Payments Orchestration

How Do Open Banking APIs Work?

Understand how open banking APIs work, what their use cases are, and how to enable them for your payments ecosystem.

Written by
Andy McHale
Publication Date
June 21, 2024
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How Do Open Banking APIs Work?

Could open banking APIs be the key to reinventing the payments wheel? 

By 2027, the value of global open banking payment transactions has the potential to reach $330 billion, nearly six times the value of $57 billion seen in 2023. However, researchers note that consumers need to overcome fears regarding sharing financial data via open banking for these payments to fully take flight. 

From a regulatory standpoint, open banking has driven innovation within the global financial services sector. The next step requires finding the right ways to integrate open banking into the day-to-day experiences of consumers and businesses. 

API Crash Course: What is an Open Banking API?

Application program interfaces, or APIs for short, are the software that powers our digital communications. With APIs, we can connect our various accounts to all sorts of different web and mobile applications, including essential services for both personal and professional purposes. 

Open Banking APIs are a specific type of API that connect an individual or business’s bank accounts to financial services. While the exact services can vary depending on each use case, they can include:

  • Payment tools
  • Lending solutions
  • Fraud prevention
  • Embedded banking products
  • Accounting services

Connecting to open banking APIs can have significant benefits, especially for businesses handling large volumes of payments. Open banking APIs enable you to leverage a mix of different payment service providers to find the ideal balance between payment efficiency and digital due diligence. 

How Do Open Banking APIs Work?

APIs are a key component in the open banking process, ensuring third parties have secure access to data. 

Such access to data comes with strict regulations to keep consumer and business data private during any transactions or exchanges between third parties and financial institutions. As such, a critical enabler of open banking APIs is consumer consent. 

Open banking APIs give financial institutions the tools to build sophisticated endpoints for third-party services to access consumer data. These APIs do not provide third parties with total access to consumer accounts but rather with access to the specific data each consumer has agreed to share. Typically, open banking APIs can provide access to the following types of user-permissioned data:

  • Account balances 
  • Transaction history 
  • Account and identity verification

The operational benefits of open banking APIs reduce complexity for both financial institutions and the end-users connecting to their services. Open banking APIs also provide businesses with the opportunity to generate new value and revenue by building embedded banking services into existing products. 

Let’s look at  how open banking APIs work in practice with the following use case: 

An online ticket marketplace wants to enable open banking payment methods, requiring it first to integrate open banking APIs into its payment environment. Integrations with open banking APIs often go smoother when connected to an open payments platform, though these APIs are also useful for improving communications with more outdated legacy systems. 

Once connected to an open banking API, the marketplace can now allow customers to connect to and save their preferred open banking payment methods. This connectivity ensures that customers are met with a frictionless checkout experience when using the marketplace’s web or mobile application.

In addition to providing the marketplace with direct access to the customer’s preferred payment methods, open banking APIs can enable consumer data aggregation to help the marketplace learn more about its most loyal customers and their typical financial behaviors. 

When customers want to connect their accounts to the marketplace’s platform, an open banking API provider will often create an encrypted token that shields the sensitive financial data during transactions. Tokens make API calls possible, allowing the marketplace to request specific data as needed.

As Interest in Open Banking Payments Rises, Can Availability Keep Up?

Open banking remains a relatively new concept across financial markets. 

While the United Kingdom and European Union have each established their respective open banking regulations, countries like the United States and Canada have adopted a more market-led approach, with regulators still solidifying their stance on the open banking model

Though the global spread of open banking certainly shows no signs of stopping, we may still have some ground to cover in terms of general consumer awareness about open banking APIs and payments. 

A 2024 PYMNTS consumer survey found that 44% of participants who have never used an open banking payment method had never even heard of such a thing. Despite this lack of overall awareness, there is a clear growing interest from those who have used open banking payments, with 68% of consumers using this payment being “very” or “extremely” satisfied. 

Notably, the survey also found that satisfaction climbed with frequency of use. For consumers using these payments 15 times or more per year, high satisfaction levels rose from 68% to 82%. 

With such high satisfaction rates among customers using open banking payment methods, it’s likely the adoption rate of open banking products (and, thereby, open banking APIs) will increase over time. Enabling new payment methods via open banking APIs can certainly play a role in exposing more consumers to the open banking payments available to them, building greater trust along the way.  

The Relationship Between Open Banking APIs & Open Payment Platforms

Open banking APIs and open payment platforms naturally form a symbiotic relationship.

An open payments platform leverages payment orchestration technology to create more streamlined payment experiences for businesses. Rather than using open banking APIs to patchwork together outdated legacy applications, an open payments platform provides a centralized infrastructure in which you can integrate everything you need, from open banking APIs to payment service providers. 

Together, these two technologies can reshape the entire payment process to be smoother and more intuitive, as well as open up opportunities for businesses to generate new revenue with improved financial services in their products and applications. 

Take the Road to Open Banking with Spreedly

At Spreedly, our open payments platform can supply you with the flexible payment ecosystem you need. 

Through the Spreedly API, you can do everything from connecting to different payment service providers to capturing and securing payment methods with Spreedly’s PCI-compliant Advanced Vault. 

Chat with Spreedly today to learn more about our open payment platform.

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