Open Banking Leads the Next Generation of Financial Services

With the booming API economy, the open banking industry is gaining momentum internationally and will experience significant growth in 2021, says Jasen Meece, CEO and a board member of Cloudentity. To keep open banking systems secure, app providers need to apply dynamic authorization to protect APIs from being compromised.

Application programming interfaces (APIs) have been elevated from a development technique to a business model driver and boardroom consideration. APIs enable companies to build products and exchange data more easily with an internal, partner, and customer services. Due to the business potential this offers, the API economy has boomed in the last few years, creating great opportunities, especially in the financial services industry. 

As a result, 2021 will see significant international growth in the open banking industry as it democratizes financial services. With open banking, third-party developers can use open APIs to build applications and services around existing financial institutions, which puts the power of consumer data back into the hands of the users.   

The Open Banking Movement   

The benefits of open banking Opens a new window are far-reaching and multifaceted. Open banking is a system where users’ personal and business data can be shared, with their consent and control, to allow easier access to financial products that will save money, time, and hassle. APIs enable this data to flow between apps, platforms, and financial providers safely and securely.  

Gen Z has grown up using mobile financial apps, such as Venmo, Greenlight, or SoFi, to manage their personal finances and transfer money instead of traditional banks. Open banking-enabled apps can provide access to cheaper loans for businesses and the ability to manage money quickly and easily.  Additionally, it increases competition in the financial services sector beyond the big banks and creates new opportunities for financial technology companies and startups.   

The open banking revolution started when new regulations, such as Open Banking EuropeOpens a new window (OBE), were formed in 2017 to foster innovation, competition, and efficiency to increase consumer choice and enhance security for online payments. In recent years, Europe has been the center of this movement towards customer-centric banking using open banking to build new consumer banking apps, but open banking is gaining momentum in the U.S. as well.   

In the U.S., the Financial Data ExchangeOpens a new window (FDX) built a consortium of providers around a common standard for secure access to financial data. Now, we are seeing an influx of software companies founded to create a new method for digital-first consumers to do banking and manage personal finances. To keep up with the growing demand for these easy-to-use digital banking solutions, banks have now embarked on the same journey by introducing similar mobile apps designed to make customers’ financial lives more productive and seamless.  

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Securing Open Banking APIs with Dynamic Authorization   

It goes without saying that when people or businesses share their financial details, they want it done securely, so it doesn’t create an opportunity for theft, fraud, or unwanted exposure. Suppose an open banking API doesn’t have proper identity authorization in place. In that case, criminals could transfer all your funds from personal accounts or take out loans or credit cards and rack up millions in debt.

More subtly, if an advertiser gets a hold of your transaction details, they could manipulate your future purchases through targeted marketing. Or, if a competitor has access to all your banking data, they could much more easily undercut your prices or target your existing customers to take business away from you.  

Well-built open banking APIs are critical to exchanging data. Dynamic authorization ensures the security of this data, helps foster trust in the system and streamlines the usability of open banking enabled apps. Dynamic authorization links to your applications, data, or other sensitive assets, then grants or denies access in real-time by policy, according to the context of the Five W’s (who, what, where, when, and why) of the user and transaction.  

It’s essential for consumers to provide consent and direction on how their data is being used. This context adds to the risk profile managed at the authorization level. Since all this data is flowing through open banking APIs, it’s critical for authorization to be context-aware, dynamic, and evaluated continuously for each transaction executed within the API itself. For example, some customers may only want their name shared and not the rest of their user profile. Other customers may only want to share transactional data one time or for a week.  

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Building Trust with Third-party Providers   

For the open banking ecosystem to work, app providers must be trustworthy. In the UK, Europe, and Australia, there is strict legislation that requires third-party providers to go through an authentication process with their respective competition and consumer governing body before they can participate. These regulations help ensure security and reduce the risk of bad actors manipulating the system for selfish or criminal interests.  

With the proper regulation, only legitimate businesses with the client’s best interests at heart have access to the financial data people are willing to share. If users don’t trust that it’s secure, people simply won’t use the system. Then everybody loses. As a first step to build trust, third-party providers must use secure APIs with a dynamic, fine-grained authorization that will respect the consent of users and keep that data safe. Those APIs need to assess the context of any party seeking authorization in real time; otherwise, it will hamper the user experience and leave people frustrated.  

More importantly, if there’s just one security leak, it will undermine trust in the system. That means if a supplier is seen to be negligent in their security or treatment of users’ consent, they’ll damage the reputation of open banking as a whole, lose customers, and be ejected from the open banking ecosystem. If a third-party provider, such as a chartered accountant, can prove they’re using a secure platform with secure APIs that use context-aware dynamic authorization, they can cement a foundation of trust at the ground level.  

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What’s Next for Open Banking?   

With the increased ability for customers to share their banking data with any trusted provider in the FDX or open banking network, the opportunity for smaller financial companies to offer competitive services has skyrocketed. This has started a gold rush for app developers working to build what will become the new, go-to open banking platforms.   

A new technology that involves sharing data across different platforms can create risk of data breaches, but well-built APIs can mitigate security risks. It’s essential that regulations, well-thought-out standards, and secure technology are harnessed to maximize the benefits of open banking. Dynamic authorization solves the security challenges of open banking and assesses the context of each data transaction for better protection and usability. This results in better security and a better customer experience for all.  

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