Launched in the United Kingdom in January 2018 with the European Commission (EC)’s second Payments Services Directive (PSD2),
open banking gives third-party financial service providers access to consumer banking, transaction, and other financial data, from banks.
In a practical sense, open banking was a major milestone in the journey toward sharing banking data between parties – boosting industrial competition, handing more options to end-users, and introducing innovative financial services to the marketplace.
According to the latest
figures from Statista, in December 2024 the number of active open banking users in the UK surged to 12 million, up from approximately eight million at the end of 2023. The number of API calls worldwide, meanwhile, which sat at 102 billion in March 2024,
is predicted to “increase to 580 billion by 2027, signalling the rapid expansion of open banking services and their integration into various financial ecosystems.” Today, the value
of open banking transactions worldwide stands at over
$57 billion.
So how does open banking work technologically? What systems are in place to support innovation and the sharing of information? This article looks at how financial institutions implement open banking.
APIs: The digital waiters
Open banking is executed in different ways depending on the region in question, but in principle it requires the bank or payment service provider (PSPs) to share its financial data with third-party providers (TPPs), via application programming interfaces
(APIs).
So, what are APIs exactly? Simply put, APIs are engine-like technologies that transport requests – in the form of data – from system A to system B. These systems can be devices or applications, but
the data moved between them informs the tributary system exactly what a user would like actioned. In practice, the process equates to the delivery of financial products or services to users’ fingertips.
A useful metaphor here is that of the restaurant experience. Sat at a table, a guest browses the menu of dishes (here analogous to a list of financial products), before informing the waiter (the information-carrying API) of their request. The waiter takes
the ticket to the kitchen (the financial service provider) for preparation. Once ready, the waiter returns to the customer with the order.
In this way, APIs move information back and forth, between the user and the provider, to deliverer digital banking services, authentication processes, payments, account data aggregation, information verification, insurance comparisons, and more.
There are several kinds of APIs – including public, private, partner, and composite – and each has its own benefits and functionalities. For compliance reasons, customers should always be asked to give their consent to allow such data access, such as checking
a box on a terms-of-service screen.
If fit-for-purpose and used correctly, APIs can expedite data transmission, integrate services, and reduce touchpoints – thus rendering banks’ composite architectures interoperable, agile, automated, and secure. To learn more about building an API, read
Finextra’s short read, ‘What is an API?’
Fundamentally, the API is the requisite technology of open banking and underpins much of the connectivity of our modern world.
The intermediaries
The relationship between the banks and the TPPs, via APIs, is only part of the picture. In some cases, TPPs do not connect directly with individual banks’ APIs themselves, since it can be challenging and resource intensive. Instead, some organisations lean
on intermediary platforms, which specialise in connecting banks and TPPs through a single, proprietary API.
While these arrangements can come with per-transaction fees, connecting via an intermediary can mean faster integration; low operational overhead – with technical maintenance, customer consents, and data security all outsourced; and a wider data scope.
It is the job of the institution to consider its goals, project budget, and weight up all pros and cons. Clearly, the world of open banking execution is an increasingly complex ecosystem and necessitates close collaboration between IT leaders and the business.
The risk and the opportunity
At the end of the pipeline, the upshot of opening access to transaction data should enable customers to, for example, compare financial products like-for-like, so that they can shop around for the best deals; or access more tailored services, via a single
portal to manage their cash across accounts. The possibilities are innumerable.
While this could usher in an era of what Deloitte calls “marketplace banking” – where traditional institutions lose their grip on the ownership of the customer relationship to providers of these new
applications – there are also many opportunities. Incumbents should leverage their advantages of customer base and brand to provide aggregated services themselves, or strengthen customer relationships and retention by better helping them
manage their finances, instead of simply facilitating transactions
In the wake of the third instalment of the Payment Services Directive (PSD3), which is likely to be implemented in 2026, even clearer guidelines on APIs will be issued, which, once applied, will engender
higher standardisation, less downtime, and increased access to support. As such, banks and their APIs must get ready to deliver on the next age of open banking.
Back to the end-user
Ultimately, when implementing open baking, incumbents must think of their consumer base, which in a highly competitive financial marketplace goes where it is served best.
Technicalities aside, open banking is about traditional institutions sacrificing their core competitive advantages, so that customers can be handed more transparency and greater choice with which to manage their finances.