Open Banking is a financial technology innovation that enables banks to safely share the financial data of customers with the use of a third-party software called Application Programming Interface (API). The API provides the platform through which bank applications communicate to extract and share customer financial data. Doing so enables bank clients to access an extensive range of financial products and services; thereby providing them with more options in managing their financial resources.
Open banking is the practice while API is the regulated software intermediary that acts as a conduit for the data sharing practice within and across various organisations. As a fintech innovation, it stands in contrast to traditional banking in which only the bank can access a client’s financial data as a means of rendering a financial service or of integrating a financial product opted-in by a bank account owner.

Ensuring security is paramount for open banking, to effectively put in place the infrastructure in which third parties can safely access and share financial data subject to the condition that a customer will authorise or a bank client will grant permission.

How Exactly Does Open Banking Work?

Basically, open banking relies greatly on use of API technology, since it offers the interface within which a third-party software speaks to another third-party software. It’s important that an API is compliant with the rules and policies prescribed by banks, by the government and its regulatory authorities.

Through the express permission granted by a customer who intends to obtain the financial services and/or product of his or her bank, the latter opens up access to financial data that are traditionally kept in-house to make it accessible to the API facilitating the financial transaction. The technology was conceptualised as a means of improving the ease and speed by which financial services are rendered to clients and customers of businesses and other banks.