Key takeaways

• Open banking enables consumer financial account management through third-party apps, making financial services more innovative, accessible, and user-friendly.

• Open banking adheres to strict regulations like anti-money laundering (AML) and know-your-customer (KYC), which ensures security and trust in financial transactions.

• Beyond traditional finance, open banking allows diverse companies to integrate specific banking data into their apps, enhancing services and customer experiences.

With open banking, companies can tap specific data and fold it into their app. Solutions ranging from consumer banking-oriented Mint, subscription wrangler Subaio, BNPL Klarna, and budget app Cleo completely rely on open banking — and thus on third-party providers without which their platforms wouldn’t exist.

On an even more advanced level, complex approaches involving physical and virtual card issuance, programming integration with payment providers, currency exchange, and support with regulations, can be facilitated with open banking, as is the case with UK-based decacorn startup Revolut.

Open banking’s key benefit lies in reduced attrition: Customers execute purchases and payments without leaving a digital storefront — what’s increasingly referred to as “frictionless commerce.” Nothing interrupts purchases faster than clients bouncing between URLs, so instead, companies use open banking APIs in their websites and apps to streamline the purchase journey. Anything related to payments is delegated to third-party providers, the API holders.

Lately, non-fintech companies have become keen on tapping the benefits of open banking more directly. In 2022, Apple acquired UK startup Credit Kudos, whose banking app uses machine learning to analyze a client’s financial data and create credit ratings — a boon to a massive company that isn’t a traditional credit house but still possesses troves of data. The outcome is more or less banking-as-a-service: Apple gets access to algorithms it can pair with its customers’ bank account data, which allows for much more accurate risk assessment and lending decisions for Apple’s fintech business partners, such as buy-now-pay-later platforms (that may offer to consumers interest-free financing for Apple purchases).

At their most basic, the APIs that enable and use open banking are still conceptually the same as in the 90s: You create a website and connect it to an API provider that can process your payment system — like Visa, Mastercard, Paypal, Stripe, or Alipay — to get your payment executed. That’s the payment rail system in a nutshell, right?

What’s changed is the scope. Thirty years ago, open banking meant using your credit card anywhere, and much like McDonalds, (ideally) having the same experience no matter where in the world you went, while the backend was managed by one party who could then offer it to plenty of sellers. Today, the still-great credit card doesn’t cut it for customers with smartphones who expect full access to their finances not only anywhere, but also at all times. This extra demand gave rise to multiple open banking APIs, some of which have become the unofficial industry standard of modern fintech.

The most popular ones include:

• Plaid – Plaid is a single but comprehensive integration layer that acts as the middleman between a consumer’s bank account and other companies’ platforms, authenticating personal data to ensure the payments and transfers are secure and legit. Plaid is trusted by plenty of major conventional financial companies and fintech startups, including Bank of America, American Express, Venmo, and Wise.
• Quickbooks – Focused on accounting, Intuit’s Quickbooks is a collection of different open banking APIs with compartmentalized functions that fetch data from various platforms and present it in one screen. It tracks and organizes inventory, payroll, income, expenses, bookkeeping, and invoicing, catered mainly for small businesses.
• Experian – As one of the world’s leading credit reporting companies, Experian relies on APIs for quick checks to verify a client’s identity, credit scores, lending risk, and even criminal records to curb financial fraud. Its reputation and scope, particularly on credit scores, are trusted by governments worldwide, including the UK and Brazil, which uses the tool as the de facto national credit evaluation method.
• Stripe – Like Plaid, Stripe’s main feature is to help process payments. Unlike Plaid, which works like a “read-only” program, Stripe itself processes payments. Its open banking APIs must be robust enough to withstand common fraudulent tactics such as man-in-the-middle attacks. As such, Stripe (which happens to be a Vention partner) boasts a full suite of security systems designed to certify safe transactions, serving as a PCI service provider for businesses looking for PCI DSS compliance.

There’s no limit to how many APIs an application can include, but as with any platform, bloat is to be avoided. The exception is compliance, where a healthy dose of redundancy never hurts.

Customers must feel safe using products like the above for open banking to work, so fintech companies go the extra mile to ensure that their APIs development abides by security standards like Anti Money Laundering (AML) and Know Your Customer (KYC) that validate whether money and identities, respectively, are legit.

Most importantly, AML/KYC-compliant API providers can extend their certifications to the businesses that use their APIs. Vendors can simply submit data to a third-party provider who does background and credit checks, paying a banking-as-a-service fee for their analytics without the need for dedicated staff or infrastructure.

By outsourcing the compliance processes, businesses can aggregate customer financial data from multiple open banking platforms into a single screen — and retire the old method of clients supplying their personal data directly to the vendors to verify themselves in compliance-dedicated websites. With APIs, the operators execute regulations seamlessly and create surplus efficiency within the open banking ecosystem.

While compliance differs among regions (regulations in the EU, like the GDPR, are notoriously stricter than in the US), the verticals a company operates in also matters when setting up shop: Payments, for example, are more straightforward in the EU — a legacy from pre-Euro times when Europeans were familiar with transactions in multiple currencies by necessity. Lending, on the other hand, is more accessible in the US, given Americans’ appetite for risk.

Because of these regional variations, international companies outsourcing their compliance requirements are incentivized to have different local API providers to warrant full coverage in the areas they operate in.

Furthermore, emerging tech is quietly changing (for the better!) how the regulations technologies companies, or regtech, do business. Much like Grammarly uses AI to scan writing and suggest context-sensitive improvements, AI-powered solutions such as compliance.ai can break down the legalese of regulatory requirements into bullet points and directly tell the customer what must be done to address it — and even anticipate new relevant laws as they are scheduled to come into effect.

Visa and Mastercard haven’t gone the way of Blockbuster (yet), but the banking industry displacement and competition caused by modern open banking is very much real. Many of the latest fintech solutions created with the help of open banking are payment-related, with a strong focus on micropayments and microloans. Their open banking nature reduces customer dependency on traditional banking for loans, which in return affects the banks’ revenue — and non-bank lending is a hot market coming into 2023.

Two main types of disruptive players have appeared in the last decade:

Digital banking startups, or neobanks, as a rule of thumb don’t have the liquidity or underwriting themselves to support loans or mortgages, but they still offer those financial services by passing them off to someone else: It’s simpler to have HSBC or JP Morgan do it, as the alternative is highly bureaucratic and expensive — especially at scale. That’s where open banking APIs and their concept of simplicity through outsourcing come in. Neobanks jump at pre-existing infrastructure using tech as a trampoline.

But at the end of the day, it’s all backed up by a big bank. So, major fintech service companies act as payment rails for as many third-party banks as possible. Before neobanks, companies like Fidelity (specifically its fintech arm, FIS), Fiserv, and Jack Henry in the US (or Santander, Finextra, and Revolut in the EU) processed payments for small regional banks, whose modest vaults couldn’t operate large volumes of loans and cash transfers. This lets smaller banks compete with bigger ones and offer more financial services to customers.

Revolut, in fact, started as a humble little frontend digital banking startup all the way up to a critical player in less than a decade. Now, it's scaling to attain enterprise robustness and be able to provide, by themselves, the same products that legacy retail banking institutions do.

Despite its recent downturns, crypto came to the world as the newest, regulation-light version to smash up traditional banking. Under the microscope, though, it really is an open banking idea: Everything is public, transfers included, with cryptocurrencies serving as payment rail, payment receiver, and processing of charges, all in one. It’s almost a one-stop shop for what usually happens in the background, away from typical consumers.

Cryptocurrencies have their own APIs that come from the same concept as the traditional ones, just for crypto. Paired with distributed ledger technology, moving currency and assets around becomes much more efficient. There is no need to have a bank account and tell the bank what is wanted; consumers can do it by themselves.

Vention knows a thing or twenty about programming API integrations. Over the years, we facilitated the development and setup of API connections, together with the security and compliance required when dealing with private data — whether from scratch or on existing open banking platforms.

Beyond modernizing the platform of StoneX, the US’s online trading services provider, we’ve added several integrations into its trading systems to considerably ramp up the transaction volume and global reach of their products. DealCloud, on the other hand, relied on us to build entire web and mobile CRM apps to support its offerings to financial enterprises. Moreover, the right open banking APIs (like Mint’s single screen-based credit card integration) streamlined DealCloud’s logistics and opened up the world’s most extensive financial data storage to its clients.

Most importantly, we get that the benefits of open banking aren’t restricted to the financial realm. As our head of fintech, Andrew Haines, summarizes it: “Everything is fintech at some point because everybody expects to be paid.” Anybody connected to a payment system or engaging in e-commerce platforms, while maybe not directly related to fintech, invariably relies on open banking and its benefits, regardless of industry.

The open banking philosophy aims to build a single pane of glass so it’s easy for us to keep an eye (and both hands) on our money. This “centralized decentralization” isn’t a new phenomenon; it’s just more perceptible as our financial center of gravity moves from the wallet to the smartphone. Inevitably, the more options open banking technology creates for us, the more demanding we become — and as innovations consolidate into banking industry standards, open banking integrations are, without a doubt, the most reliant tool for fintech newcomers to stand out and capture the market.

The development of open banking, and its accessible-to-all APIs, not only level the playing field but do so brimming with healthy competition.