Open banking had an estimated market size of $25.14 billion in 2023 and is expected to grow 27.4% by 2030.
This technology is reshaping financial services for individual consumers and businesses alike. From its earliest introduction in 1980 to its recent widespread adoption, the products and software you use are built on, influenced by, and improved with open banking.
But what is open banking and how can you maximize its impact on your business? We’ve got the answers you need.
What is open banking?
Open banking is a new wave of financial practices that allows service providers to access and create banking information and transaction data in traditional banking systems for their customers.
Providers use APIs (application programming interfaces) to send and receive transaction information with existing bank systems. By accessing transaction and account information, platforms like payment processors, budgeting apps, invoicing tools, and accounting software get seamless, automated imports of up-to-date financial information.
As a result, customers get stronger, hands-off finance tools that require less manual labor and offer greater, data-driven insights.
What is an open banking API?
APIs are computer-based systems that allow information to be passed from one platform to another. The API defines what level of access the software is allowed access to and passes only that information along.
Think of APIs as a self-service kiosk. The kiosk knows all the information it has to offer and provides a way for users to request it in a limited, but functional, way. You can use a self-service kiosk to order a large fries, but you can’t request an exact count of how many fries you’d like, the recipe they use, or who made your fries.
In open banking, APIs provide limited access to financial information through a pipeline of requests and provisions. The API a software uses will define what information it can request, much like the kiosk.
For example, a budgeting tool would use an API that accesses transaction data, but its unlikely to be granted access to create transactions. A payment processor would be the opposite, having access to create transactions but not the entire transaction history.
Platforms have their needs serviced with one of three main types of open banking APIs:
- Data APIs provide read-only access
- Transaction APIs can create transfers like payments and direct debits
- Product APIs allow third parties to display financial products as offered by banks, like comparing mortgages or credit cards
How open banking works
Open banking starts with financial institutions developing APIs that grant developers access to information with the consent of its customers. The API defines what sort of requests can be made, ranging from read-only access to the ability to initiate new transactions.
Once access has been granted, information is seamlessly passed on from the financial institution to the platform.
These pipelines of communication are restricted and regulated. No platform will be granted access to information the user hasn’t consented to.
The European Union led the way in regulating open banking with its revised Payment Services Directive (PSD2) in 2018. Despite Brexit, the United Kingdom kept the revised practices, however, oversight has been passed on to the Open Banking Implementation Entity (OBIE).
North America has yet to formalize regulations on open banking. The Consumer Financial Protection Bureau (CFPB) released its final rule in early 2024, but it hasn't been published.
Open banking APIs are still active at this time. Data is kept secure through encryption, nothing can be shared without your consent, and connections can be revoked at any time.
How do banks use open banking?
Banks are using open banking to offer customers a better experience, innovative new technologies, and greater access than ever before.
Providing seamless access to account information
From accounting software to payment processors, multiple parts of your tech stack leverage open banking to make your day-to-day life easier.
Banks are developing APIs to make your account go further. Now it’s powering your financial reporting, making seamless payments, giving you spending insights, providing you access to credit, and automatically reconciling invoices.
Investing in partnerships and collaboration
Banks work with third-party developers and fintech companies to expand their service offerings to their clients.
It even goes so far as to have Banking as a Service (BaaS), banking products offered by third-party providers built on the bank’s infrastructure.
This means the bank’s customers are being offered a wider range of services without the bank having to develop anything in-house. New account and credit offerings, better platforms, and brand-new apps are all being developed on the back of open banking.
Streamlining credit applications
Loans, lines of credit, and credit cards all require a thorough review of the applicant’s financial history. Open banking makes it easier to aggregate financial information and get the full picture.
Credit aggregators start by using APIs to gather offerings from different banks. These platforms make it easy to compare rates, terms, and features across different offerings.
Once you’re ready to apply, open banking APIs simplify applying by passing through information from any accounts you connect.
You benefit by getting a better comparative marketplace and an easier application process.
Building digital-only banking platforms
Digital-only banks give you all the access and features of a brick-and-mortar bank. However, instead of physical locations, you get access to specialized apps, lower account fees, and a more robust set of online account features.
Innovating the financial services space
Open banking is still relatively young when you look at the overall timeline of banking. Still, the changes have shaken what banking does for its customers at its very core.
Business owners save time on writing checks with automated payroll, monitor budgets with real-time expense levels, and send payments halfway across the world with the click of a button.
But this is just the beginning. With the expansion of the fintech industry, new minds are leveraging open banking to redefine financial services. It’s possible that the biggest shakeup is still yet to come.
Open banking examples
Open banking is a part of a wide array of tools used by businesses to save time and streamline workflows.
Some examples of where open banking is used include:
- Payment services: Payment platforms use open banking to set up a transfer of funds; you may also be using a payment provider that uses open banking to pull funds directly from the bank accounts of your customers.
- Budgeting tools: Platforms like Emma and Lumio use open banking to import transaction information and categorize expenses in real-time.
- Accounting software: Accounting tools like QuickBooks and Xero connect with bank accounts to automatically import transactions and confirm balances saving you time on reconciliations and audits.
- Invoice reconciliation: Invoicing tools like BILL match invoice payments to bank transactions so your accounts are up-to-date and audited.
- Access to credit: Creditors do a more robust credit check by accessing all necessary information through an open banking API, speeding up the process from application to approval.
- Digital-only banks: New banking services are launched using APIs to access and build off of an existing bank’s infrastructure, with fewer fees and lower costs.
Benefits of open banking
Open banking is already powering much of the financial technology businesses use today, meaning you’re already benefiting. But you should look to maximize the return on this tech by making changes that leverage these benefits.
More innovation in financial tools
With open banking APIs, fintech companies have access to resources that give them a head start on building on an idea.
More development in the fintech space means more innovation. New apps, software, digital-only banks, and processes are changing the way businesses understand and manage their finances.
If there’s a pain point in your workflows, there’s a chance that someone will develop a tool built on an open banking API that takes it completely off your plate.
Streamlined workflows
Open banking saves time on manual processes.
Whether it’s reconciling accounts or sending a payment, you don’t need to jump into another platform to do your work. An open banking API is used so your work is automated or done in the same tool, saving you precious time on menial tasks.
Complete financial reporting
Account aggregation tools (like accounting platforms) give an overview of all bank accounts and credit cards in a single place.
There’s no worrying about whether the latest transactions have been reconciled or whether the balance is updated. Instead, you get the insights you need when you need them.
Now you can see every transaction, every balance, and every amount owed in a single spot for quick analysis and planning.
Fewer errors
There’s always a risk of human error with manual entry. But with open banking, you get peace of mind that each detail is imported accurately.
Every financial professional knows the pain of searching for the dollar or cent that throws off the balance. But those days are a thing of the past when transactions automatically import and are checked against bank account balances.
That’s fewer audits looking for a needle in a haystack and more confidence in your checks and balances.
Risks of open banking
Open banking is still in a place of change. As you look to use the technology more, be mindful of these challenges and how they may impact your business.
Changing regulations
In the United States, open banking regulations haven’t been set and may change in the coming years.
When regulations are finalized and implemented, it could make some of the tools built on open banking APIs redefine their usage. Some tools may need to be rebuilt or redefine their services entirely.
Such a dramatic shift isn’t expected given how regulation has been implemented in Europe without disruption. But it’s something to keep in mind as you’re implementing tools with open banking into your tech stack.
Privacy and security risks
Open banking APIs are built with security in mind. However, the more places financial information is housed means more vulnerabilities for the business.
For example, if a business is using five different platforms that leverage open banking, that’s five different platforms that hold your financial data and sensitive information.
It’s important to take time to vet platforms before consenting to connect bank accounts. Look at user reviews and search for any past security breaches that have come up. Only consent to give your information to platforms that you trust holding it.
User awareness and education
Users are consenting to open banking practices and may not be aware of what they are signing up for or how much permission they’re granting.
A 2017 study by Deloitte showed that 91% of users don’t read the terms and conditions of the platforms they’re using. With open banking, this means users aren’t clear on what they’re consenting to and how their information is being used.
As the landscape continues to shift, you must take time to understand the platforms you use and how they’re using your data. If you choose to move on from a platform, always review to ensure you’ve properly revoked their access to your information.
Lack of standardization
Banks build their open banking APIs on different frameworks, creating variation in implementation and integration.
There’s a wide range of quality in banking APIs and the applications that use them. Your experience with a platform given your bank may be completely different from someone with an account at a different financial institution.
In some cases, integrations for specific providers may break resulting in long troubleshooting sessions to get things running again. At worst, your bank could become incompatible with the tools you use because a small change didn’t work with their API.
How to make the most of open banking
Once you’re primed on the ins and outs of open banking, it’s time to figure out how to maximize its positive impact on your business.
Take the following steps to make the most of open banking:
- Get a clearer picture of your finances: Use account aggregation to keep a constant pulse on your financial health. Save your time jumping through accounts and spend more time understanding your finances.
- Make (and stick to) data-driven budgets: Leverage spending insights to learn how your expenses change over time and create budgets. Track spending against your goals in real time and know when an adjustment is needed.
- Streamline the payment process: Start accepting and making payments directly from bank accounts with ease. Turn payments into a one-click process done directly from an invoice or bill.
- Automate your accounting: Connect bank accounts to your accounting platform to automate account reconciliation and keep reporting up-to-date.
- Have a better credit application process: Businesses looking for a loan, credit card, or line of credit can easily apply with open banking providing all the information needed. Credit comparison tools make it easy to compare options and make the best choice for you.
Better payments with open banking
Streamline workflows and make accounts payable and receivables easier with open banking and BILL. Our platform helps turn invoices to payments with a single click, from domestic ACH payments to international wire transfers.
By confirming transactions against bank activity, all incoming and outgoing invoices are reconciled and matched without having to lift a finger.
Reach out for a demo and see how we can save you both time and money.
