We see it here; we see it there… open banking is everywhere. Well, at least that’s how it feels when you read the financial services press. Open banking has been the hot topic for several years now, spurred on by regulations in Europe – snappily titled Payment Services Directive 2 (PSD2) – and an increasing number of initiatives around the world.
The term open banking has become synonymous with these regulations but it was originally created by the Open Bank Project, with the “open” referring to “open API”. Their model proposes a means by which the functions of a customer account – making a payment, creating a beneficiary, and so on – can be performed using APIs. Having APIs available to perform such functions gives customers choice, allowing them to use whatever app or service they like to check their balance, make a payment, or use their account data in whatever way they see fit. This is often called “composable banking”, as consumers can compose their banking services as they see fit with the bank itself providing the important role of providing a secure store of value in the form of the account.
The regulations and initiatives that invoke the spirit of this model are squarely aimed at bringing competition into the banking sector by introducing “non-banking” participants, who are largely defined by the catch-all term Fintechs. Most Fintechs don’t hold accounts or banking licenses but aim to do that same very important thing of giving customers what they want when they want it. At the heart of most, their products are doing something “different” that they don’t get from their bank, be it providing a financial lifestyle app like Snoop or bringing alternative ways to pay like TransferWise and Trustly.
Fintechs rely on the ability to get to the customer’s account in order to perform actions like pulling their transactions or making a payment. Such products have long been available by interacting with a customer’s internet banking through a practice called screen-scraping, but this has various implications – especially around account security and scope of access – that makes it sub-optimal.
New Roles in Banking
Regulations like PSD2 have therefore been created to formally define the Fintech “role” in financial services and coerce the banks to provide a standardised means for this new role to access data or make a payment. Taking PSD2 as an example, 2 key roles were created:
- Account Information Services Provider (AISP): Can access the customer’s account to retrieve data that a customer has consented to share – their balance, transactions, or profile information.
- Payment Initiation Services Provider (PISP): Can initiate payment from the customer’s account based on their instruction and consent.
These roles are by no means the only ones available in open banking initiatives around the world, but they typify the data and services that Fintechs build their business on.
To that end – and largely because of the markets taking the most appropriate choices to make it happen – open banking regulations and initiatives have resulted in a raft of new APIs being created by banks in the market.
Standards and Continued Growth
These APIs really square the circle of open banking, with regulations resulting in something close to the original model discussed above. The markets – driven by standards bodies working on behalf of regulators – have also created standards in the form of OpenAPI specifications. Examples in Europe include OBIE in the UK and Berlin Group which is implemented in multiple countries. This helps set expectations for both the Fintechs – who know what to expect from the APIs in the market – and the banks – who understand what to implement.
However, the regulations and the APIs are only the tip of the iceberg. Regulators and commentators are already looking to expand the scope away from just payment accounts towards all types of accounts across more banking functions. This movement – often termed open finance and being investigated in markets like the UK – looks beyond regulatory coercion and towards what the banks have to benefit from playing in the API Economy. Such initiatives indicate that the door to open banking is only just opening, and much more is to come.
Making Open Banking Happen with Tyk
Open banking represents a significant opportunity for banks and Fintechs alike to profit from new opportunities rooted firmly in the API Economy. As the market grows – with the development of open finance and the moves in other sectors towards an “open” market – having the means to play in this world by being able to act as an API Provider can only be of increasing importance.
You probably wouldn’t be reading this post if you didn’t already know that Tyk is all about APIs. The Tyk API platform offering – available in both Cloud and On Premise form factors – can help get your open banking implementation off the ground. Whether you’re re-platforming your API management solution or looking to move into the open finance space with commercial APIs, Tyk can help by:
- Automatically ingesting existing OpenAPI and Swagger specification documents to create your APIs, so you can take the documents created by the standards bodies and get up and running quickly.
- It works natively with OAuth 2.0 and OpenID Connect (amongst many other authentication modes), two security protocols at the heart of the majority of open banking standards.
- You get a fully customizable developer portal right out-of-the-box, essential for engaging with the open banking community and driving easy adoption of your APIs.
Tyk therefore gives features to rapidly build an open banking implementation, with a platform geared towards getting you started as quickly as possible.