The financial industry is in the middle of a period of rapid innovation. The sector has fully latched on to the digital revolution, embracing new technologies to help improve security and provide more value to customers. APIs play a crucial role in this evolution.

As financial technology (FinTech) startups have started to disrupt the industry, traditional banks have quickly moved to acquire or partner with them. Now, APIs have provided a new way forward for both parties through open banking.

What Is Open Banking?

Open banking uses APIs to share data between financial institutions, most often a bank and a FinTech service. Via APIs, FinTech developers obtain the data they need to create innovative apps and services that banks can then use to expand their offerings. This exchange moves away from the old banks-versus-FinTech dynamic, favoring partnerships instead.

With open banking APIs, banks and FinTech firms profit from each others’ resources instead of competing. The practice also promotes standardization, as a single platform can connect many financial institutions. Different banks across the globe can use these APIs to offer the same familiar services.

While this practice is relatively new, it’s already showing promising signs of growth. As of 2020, 24.7 million people worldwide use open banking services, and experts predict that number will pass 132 million by 2024.

How Open Banking APIs Are Changing the Finance Industry

As open banking APIs become more popular, they’re shifting the face of the finance sector. Here are three primary ways that evolution is taking place.

1. Faster Modernization for Banks

One of the most significant aspects of open banking APIs is how they enable rapid innovation. Finding and acquiring leading FinTech startups is an inefficient and expensive way to implement new technologies. If banks can connect to existing FinTech platforms through open APIs, they can modernize much faster.

Technologies like customer relationship management platforms can improve profitability and streamline processes, but many banks lack the experience to create or implement them effectively. Open banking enables them to connect their customer data to a platform developed by experts at another firm, delivering faster returns on investment.

As more banks capitalize on open APIs, the industry’s tech adoption will accelerate. More financial institutions in more areas will have access to cutting-edge technologies. This shift can improve customer satisfaction, open new revenue streams, and improve digital security.

2. New Business Opportunities for App Developers

On the other side of the equation, open banking APIs provide new opportunities for FinTech developers. FinTech investments have experienced explosive growth in recent years, bringing in $34.4 billion in Q3 2021 alone. That presents a promising market for new products and services, but it also means a higher threat of competition.

App developers can capitalize on banks’ open APIs to find new applications and customers for their products. Rapid innovation through open banking makes it easier for developers to find business. As these firms gain access to large banks’ wealth of data, open banking also opens the door to more technological development.

Smaller FinTech companies may have the skills but lack the data to create disruptive new technologies. Open banking APIs provide them with the data they need to move past these historical obstacles. They can then refine their current services and find opportunities for developing new ones.

3. More Services for Customers

While open banking APIs typically connect two financial institutions, they also benefit a third party: customers. For much of its history, banking has been a relatively inaccessible, expensive, and inconvenient industry. Open banking is transforming that by bringing FinTech and large banks together.

FinTech platforms typically offer more user-friendly services like mobile banking, biometric authentication, and integration with other apps. Open banking brings that accessibility and convenience to larger institutions with more customers. APIs then use these bigger companies’ data to refine these services and customize the customer experience.

While 81% of banking customers will switch financial providers for flexible banking and easy access, 46% of banks are unsure how to embrace digital, data-driven technologies. Open banking APIs provide the bridge they need to meet customers’ needs. As that happens, banking as a whole will become more accessible.

Remaining Obstacles

APIs are reshaping finance through open banking, but this shift still has some obstacles in its way. Banks, API developers, and FinTech companies should consider these challenges when approaching decisions concerning this technology.

1. Regulatory Uncertainty

The most prominent challenge with open banking APIs is a lack of regulations surrounding the technology. The finance industry is highly regulated, so sharing sensitive customer data with third parties will naturally raise some concerns. Until more unified standards emerge over this practice, some banks may be unwilling to embrace open APIs.

This issue will resolve with time, and it’s already fading in some areas — as of early 2022, 108 countries have open banking regulations in place or under review. Europe currently leads the rest of the world, with E.U.-wide open banking standards already in place and expanding, as directed by PSD2 regulation. The U.S. and Canada currently lack such legislation but will likely pass similar laws before long.

Developers and banks should keep a close eye on how these regulations develop. Even as new laws clarify open banking standards, there may be discrepancies between various countries. These could limit what APIs can do or how they should operate across borders.

2. Security

As with any data-centric process, open banking APIs also raise cybersecurity questions. While open banking platforms can provide banks with new security solutions, sharing data between parties introduces more risk. The APIs these companies use must have robust security measures to minimize the chances of a breach.

Financial institutions saw a 238% rise in cyberattacks amid the COVID-19 pandemic. APIs must offer more security controls to account for that worrying trend. That will likely mean enabling support for third-party security plugins, encryption, customizable permissions, activity monitoring, and penetration testing.

Regulatory guidance will likely include security standards for open banking APIs. Developers should aim to go above and beyond these minimum requirements to provide more security and assuage fears from banks and their customers.

Open APIs Are Transforming Banking

While challenges remain, open APIs have paved the way for a new era in banking. As open banking regulations create more widely accepted standards, this practice could help improve the industry for all involved. Banks, app developers, and customers alike can all benefit from open banking APIs.