The Emergence of Open Banking and APIs

By: Paola Gasca, Analyst

References “Open Banking and the Future of Financial Services” published by MuleSoft

Open banking is essentially a system that provides users with a network of a financial institution’s data using APIs (application programming interfaces). The idea of open banking is appealing to clients of financial institutions as it relies on a network, not the centralization of banks, to define how financial data should be created, shared, and accessed. The concept of open banking has been reluctantly accepted by most financial institutions as it is seen as a threat to established banks. Essentially, open banking forces large, established banks to be more competitive with smaller and newer banks; in order to compete with open banking systems, established banks have to change their operating processes, adopt new methods, and spend money adopting new technology. Financial institutions that adopt an open banking system are more likely to see lower costs, better technology, and better customer service.
Open banking is attractive to clients as it provides them with easier and quicker access to more information. Open banking APIs facilitate easy fund transfers, evaluate consumer transaction data, and can compare product offerings to identify the best financial products and services for a consumer. Additionally, open banking systems can help lenders evaluate a client’s financial situation and risk level. The use of open banking APIs makes data more accessible to clients and their financial institutions, making data procurement much easier and faster.
The concept of open banking revolutionizing the financial industry, meaning established banks would be wise to adopt the new technology.

“Those who treat Open Banking as an opportunity to re-define and prioritize what value they add in the value chain will be thrivers, and will win, both short- and long-term”
“Traditional banks know that to compete [with newer, more technologically advanced banks] they must develop digital capabilities to avoid being dis-intermediated completely by new entrants with superior, more agile offerings”.

APIs: Application Programming Interfaces

An API, or Application Programming Interface, is a programming code (or set of codes) that queries data, analyzes appropriate responses, and sends instructions between softwares according to the analyzed data. APIs are often used in trading in the form of algorithms. For example, banks managing foreign exchange trades will use automated trading algorithms to determine a markup price between currencies; an API helps connect data from involved financial institutions to expedite the exchange of information.

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