What is open banking?
Open banking is a practice in the banking industry that ensures the secure and transparent interchange of data between all parties involved in the payment value chain, including banks and other account-holding financial institutions as well as third-party financial service providers, usually fintech companies. The foundation for open banking is the second Payment Service Directive, more commonly known as PSD2, which is legislation designed and used by countries in the European Union and European Economic Area to establish a unified regulatory framework for payment services and payment services providers. Open banking based on PSD2 objectives demands account-holding financial institutions to open up their previously monopolized customer accounts to other financial service providers. Under open banking, third parties can access consumer banking, transaction, and other financial and personal data from banks and use this information to improve or create new financial services. Also, third-party providers can access, use and share data to benefit consumers in many ways, including speeding up various financial services, such as applying for a loan, making a transaction on behalf of a consumer, or giving a consolidated overview of several payment accounts from different banks in one dashboard. Most importantly, open banking ensures that banks open up their data channels to third parties and share consumer data with them only when requested by users. Also, open banking enables consumers to know who has access to their data and allows them to permit or deny access to their financial data.
What is the role of API in open banking?
Under open banking, the communication and exchange of the data with the permission granted by the consumer are available thanks to open banking APIs, also known as Application Programming Interfaces. APIs are software that allows to form a connection between two different applications from different institutions and simplify the retrieval, exchange, and presentation of financial information. The utilization of API is strictly governed by regulatory standards specified in PSD2. APIs established by banks and integrated with third-party technologies allow these financial service providers to carry out specific services regarding consumers’ data. APIs enable applications provided by the third party and used by the consumer to make a request for an application used by banks and give a response back to the previous application used by the consumer. To put it simpler, APIs ensure that when consumers through the application on their mobile request to check their account balance or make a transaction, third parties access relevant information needed to grant this request and provide these services from account-holding financial institutions. To sum up, APIs technically ensure that the process of banks opening up data for regulated providers works, as these interfaces are crucial for the sharing of account information between third-party providers and account-holding financial institutions.
How open banking API benefits consumers?
As APIs provide a technical way for data sharing between banks and third-party providers that aims to improve or create innovative technology-driven services, open banking benefits consumers with better value and more choices regarding financial products and services. In open banking, third parties, known as Account Information Service Providers, or AISPs, can provide consumers with a consolidating view of their financial data from different accounts in a single dashboard. This consolidated view allows consumers time-efficiently and comfortably to get budgeting advice, loan or credit approval, and various other financial or investment services. Also, third parties, known as Payment Initiation Service Providers, or PISPs, can help consumers initiate payments by using open banking APIs without needing to log into their account or utilize a credit or debit card. Also, open banking encourages not only third parties but also banks to provide better payment services and boost innovative solutions to financial problems, ensuring the best consumer experience. Find out more about Open Banking API: https://nordigen.com/en/open-banking/api-online/