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How are Open Banking APIs Disrupting Fintech and Banking Sector?


There is no doubt that fintech firms are disrupting the banking sector. Customers are beginning to rely more on the convenience and ease of use of digital services, which is adding strain on traditional banking institutions.

In 2018, there will be an even further shift towards Fintechs and new technologies with the implementation of the Revised Payment Service Directive (PSD2) throughout the European Union. This directive requires banks to open up data, functionality, and APIs to third-party companies offering financial services. PSD2 levels the playing field, giving fintech firms access to information that was once only available within the banking monopoly and giving them the ability to create services that are more agile and better able to meet customer needs. PSD2 has yet to take full effect and it is not exactly clear how exactly it will take shape but it is expected to create not only healthy competition but creative partnerships. While this particular directive is only being set in motion in the EU, it has consequences for global standards and practices.

In the past, traditional banks have only had to compete against other banks. Now, open APIs have brought new players into this sector. By allowing systems to talk to one another, open APIs have given fintechs the opportunity to develop innovative solutions built on top of the existing infrastructure.

This innovation is most notable in the area of payments. Individuals and businesses are able to use third-party apps to make and process payments that connect directly to the end-user’s bank account. The ability to provide these services in real-time has lead customers to expect the same level of transaction speed from all of their interactions.

People are no longer interested in dumping their money into a bank account and trusting the banks to handle all of their needs. They are looking for more control which is where the apps and services developed by fintechs are having a growing impact. Consumers want to decide for themselves on what happens to their money.

The benefits of open banking APIs

While it may seem at times to be an uncomfortable union, open banking APIs have created opportunities for banks and fintech firms to work together to deliver better services to a wider range of people.

Some financial institutions have expressed concern about allowing fintechs access to their data but they have also seen an opportunity to enhance their current offerings.

An open API allows a bank to access native fintech solutions in a plug and play type way. For example, the Experian Connect API allows customers to view their credit score, in real-time, through their existing bank account. This sort of partnership shows flexibility and makes a bank more appealing to current and potential users and helps it solidify its role in the value chain. 

And it is not just the actual financial side of things that banks can improve through open API, it is the customer experience in general. Closing a bank account, changing banks, or even submitting a change in address can be time consuming and frustrating. Because open APIs allow different systems to talk to one another, these processes become far more streamlined and easier for all parties involved.

Fintech companies have already found ways to make financial transactions easier. PayPal, for example has made peer-to-peer payments simple. To pay someone through a bank, the user would need to input a whole host of detailed personal banking information that slows and complicates the process.

Both sides stand to benefit from working together. Fintech firms can grow and develop their applications in new ways with access to customer data and the banks can use these firms and their apps to improve services, increase customer satisfaction, boost digital revenue and perhaps most importantly, stay relevant.

As customer data becomes more available, people on all sides of this have expressed concern over the potential for data breaches, fraud, and other cyber threats. When it comes to fraud and system breaches, machine learning (ML) is being used to detect abnormal behaviors. Starting with a random subset of data, the machine learns to detect fraudulent behavior, identifying the fraud and over time, predicting and preventing it.

How Open APIs, ML and AI are changing the entire system?

More than just being able to help with fraud, ML and artificial intelligence (AI) have the potential to transform the entire financial sector.

First, a wider range of available information allows for better marketing strategies. Being able to better target ads increases the chance that they will convert. This will not only improve the potential profits for financial institutions, it also provides them with a chance to improve their product offerings and services. ML can peruse customer data like spending habits, financial investments, risk tolerance and even financial goals. These insights can lead to proactive software and improve the quality of the guidance provided by financial planners and advisors. Instead of basing suggestions on irrelevant factors, banks will be able to look forward in a deeply personalized way helping customers avoid future problems and improve or maintain their current financial status.

This level of personalization will greatly improve customer experience. In the traditional system, it would take too long to learn the full ins and outs of a customer’s personal history and even more difficult to predict potential future behaviors. Machine Learning will give the customer better control and understanding of their financial status and it gives them the power to make informed decisions about the services they need or want. This transfer of power is perhaps the most profound change to the sector.

Customers no longer have to simply accept the products and services offered by the traditional institutions. Fintech firms have given them options. And now, with open API and all the developments made possible by Machine Learning and Artificial Intelligence, the entire industry is in the hands of the customer.

Open banking APIs have forced adjustments within the financial sector. Once considered to be in competition, banks and fintech firms are now creating partnerships that are poised to transform and revolutionize the entire industry.


Market Research Analyst, RapidValue 

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