Open Banking: Breaking Down the Buzzword
Open banking is a system that allows third-party financial service providers to access bank account data — with the customer's explicit permission — through secure, standardized APIs (Application Programming Interfaces). It's a regulatory and technological shift that's fundamentally changing who controls financial data and who gets to build on top of it.
In simple terms: instead of your financial data being locked inside your bank's app, open banking gives you the ability to securely share it with other services you choose — budgeting apps, loan providers, payment platforms, and more.
How Did Open Banking Start?
Open banking gained significant momentum when the European Union introduced PSD2 (Revised Payment Services Directive) in 2018, which required banks to open their APIs to licensed third parties. The UK implemented its own Open Banking standard around the same time. Since then, similar frameworks have emerged in Australia, Brazil, Singapore, and beyond, while the US has been developing its own approach through the CFPB's rules on personal financial data rights.
How Does Open Banking Work?
The mechanics follow a clear pattern:
- Consent: A customer explicitly authorizes a third-party app (called a TPP — Third Party Provider) to access specific data from their bank account.
- API connection: The TPP connects to the bank's API using that authorization, rather than asking for login credentials directly.
- Data or action: Depending on the permission granted, the TPP can read account data (balances, transactions) or initiate actions (like making a payment directly from the bank account).
- Revocation: The customer can revoke access at any time through their bank's app or portal.
Types of Open Banking Services
Open banking enables two main categories of third-party services:
- Account Information Services (AIS): Read-only access to account data. Used by budgeting apps, credit assessment tools, accountancy software, and financial aggregators.
- Payment Initiation Services (PIS): The ability to trigger a bank transfer on behalf of the customer, bypassing the traditional card network entirely. This enables faster, cheaper payments for merchants.
Open Banking vs. Traditional Card Payments
| Feature | Card Payment | Open Banking Payment |
|---|---|---|
| Infrastructure | Visa / Mastercard network | Direct bank-to-bank API |
| Settlement speed | 1–3 business days | Near-instant (via Faster Payments / SEPA Instant) |
| Merchant fees | Interchange + scheme fees | Typically much lower |
| Chargeback risk | Yes | Generally lower |
| Consumer protection | Strong (zero liability) | Varies by jurisdiction |
Why Open Banking Matters for Payments and Fintech
Open banking is accelerating innovation across the financial services landscape:
- Cheaper payments: Merchants can accept bank payments at a fraction of card processing costs.
- Better credit decisions: Lenders can analyze real transaction history rather than relying solely on credit scores.
- Financial management: Consumers can see all their accounts in one place, enabling better budgeting and financial planning.
- Embedded finance: Non-financial companies can offer payment and lending products without becoming a bank.
Is Open Banking Safe?
Security is built into the architecture. Regulated TPPs must be licensed by their country's financial regulator, use OAuth 2.0 authentication, and never store credentials. Customers are always in control — they decide what data is shared, with whom, and for how long. That said, consumers should always verify that any app requesting open banking access is a licensed, regulated provider before granting consent.
The Bottom Line
Open banking represents a fundamental shift in the ownership and utility of financial data — from banks holding it exclusively to consumers controlling it actively. As the ecosystem matures, it will increasingly compete with and complement card-based payment infrastructure, reshaping the economics of the entire payments industry.