Open Banking and Open Finance Defined

Open banking is the structured sharing of data via APIs between financial service providers, based on the needs of and consent by their mutual customers. It’s about getting reliable, secure, and fast consented access to accurate information, with the ability to share and revoke that access.

Open finance extends open banking to include customer data access for a range of services beyond the banking industry, including retail shops, hotels, airlines, car apps, and much more. It makes broader data sets and business applications available beyond banking.

Open banking is expanding to become open finance and embedded finance, where APIs enable white label financial services such as Uber Money and Google Cash. In this way, banking looks less and less traditional than it ever has and customers experience a completely new way to interact with their money.

Open Banking API Platforms

Open banking API platforms give organizations a way to launch open banking initiatives and connect with financial data from a variety of sources. Leading platforms include a dashboard view that allows banks, credit unions, and fintechs to easily see all connections and choose which ones to enable and disable with a click. These platforms bring everything together in one view and give access to third-party application marketplaces.

How Does Open Banking Work?

Unlike screen scraping technology, which requires customers to input their username and password for a third-party provider to pull their data, open banking works via API integrations that include data sharing with banks, credit unions, fintech companies, and third-party providers (TPPs) via direct connections. 

These API connections include public partner APIs that link internal programs to external programs via open standards, open documentation, and open access. In addition, these APIs are sometimes accessed for free, but may require committing to terms of use first. 

In short, instead of a third party scraping data from various websites (with or without permission), open banking standardizes the process and enables user tokens so username and password don’t need to be shared at all. 

Open Banking Regulation

Because open banking enables data sharing between firms, it’s prone to regulation. The Consumer Financial Protection Bureau (CFPB) plays a major role in the U.S. and the Revised Payment Services Directive (PSD2) plays a major role in Europe.

Open Banking in the US: CFPB Data Sharing Regulations

In 2017, the CFPB outlined principles for data sharing for the purpose of meeting the needs of consumers, fintechs, and financial institutions. These principles, most of which focus on consumers, include details around access, data scope, control and informed consent, authorization and more. In 2021, companies submitted comments about the topic to the CFPB. 

For our part, MX submitted a comment explaining why we believe that consumers own their financial data and should have the ability to securely share it with third parties of their choice.

What Is PSD2?

PSD2 is a set of European rules for data sharing and payments. It replaced the Payment Services Directive (PSD), created in 2007, and is coupled with regulatory standards around customer authentication, API communication, guidelines for reporting potential incidents around fraud, and more. This updated directive focused on online and mobile payments, with particular attention to open banking and APIs. 

PSD2 Open Banking Requirements

Ultimately, PSD2 requires financial institutions to share data with their customers so those customers can use the apps, UI, and services that create the best financial outcomes. This directive may play an enormous role in preparing other nations to figure out the best approach to connectivity and data sharing.

Open Banking Case Studies

Here are three examples of open banking innovation in the United States:

Each of these examples show what innovative banks are doing on this front.

Open Banking APIs

What Is an API?

An Application Programming Interface (API) is an interface applications use to communicate with each other. It defines request and response types, data formats, and more.

How Do APIs work?

Just as there are interfaces made for humans, there are also interfaces made for programs — application interfaces that communicate between programs. Thus the name: application programming interfaces (APIs). 

As Daniel Jacobsen, author of APIs: A Strategy Guide, writes, an API is “a way for two computer applications to talk to each other over a network, using a common language they both understand.” In other words, APIs convey a set structure for requests and responses so data can transfer between one application and another.

Types of Bank APIs

To understand how this works in practice, view the MX Open Finance Portal.

Open Banking API integrations

Open banking API integrations cover a range of possibilities, including: 

Open Banking Benefits

Open Banking Benefits for Consumers

Open banking enables consumers to enjoy a single view across their accounts and make direct payments. Open banking also lets them choose services from a wide competitive set and access new financial products. Consumers can link bank accounts to loyalty programs, share data with accountants and advisors, and even speed up the loan process by automatically and safely transferring data into application forms.

Open Banking Benefits for Banks and Fintechs

Open banking also brings enormous benefits for financial institutions and fintech companies. To start, many people mistakenly believe that data sharing for open banking is mono-directional — that it merely consists of financial institutions giving away all their data. However, in reality customer-permissioned data sharing is bi-directional, meaning that financial institutions and fintech companies also receive data from the sources they connect with via API. This sets them up to use that data in creative ways to best serve their customers. 

Open Banking Benefits for Nations

In addition to enjoying the benefits of individual flexibility and added security, open banking brings innovation at the national level. As nations roll out open banking and as consumers share their data with companies they choose to share that data with, savings rates, deposit rates, loan rates will increase. After all, if a lender is able to see a 360-degree view of a user’s financial life, the lender’s algorithm will more confidently be able to pinpoint whether that user is credit worthy. Those who deserve credit will get it. Those who don’t, won’t. In light of this, default rates will decline and healthy lending will go up, making the entire financial system across the nation a better oiled machine. As this success feeds into itself — coupled with citizens who have a better sense of their personal finances — nations that leverage open banking will have the advantage in innovation and collaboration over those that don’t. 

Open Banking and Security 

Open banking brings added security by replacing sharing credentials (such as username and password) with anonymized, single-use digital tokens. This means that bad actors can’t access the personal information of end users during a transaction. Tokens de-identify user data, greatly increasing the chances that personal data will not be subject to risk.

Looking to understand more about open banking? Read the Ultimate Guide to Open Banking.

guide to open banking