Open banking apis

adminonDecember 17, 2022February 19, 2023Leave a Comment

What is an Open Banking API and how does it work??

Open Banking APIs are changing banking. The open banking initiative allows bank customers to securely share their account information with third-party providers (TPPs). This is achieved through application programming interfaces (APIs) that allow TPP programs to communicate with banks' applications. The goal is to foster innovation in digital banking and accelerate the development of new financial applications and improved services for businesses and consumers.

Open Banking was initiated in 2018 by the U.K. Competition and Markets Authority (CMA), which directed banks to open their applications to TPPs. In the same year, the European Union pursued the same goal by updating the Payment Services Directive (PSD2), while imposing new security rules for access to payment accounts and financial transactions.

A typical application of an Open Banking API is the aggregation of data from different bank accounts into a single view provided by a TPP application. There are two types of TPPs. Payment Initiation Service Providers (PISPs) connect to a customer's bank account and initiate payments on the customer's behalf. Account Information Service Providers (AISPs) connect to a customer's bank account to provide a financial service, such as e. B. the money management, offer.

Benefits of Open Banking APIs

Because one of the long-term outcomes of Open Banking will be increased competition, incumbent banks have been reluctant to get involved. Historically, they have competed with fintech companies to provide better financial services to their customers. But Open Banking actually offers banks the opportunity to explore new business models where they collaborate and partner with emerging fintechs and other banks, rather than trying to compete with them. And customers ultimately benefit, as Open Banking gives them more control over their transaction data.

It's a win-win for both the banking customer experience and financial institutions. Customers gain better access and control over their accounts and finances and can take advantage of new features and services. Financial institutions can offer enhanced services to their customers and participate in a revenue-sharing ecosystem. According to an Insider Intelligence article titled How open banking and bank APIs are boosting fintech growth, the research firm "forecasts the revenue potential in the U.K. generated by open-banking-enabled small and medium-sized businesses (SMBs) and retail offerings to reach $2 billion by 2024."

Banks, and therefore their customers, can be the big winners if they use open banking APIs to open up their applications to fintechs. A few benefits are:

Faster innovation: Fintechs can typically innovate and develop new applications and features faster than IT teams at established banks.
Increased revenue: fintechs are better positioned to take on and deliver technology build projects.
Detailed customer insights: fintechs can connect to banks' customer data to identify customer financial trends and patterns.
Personalized offers: Using customer financial trends and patterns, fintechs can improve customer engagement by offering personalized services and recommendations.

Examples of banks using Open Banking APIs include

Across the financial industry, some of the best-known and largest banks, financial institutions, lenders and fintech startups are already using Open Banking APIs to offer enhanced financial products and services. Here are a few examples:

Telefonica Deutschland's O2 Banking: Telefonica Deutschland has launched a mobile-only bank account that offers mobile number transactions, small instant loans, and better mobile data plans, built on the platform of German bank Fidor.
Wave integration of customer financial information: Wave billing and accounting software uses banking APIs to connect to a user's bank account and give its customers full control of their business finances in one place.

Open Banking initiatives

There are two main categories of drivers for open banking initiatives around the world: market-driven initiatives and regulatory initiatives.

In market-oriented environments, such as in the U.S. and some Asian countries like Japan, Singapore, India, and South Korea, regulators are leaving the initiative to the players – banks and TPPs – to implement Open Banking APIs. Many large banks in the U.S. have launched their own initiatives and are working with TPPs. In the U.S., for example, open banking is still largely based on screen scraping, where fintechs collect customer information from data displayed on the banking app screen, but the industry is expected to move to more secure and reliable APIs.

In regulatory environments, such as z. B. In the UK and Europe, initiatives have been driven primarily by PSD2. Hong Kong has also taken the regulatory approach, allowing financial institutions to choose which TPPS they work with.

Another point worth mentioning is the Open Banking approach in Australia. This is perhaps the most ambitious and innovative approach to Open Banking to date. Australia is going even beyond Open Banking, proposing an Open Data economy in which Australian citizens can require not only retail banking institutions to enable data sharing with third-party providers, but also with other companies such as z. B. Utilities or telecommunications companies.

Security risks associated with open banking APIs

Opening up banking applications to TPPs has risks that need to be addressed. Fraud prevention must be a top priority for all stakeholders. Frederik Mennes, head of OneSpan's Security Competence Center, breaks these risks down into three types.

First, financial institutions open their systems and share consumer data with TPPs. So it's up to the financial institution to make sure it only works with trusted TPPs. They cannot allow a malicious or unauthorized TPP to access their data.
Second, users of TPP-provided applications must be properly authenticated to prevent unauthorized access when they access an account in the bank. This may require additional authentication such as Strong Customer Authentication (SCA).
Third, the bank's IT infrastructure now essentially contains the IT infrastructure of the TPP. So if the TPP suffers a data breach or is otherwise compromised, the bank may also be affected.

How to protect banks from security threats

The first risk described above is that unauthorized TPPs will attempt to access the bank's accounts. To protect against unauthorized access of this nature, banks can require the TPP to digitally sign all requests. TPPs would have a public/private key pair with a corresponding certificate issued by a trusted certificate authority. This will allow TPPs to authenticate themselves when communicating through open banking interfaces.

To address the risks of unauthorized access to bank accounts, banks must use strong customer authentication and transaction monitoring as required by PSD2. Among other specifications, PSD2 mandates transaction authentication, where the level of authentication required to process a request depends on the risk level of the requested transaction. For example, after logging into online banking, a request from a customer to check their account balance can be processed seamlessly, but a request to transfer money may require the user to use stronger authentication.

PSD2 and its associated Regulatory Technical Standards (RTS) mandate that for a majority of online payments, including those made through Open Banking APIs, fraud monitoring should be performed and strong customer authentication (SCA) should be applied to. SCA must be applied to access payment account information and to any payment initiation, including transactions through Open Banking , unless an exception applies under the RTS. Waivers are not mandatory, but banks can use them if they choose to do so.

As part of open banking fraud analytics programs, solutions such as OneSpan Risk Analytics support the monitoring of events coming from a TPP running one or more open banking services via open banking APIs published by the bank. OneSpan Risk Analytics provides pre-built rule scenarios that cover PSD2 fraud monitoring requirements, business logic and typical fraud scenarios. These rules support digital banking channels, including Open Banking.

Open APIs required by PSD2 will lead to new, innovative banking services and apps. However, there is a risk that criminals can gain access to customer data and transactions. Banks and third party payment service providers need to be aware of these risks and provide adequate protection. Learn more in this blog: Open Banking APIs under PSD2: How to mitigate risk.

Strong customer authentication

To pass SCA, the customer must successfully authenticate using multifactor authentication (MFA). In the context of online payments under PSD2, this means that the customer must provide two of the three factors to authenticate them. The three factors are:

Knowledge: something the user knows, z. B. his password, PIN, etc.
Possession: something the user has, z. B. his cell phone etc.
Inherence: something the user is, z. B. Its fingerprint, palm print, etc.

There are three methods for performing SCA:

A redirect approach with the bank's web application
An embedded approach directly through the TPP application
A decoupled approach with the bank's trusted device mobile app

In the redirected approach, users are redirected to their bank's website to enter authentication credentials. In the embedded approach, the authentication process is fully automated, with users passing their credentials to a TPP that authenticates and initiates the payment in the background. In the decoupled approach, the second factor is provided via a different device than the one requesting the transaction.

Moving on to open finance

Open banking is still relatively new to the banking industry. But financial organizations are already talking about the next step – Open Finance. Open Banking initiatives are primarily related to payment accounts.Now is the time to apply the concept to all accounts so consumers can have a holistic view of their personal finances and financial data. There is no reason why the new services, techniques and benefits of Open Banking cannot be applied to other financial accounts, such as mortgages, investments, pensions and insurance.

As the name suggests, a microloan involves comparatively small amounts of money. As a rule, it is about three-digit sums, now and then also about money in the amount of 1.000 euros or a little more.

For most entrepreneurs, a microloan is sufficient to help them get their business off the ground. Since the risk for the lender is often high, the interest rates are also correspondingly high: They are almost twice as high as conventional installment loans. In order to mitigate the repayment risk, microloans are therefore often granted in groups. In this approach, only one person receives the desired sum at a time, while the others serve as guarantors. Only when a loan has been repaid in full does the next person receive their money, with the rest of the group of people again acting as guarantors.

What is a microcredit?

Although even low-income people in Germany usually live far above the standard found in developing countries, the granting of microloans has the same goal. Numerous people who see no future for themselves on the primary labor market and who have a promising business idea take out such a loan. This shows how important this form of development aid is, even in large industrialized countries. Even without the high existential pressure that weighs on large sections of the population in poorer regions of the world, microfinancing in this country is aimed at the same motto: Helping people to help themselves. Only in the way of granting resp. The terms and conditions of microloans in Germany and Europe usually differ slightly from the prevailing practice in India or Bangladesh.

Instead, the principle of the 19th century cooperatives applies here. Even in the early twentieth century, the motto was "one for all and all for one". Such cooperatives have lost none of their strength and offer many advantages to small entrepreneurs in particular. Whether it is an association with other companies from the same industry or the regional connection of companies: Through mutual support, all parties involved gain security and the likelihood that the microloan will be used sensibly and sustainably is greater.

How the microcredit came into being?

The idea of microcredit originated in developing countries. Individuals or groups who want to start their own business and thus secure their existence benefit from the credit model.

Microcredit first became popular in Bangladesh, where it was intended to enable the poorer sections of the population in particular to start a business. The idea for this came from Muhammad Yanus, who used such loans to z. B. enabled slum dwellers to move up the social ladder. A typical example of the type of use of a microloan here was, for example, the installation of a telephone connection. This could be made available by the owner thereupon to other people from the neighborhood for a fee. Simple business models with a one-time investment, like this one, could and can help many people in developing countries to improve their situation through microloans, which is why Muhammad Yanus was even awarded the Nobel Peace Prize for his commitment. His concept of microloans for business founders also proved to be a financial success. After a short time, he himself founded his own official financial institution: Garmeen Bank.

The terms microloans and mini-loans are often used as synonyms for microcredit because of the way they are referred to. However, these must be clearly distinguished from one another, as the microloan is intended exclusively for entrepreneurs in the start-up phase. Normal mini and small loans, on the other hand, are loans that i. d. R. be given to private individuals and have different terms and conditions. What these forms of credit have in common with microcredit proper is, at most, a small amount or a short duration.

The benefits of microfinance

An ordinary loan is not always the best choice when it comes to getting started in credit for the self-employed and freelancers. While interest rates are generally much lower than those found in microloans, the hurdles to obtaining such a loan are much higher. Also, the long maturities not infrequently represent too high a permanent burden for a small entrepreneur to bear. Again and again people get into a debt trap, from which they cannot find their way out by their own efforts. Microloans, on the other hand, are ideal for bridging a short-term financing gap. With single enterprises often already few hundred or thousand euro decide on the continuance of the company. Moreover, microcredit as development aid is not just a purely monetary transaction. In order to be able to really help the people, the earmarked allocation is usually accompanied by comprehensive consulting services, which are intended to support the new traders in building up their business. Market economy knowledge is imparted and entrepreneurial thinking is encouraged. Microfinance is to help women in particular in strongly patriarchal social structures to achieve greater security and independence.

The downside of microfinance

The fact that microcredits cannot be a miracle cure for poverty is already evident from the basic market-economy idea that also underlies this form of financing. In addition, the terms and conditions offered by microcredit providers now differ significantly from one another. Although microfinance has helped and continues to help many people, and in some regions has improved the standard of living of whole sections of the population, it is still a capitalist model and not a purely charitable one. Whereas the idea of helping people to help themselves was central in the beginning, more and more institutions are primarily concerned with their own profit prospects.

The main problem is usually the extremely high interest rates, which break the neck of many a borrower. The founder of a company is not always able to repay his debts, and so sometimes the security strengthened by the parallel involvement of several borrowers turns into social pressure, which the insolvent quickly feels. A few sad examples from Andhra-Pradesh in southern India show how dramatically such a situation can develop. Here, several women committed suicide after falling too far behind with their loan repayments. Since the claims expired with death, they hoped to protect their families with this step.

In 2018, Mexico's GDP was $1.2 trillion. (Image: Pixabay)

Given the tense situation between Mexico and the U.S., the emerging market faces significant challenges. MainFirst's Cornel Bruhin says investment opportunities in the energy and financial sectors can be found there, relatively independent of the U.S.

A new president, low growth in the first quarter of 2019 and tensions with the U.S. over immigration and trade: Mexico faces a number of challenges. Not least in view of the tense situation with the USA, many investors are currently rather negative about the markets in the Latin American country, says Cornel Bruhin, fund manager of the MainFirst Emerging Markets Corporate Bond Fund Balanced. However, he still sees interesting investment gems in Mexico – especially in the energy and financial sectors: "Oil and gas, electricity and finance are only slightly influenced by the US economy. Tourism as well as export business can even benefit from a weaker Mexican peso, as services and goods are mostly paid for in U.S. dollars, but their operating costs are in pesos", Bruhin points out. Thus, if you know the companies well, there may even be opportunities to expand positions.

In addition, the U.S. and Mexican governments have reached an agreement based on a deal negotiated over the past several months. Even if Trump threatens tariffs again, he said they are unlikely to be imposed. Because they would hit U.S. consumers significantly, and the U.S. auto industry would suffer especially, Bruhin said. In addition, Mexico is the third largest trading partner of the U.S. and tariffs would also jeopardize the new United States-Mexico-Canada Agreement (USMCA), he adds.

Heavyweight among emerging markets

Overall, he says, Mexico is increasingly becoming a heavyweight among emerging economies. Its gross domestic product was $1.2 trillion in 2018, putting the country in 15th place, just behind Australia at $1.4 trillion. Mexico is also one of the big players in the export business and has free trade agreements with 46 countries, more than any other country. It produces and exports the same amount of goods as the rest of Latin America combined, and: "Mexico's main exports are not raw materials, but manufactured goods such as cars, electrical appliances and computers.", Bruhin emphasizes.

In recent years, he said, many reforms by the previous president, Enrique Pena Nieto, helped reduce dependence on oil – it used to be ca. 40 percent and now only 20 percent of government revenues. The new President Andres Manuel Lopez Obrador, or "AMLO" for short called, wants to drive this development and plans to build two new refineries, renovate six existing ones and spend 4 billion. Provide U.S. dollars for new exploration. "These investments are urgently needed to restore margins and boost production", explains Bruhin. AMLO's goal, he said, is to increase production from the current 1.9 to 2.5 million barrels per day within two years.

Exploiting tensions

Investment opportunities in Mexico that are relatively independent of the USA can be found, for example, in the energy sector. The company Saavi Energia is the fourth largest independent energy producer in Mexico and has been active in the market for over 20 years. The majority are commercial and industrial customers, 92 percent of whom remain in Mexico. This makes cash flows quite stable and predictable. The yield on the recently issued bond is currently 6.3 percent.

The financial sector is also home to interesting, innovative financial companies such as AlphaCredit and Unifin Financiera, which give borrowers access to credit online and generate returns of over 10 percent. "As active managers and value investors, we keep seeing gems here and will analyze whether we can use the tensions as buying opportunities", says Bruhin.