What are open banking APIs and how do they work?

It’s crucial that banks keep customer information secure. At the same time, access to that data can unlock a wealth of services that could boost your business and its offerings to customers. Enter open banking APIs, which allow third parties to access banking data with customer consent while maintaining security.

This concept of securely sharing data with innovative third-party companies is also known as open banking, and it’s on the rise: the value of open banking transactions reached US$57 billion in 2023. It’s smart for businesses like yours to stay on top of this trend to leverage automation, insights, and other services that open banking APIs can provide. 

Read on to find out what you need to know about open banking APIs.

What is an open banking API?

Open banking APIs allow banks and financial institutions to share financial data with third-party developers. API stands for Application Programming Interface; these interfaces allow two applications to communicate with each other. Through an API, even non-finance businesses can offer financial services on their platforms.

For example, imagine you wanted to launch a budgeting app. To use this app, your customers can consent to your platform accessing their bank data via an open banking API. Your platform can then import their data, share insights, and make recommendations on their spending. 

How do open banking APIs work?

• A bank creates an API: This software allows third-party applications to interact with the bank’s own systems according to defined rules.

• A third-party app sends a request to the bank via API: For example, a payment gateway could request that the bank initiate a transfer; a budgeting app may ask for data.

• The open banking API verifies the request: It verifies the third-party app’s credentials and generates a temporary access token. To verify, the third-party app must show that it complies with security regulations so customer information remains secure.

• If verified, the bank grants the request: The API accesses the relevant data or executes the requested function and sends a response back to the third-party app. If the request is denied, this status will also be relayed back to the user.

This is a simple explanation of how open banking APIs work. It’s also possible for third-party apps to access banking data via an aggregator, which integrates with the APIs of multiple banks. For example, if you’re running a budgeting app, you could connect with an API aggregator to provide services to customers who use different banks, without having to deal individually with each one. Using an aggregator can also cut down on the compliance requirements you’d have to handle.

Online businesses and eCommerce sellers outside of the finance industry can benefit indirectly from open banking APIs. Payment providers like Airwallex use APIs to securely handle payments for a wide range of businesses and to streamline other financial operations.

Four benefits of open banking APIs

Open banking APIs allow third-parties to build innovative products with secure access to bank data. Four common benefits of open banking APIs for businesses are:

• Automation: APIs automate access to data, reducing manual work.

• Insights and analysis: Because of this automation, businesses can gain insights from their financial transactions. Advances in artificial intelligence (AI) and machine learning (ML) allow insights to be gleaned from this data, such as customer behaviour and conversion data.

• Personalisation: A third-party developer can use the information about a business’ or individual’s transactions to personalise the user experience.

• Innovation: Open banking encourages fintech companies to come up with new and useful products that can help individuals and businesses. It means that banks can’t lock away their data, as long as customers give their consent.

What’s the difference between open banking and open banking APIs?

The term ‘open banking’ was popularised internationally in 2015, when the European Parliament adopted a proposal known as the revised Payment Services Directive (PSD2). This proposal both opened up and regulated access to bank data, giving third parties access to this data via open banking APIs. APIs can now be used to access the name of the bank account holder along with other details such as account type, currency, open date of the bank account, and transaction details.

Before this legislation, banks weren’t highly incentivised to come up with innovative offerings for services based on their customer data. In the era of open banking, third-party companies can create new types of products to make life easier for individuals and businesses.

To summarise:

• Open banking refers to the whole ecosystem in which banks provide access to customer data for third parties to build financial apps and platforms.

• An open banking API is the software that enables this secure data transfer.

How APIs can help your business

Automate payment gateways

If you sell products or services online, you can set up a payment gateway to power your payments. Payment gateways use open banking APIs to process transactions, collect subscription fees, and handle refunds securely.

Streamline payouts

Payment providers can use bank APIs to automate secure and reliable payouts to suppliers and employees. This minimises human errors and improves efficiency. 

Optimise FX rates

APIs can help you avoid unnecessary FX fees by helping you access interbank FX rates, lock in fixed FX rates, and use multi-currency pricing at stable local prices for overseas customers.

Generate virtual cards

Your business could use API integrations to automatically create virtual cards to pay suppliers. This gives you a high degree of security and control over payments without additional work.

Examples of popular apps that use open banking APIs

• Airwallex: A modern, global fintech company that provides international payment solutions for businesses, Airwallex uses open banking APIs to offer payment solutions, manage payouts, decrease FX risk and automate card issuing. 

• Robinhood: An app that allows users to trade stocks, options and cryptocurrencies without paying commission fees, Robinhood uses open banking to link users’ bank accounts to their trading accounts, making use of the app simple and seamless.

• Klarna: A fintech company that offers Buy Now, Pay Later (BNPL) services,  Klarna uses open banking APIs to access financial data and assess users’ creditworthiness, and to facilitate payments.

Streamline your business with Airwallex

Our end-to-end financial operations platform, Airwallex, offers powerful APIs that aim to make moving money as simple as moving data. Airwallex handles more than 54 million API requests daily, helping businesses like yours streamline finances and scale up quickly and confidently.

Airwallex Core API lets you white-label solutions, building them into your platform while retaining your own business’ own look and feel. Our suite of APIs covers:

• Payments: Plug in a native check-out page to collect one-time and recurring payments from customers with 160+ preferred local payment methods in 180+ countries. Avoid costly FX fees with like-for-like settlements, reduce chargebacks with fraud prevention, and price in customers’ local currency. 

• Payouts: Scale and automate payouts, convert currencies at interbank rates, and pay out from multi-currency wallets.

• Transactional FX: Lock in favourable FX rates, acquire currencies at interbank rates, display products at stable local prices, and customise settlement dates based on your business needs.

• Issuing: Simplify transactions by automatically issuing multi- or single-use virtual cards to pay suppliers in 40+ countries and 170+ currencies with no transaction and conversion fees.

Airwallex APIs are simple to implement, with high-quality developer tools, straightforward documentation, and cloud-native solutions that easily integrate with your existing workflows.