Open Banking is a regulatory initiative that requires banks and financial institutions to share access to customers’ banking data with third-party financial service providers via application programming interfaces (APIs). This simple, secure exchange of data allows businesses to create innovative services that deliver more value to customers.
PSD2, or Payment Service Directive 2, is the European Union equivalent of Open Banking, requiring European banks to open up access to customers’ financial data to third-party providers.
Because financial information can be shared between different providers, customers can see all their data in one centralised place, making it easier to manage and move their money. Open Banking also simplifies and speeds up payments from banking to other services.
Banks can expand their offering by connecting with other service providers, and analyse customer behaviour to provide more personalised services. Fintechs can quickly launch new products and services to gain market share, and integrate other platforms to enhance security.
An open API is a publicly available application programming interface. It allows third-party software developers to access certain data – in the case of Open Banking, financial information in bank accounts – so that they can use this in building new applications and services.
To enrol in the Open Banking Directory, providers have to comply with the strict rules of the FCA or European equivalent. These are designed to prevent fraud and protect customers with enhanced identity verification through Strong Customer Authentication.
Open Banking and PSD2 require companies to implement strong customer authentication (SCA) in order to increase the security of online payments. Essentially, it requires banks to request additional forms of validation to confirm someone’s identity in order to complete payments – for example, through Multi-Factor Authentication.