is hosted in the cloud on Amazon Web Services (AWS); and
• Positioning is done thanks to integration with iOS or Android.

Combined with the above-mentioned API services, Uber managed to quickly gain popularity among customers and beat the giant carmakers. By the way, Uber’s API was integrated into the apps of some well-known brands, such as Starbucks, United Airlines, TripAdvisor, and others.

Do you need more use cases? So, retailers and e-commerce businesses use APIs to work with courier networks, checking that packages are picked up and tracking their movements. Streaming services like Netflix or Spotify apply APIs to distribute content among customers. Tesla sends software updates via application programming interfaces. Banks employ private APIs to manage and track clients’ accounts, credit cards, and much more.

OK, Google... How do financial institutions use APIs provided by third parties? In general, banks have been applying APIs for a long time to connect their internal platforms to each other. These platforms exchanged financial data, account information, and other details about their clients, profits, and portfolios. These types of APIs are called private. They don't let third-party companies have access to the users' financial data and bank accounts.

There are also partner APIs that are usually shared with bank partners and not available to third parties. Our article is devoted to open APIs. This type of API allows any Fintech company or developers to connect to the banking platform and payment networks. Working in tandem, financial service providers and Fintech institutions will be able to allow users to expand their experience and payment options.

How Do Fintech APIs Work?

In lay terms, utilizing an API involves only two things: a question, or API request, and an answer, or API response. You use an API to make a request. Of course, it should send you something back. You may ask for a price, your bank account balance, information about payments, or other details.

The data you need is stored on the server by the host application. Actually, you can easily change this information. For instance, you click on the Facebook like button on any website, and the info on your FB account will be immediately updated. You don't even need to visit the FB website or app. It will be done via their API.

The same is true for banking APIs. For example, you use a mobile app developed by your bank to give you access to your account details, payment data, branch hours, ATM location, and other important information. In order to optimize the app, the bank needs an API to connect with a third-party platform. As a result, the bank will be able to offer you more features, such as mortgage instruments, data on credit scores, payment card options, etc.

Thus, Barclays, one of the leading UK banks, brought its Fintech app to the market. Customers can make use of this app to view their accounts at other banks. Moreover, thanks to the partnership with the London-based Fintech company Flux, the bank has added digital receipts to the app recently, enabling customers to forget about paper checks. It's cool, isn't it? Let's see what else can APIs offer Fintech developers, banks, businesses, and ordinary users?

Looking at Benefits of APIs

How Can Banks Win the Race?

Robust competition

"Competition is not only the basis of protection to the consumer but is the incentive to progress."

Herbert Hoover

Market competition is good for both customers and banks. Competing for clients, the banks will offer them the most favorable conditions, better service, technology, as well as innovative products and applications. The availability and quality of financial services will be increased, a single digital space for data exchange will be created, and cutting-edge payment and Fintech solutions will appear.

New service distribution channels

Previously banks had to update the application or create a new one for future products or functions. This was very expensive taking into account the software development costs. Thanks to the open APIs, banks will be able to integrate the APIs of third-party organizations and expand their offers. The only thing they need is to open their interfaces for them.

Increased insights

Through a two-way exchange of information, the banks can receive data from financial and technological organizations, with which they cooperate, gaining something useful for themselves. Being connected to other open APIs, the bank will receive and analyze additional data on user behavior and make more profitable offers.

Higher quality of services

Improved customer engagement and retention rates will enable the financial institutions to offer more value-added services. Banking APIs will easily connect with Fintech application programming interfaces, facilitating the creation of new offers.

New customers

Customer expectations have top priority in the modern rapidly evolving digital world. Clients expect innovative financial solutions and a streamlined user experience. APIs allow banks to deliver personalized, responsive, and configurable financial services and offerings. Financial institutions and Fintech companies should do their best to be able to meet their clients' demands. PwC revealed that 61% of bankers consider a customer-focused business model very important.

What Will Fintech Companies Gain?

More business opportunities

Open Banking will help the representatives of the Fintech branch to offer innovative services to b2b and b2c clients, as well as develop and improve their business models, relying on the capabilities of banks' instruments and expertise.

Chance to stay ahead

Using open API technology, developers will be able to create and implement payment or e-commerce solutions much faster. Why? The answer is simple — they won't need to write thousands of lines of code from scratch to integrate a tool with open API.

Are There Any Bonuses for Users?

Convenient user experience

Customers will get more personalized services, more user-friendly financial instruments and interfaces, enabling them to manage their data and payments better. New, disruptive technology and solutions will allow merchants to automate their business processes and accelerate financial transactions. With open APIs, users will gain access to next-gen accounting, CRM, and ERP systems, mobile, and web applications.

For example, advanced apps will help users automatically create payment orders or draw up and sign payment documents directly in the accounting system. There is no need to waste time, go to the online banking office, copy or transfer data from other software to it — everything can be done in one program. With APIs, it becomes easy to monitor the status of invoices and documents, track incoming requests, receive up-to-date information on the account status, and check the balance.

Lower prices

As a rule, high competition leads to lower prices and higher service levels. Using an open API allows merchants to significantly save on software development and improvement. They will be able to seamlessly integrate the used software with bank services without having to involve intermediate links and developers.

Higher transparency

Users will find it easier to compare various financial products and services. Based on analytical data, platforms and websites will show the prices directly (e.g. Booking).

What Is the Catch?

In spite of the fact that Open Banking and open APIs can take the level of financial services to the next level, market players are concerned about some issues and pitfalls.

Data security

Cyberattacks on the financial sector skyrocketed by 238% during the COVID-19 pandemic, according to the report prepared by VMware Carbon Black company. It's no wonder that any bank will be concerned about the requirement to share data with third parties. If a data breach occurs, it will be liable for that, being obliged to pay hefty fines. Besides, financial organizations must comply with a bank secrecy law that prohibits them to disclose information about payments, transactions, deposits, and accounts of their customers.

Technical and cultural barriers

When it comes to the cooperation between financial institutions and Fintech developers, there are some incompatibility issues. The Fintech sector is more tech-savvy and able to create flexible and easy-to-use solutions much faster, tempting customers over to their side. There should be a clear business model that will be beneficial for the representatives of both industries. In addition, their collaboration should be focused on market development and customer satisfaction with the help of open APIs.

Wrapping Up

The banking sector has always been highly centralized in its hierarchy, information systems, and business model. However, the digital era makes this industry change by implementing innovative solutions and new services, as well as cooperate with other market participants, such as Fintech companies and developers. Financial institutions want to find new opportunities at the expense of breakthrough instruments, while Fintech startups consider banks as strategic partners and investors. The financial industry has a huge client base, fundamental infrastructure, and governmental support. Businesses, in turn, can offer ideas and tools that are capable of significantly increasing customer engagement and bringing banking services to a whole new level.

The implementation of Open Banking and open API provides significant opportunities to both the fintech and the financial industry, offering consumers better products and services. But it brings some risks that should be mitigated. The main issue arising from open APIs and Open Banking is the security of sensitive consumer and financial data and their sharing with various companies. The successful use of APIs depends on the creation of a legal framework and appropriate data security instruments to solve these issues.

We hope you've found this article useful. If you have any questions, visit our website for more of our expertise in banking, fintech, and other areas. If you’d like to discuss API development, feel free to contact our support team. Our high-qualified experts will be glad to help you bring your innovative idea into reality!