Open Banking explained: Everything you need to know

10 min read
Guide to Open Banking

Open Banking is a financial service term that refers to a new era for the financial industry. It opens the door to innovations and serves consumers and their needs while maintaining a strong focus on security.

In this guide, you’ll find all the most important information about Open Banking, including the definition, examples, and benefits. We’ll also cover how companies can make the most of open banking with kevin.’s help.

What is Open Banking?

In simple terms, Open Banking describes a practice of banks sharing various data with regulated third-party service providers. Banks provide access to consumer banking, transaction data, and other financial information. This data is shared via secure application programming interfaces (APIs).

The goal of Open Banking is to improve financial services for consumers. Opening up the data that legacy banks have historically kept in-house creates new opportunities. Open Banking makes more space for new companies to step into the market and offer new, innovative products that benefit consumers.

It’s important to note that all the mentioned data is only shared once a customer chooses to share the information.

Opening the data creates different opportunities for involved parties:

  • Fintech companies now have all the needed data and tools to create innovative products and services;
  • Merchants can use the solutions offered by licensed financial service providers to improve their financial tools and payment flows;
  • Consumers enjoy more opportunities for spending, borrowing, and investing their money.

How does Open Banking work?

Traditional Banking vs Open Banking

Open Banking uses application programming interfaces (APIs) for data sharing. Before we move on to explain how it works, it’s important to understand how APIs work. In simple words, APIs are a way for software to communicate with other software and exchange information.

In the case of Open Banking, banks give their APIs to authorised financial service providers. These APIs contain various pieces of information, such as an account holder’s name, account type, currency, transaction history, etc. This information is only made available to the third-party service providers once the account holder explicitly agrees to share the data. Consumers usually give their consent via an online form by agreeing to terms and conditions.

Once the consumer agrees to share their data, the third-party service providers can access the relevant shared information via APIs. Building and implementing the APIs are up to banks.

What is an API in Open Banking?

In Open Banking, banks share their application programming interfaces (APIs) with authorised third parties in order to exchange financial information about their consumers. Fintechs and other companies use this data to develop new applications and services to improve customer banking experience.

Under the European PSD2 legislation, all banks must provide qualified third parties with automated access to customer financial information. APIs are used to create secure communication between online banking systems and third parties.

What is an example of Open Banking?

Merchants and consumers already widely enjoy the benefits of Open Banking. Here are three of many examples of the new opportunities it has created:

1. Payment initiation service (PIS)

Thanks to Open Banking, companies can use payment initiation services to offer a better checkout experience to their customers. Online payment gateway service providers stepped into the market and remarkably improved the checkout flows.

For example, previously, consumers often had to pay for goods by making an online transfer from their bank account. To do this, they would have to open a number of different tabs, copy and paste or even type in account details to make the payment. Such a payment flow was inconvenient, risky, and time-consuming.

With Open Banking, fintech companies created convenient payment initiation services. These innovative solutions allow consumers to pay for goods securely and in just a few clicks. Improved payment flows also increase sales, since fewer shoppers abandon their carts due to a cumbersome payment process.

2. Account information service (AIS)

Open Banking allows loan providers to access information from different banks quickly. In the past, if someone applied for a loan, the lender would have to gather heaps of information about the person’s financial history. It would take a long time to collect the data, and it would require resources from all the parties involved: the lender, banks, and the applicant.

Banking APIs make the process much easier. The lender can digitally request information from the bank’s APIs and receive it in seconds with the applicant's permission. The process becomes much faster and requires significantly fewer resources than before.

3. Fewer transaction fees

Consumers rarely think about the fees that merchants need to pay in order to accept card payments. Each card transaction can include up to 15 different fees, which can inflate the cost of goods and services.

To avoid these fees, merchants in physical stores sometimes have to make difficult decisions. Some shops would choose not to support card payments altogether. Others would set a minimum charge or ask consumers to pay extra for card payments. Online merchants would ask clients to make money transfers from their bank accounts, leading to a set of steps that we’ve already discussed.

Open Banking paved the way for account-to-account (A2A) payments that allow shoppers to pay for goods and services directly from their bank account. Consumers can even link their bank account to a merchant’s app or a web page and make payments in one click. Paying directly from bank accounts removes all the card processing fees and benefits both merchants and consumers.

Why do we need Open Banking?

For many years, banks have been some of the most legacy-burdened industries. While many people appreciate conservative approaches when it comes to finances, the situation has mostly benefited the largest banks and not the consumers. There was no place for innovations in the banking industry.

Open Banking is a breath of fresh air compared to legacy banking. It opens the door to well-needed innovations in the financial industry and moves it from stagnation. These are the main reasons why we need the new banking system:

  • It creates more competition for banks and challenges them to offer better products and services for a better price;
  • It shifts the focus from generating funds for banks to improving the customer experience;
  • The new way of banking allows more space for innovations and encourages companies to find solutions to long-running issues.

What are the benefits of Open Banking?

Benefits of open banking

Open Banking has a lot of different benefits for both businesses or financial institutions and customers, but the main ones are:

  • Better customer experience;
  • New revenue streams;
  • Sustainable service model.

Benefits for businesses

Access to data — The new system has democratised the space that has been long-ruled by legacy banks. Fintechs and other companies can now access the same data as big banks, which creates fairer opportunities for businesses of all sizes. Even the smallest companies now have the tools to join the competition.

Better customer engagement — The data that Open Banking makes accessible allows businesses to provide personalised offerings to their customers. Analysing the data helps make relevant suggestions to different clients based on their financial habits, and this way increases client engagement.

Benefits for consumers

Centralised information — Open Banking made it possible to track financial information in one place. All the financial data can now be accessed via one app, allowing users to make informed decisions and deal with personal finances better. This way, consumers gain more control over their finances.

Client experience — Since the introduction of Open Banking, nearly every big bank has created a mobile app, digitalised a large part of their services, and drastically reduced the waiting time for their clients. At the same time, fintechs have introduced various solutions that improve payment flows, make money borrowing easier, and simplify investing money.

Innovative solutions — Many solutions that have been developed thanks to the new banking system benefit consumers. Quicker checkout flows, easier mobile payments, and digitalised banking services have been brought by Open Banking. We can only imagine what great innovations are coming up next.

Open Banking regulations

Open Banking regulations vary from country to country. For example, European regulations follow the Regulatory Technical Standard (RTS) that has been published by the European Banking Authority (EBA) and the European Central Bank (ECB).

The most important Open Banking regulations in Europe are the requirements for:

In Europe, all the developed APIs have to be approved by the authorities. They ensure compliance and guarantee privacy and security by controlling and monitoring data sharing.

What is the difference between Open Banking and PSD2?

Open Banking and PSD2 aren’t synonyms. The former is a concept that began the revolution in the banking industry by requiring banks to open up client banking data to authorised third-party service providers.

The revised payment services directive, or PSD2, is a regulatory EU legislation that defines the application of Open Banking. This legislation ensures that the customer’s financial data is being shared securely.

PSD2 covers three types of services: payment initiation services, account information services, and confirmation of funds. The legislation only applies to countries in the EU and European Economic Area (EEA).

While the two terms are often used interchangeably, they’re quite different. In short, PSD2 opens up the door for Open Banking to securely enrol in Europe.

Is Open Banking safe?

Security is at the core of Open Banking, and everything that revolves around it has been built with maximum security in mind. This applies to everything from the APIs to all the related data handling.

European Open Banking has implemented strong customer authentication and consent management features to ensure security. Most banks and financial institutions have additional features to identify fraudulent activities. For example, kevin. has integrated robust security features that can protect businesses from online fraud.

Sharing sensitive data that was long kept under nine locks may sound like a recipe for disaster. But since everyone was aware of the risks, Open Banking was developed with extra attention to security.

For example, companies that seek to gain access to consumers’ financial data are obligated to undergo thorough checks. Third-party service providers must demonstrate their security to banks before exchanging any data. When asking to access it, companies must also inform consumers how and for how long their data will be used.

Not only is Open Banking safe, but the APIs create transparency and give customers more control over their financial data.

Find out more about this topic here: Is open banking safe?

Screen scraping vs Open Banking

Screen scraping is a method for accessing financial data. It involves collecting and storing consumers’ data from a website without the financial institutions’ knowledge or permission. In some countries, this practice is illegal.

Open banking requires consumers’ explicit consent to access their financial data. This consent can be revoked at any time.

The key difference between screen scraping vs open banking is consent. In open banking, customers can revoke their permission to access their data at any time. In screen scraping, consumers must change their login details to secure their accounts. Open banking is more secure and gives consumers more control over their data.

Read more about screen scraping vs open banking.

How Open Banking helps scale your business

Open banking can help scale your business in several ways:

  1. You can expand your consumer base by providing access to financial services that were previously only available to financial institutions;
  2. Open banking enabled a quick and easy way to pay for goods or services directly from a consumer’s bank account. This payment method can increase conversion rates and boost your revenue;
  3. Additionally, open banking enables financial institutions to manage small business processes more efficiently. It provides institutions with access to small business financial data.

Find out more about this topic here: How open banking helps scale business.

What is Open Finance, and how it differs from Open Banking

Open finance covers a much larger scope than open banking, which is their main difference.

Open banking refers to the use of APIs in order to access financial data and initiate transactions. Open finance encompasses a larger range of financial services and products and can go beyond banking. Open banking and open finance share a common goal - to provide consumers with more control over their financial data and who can access it.

Currently, open finance is still in the early development stages, while open banking has a legal and regulatory framework.

Dive deeper into this subject and read our blog post - What is open finance, and how does it differ from open banking?

The fast growth of Open Banking popularity

Open banking is becoming more and more popular. The UK recently reached a milestone of 7 million active open banking users in the country. Various reports predict that card payments will decline and the usage of other payment methods will increase, including direct bank payments.

Direct bank payments feature many benefits that make them a more attractive payment option than cards. Account-to-account payments offer an improved payment flow, which can increase conversion rates and make transactions more secure. This payment method is more efficient and convenient than traditional card payments and can help companies save money.

To learn more, read our blog post Open banking - a growing challenge for card networks.

What are the main misconceptions about Open Banking?

Open banking is surrounded by many myths. Here are some of them:

  • Open banking can cause risk to consumer data security;
  • This practice is the end of traditional banking;
  • It’s bad for banks;
  • Open banking data can be shared without explicit consent.

All of these statements about open banking are myths. Open banking’s goal is to provide consumers with more control over their finances and make data sharing more secure. Financial institutions can never share any data without explicit consumer consent.

Read all Common myths about open banking.

Open Banking: buying vs building

Companies can choose between purchasing a ready-to-use open banking solution and building it in-house.

Buying a solution is convenient and saves time and financial resources. Building an in-house solution can provide more control and customization. But it also requires a lot of time and financial investments, as building relationships with various banks and acquiring relevant licenses can take a long time. The final cost of the in-house solution is also hard to predict.

Whether to buy an out-of-the-box solution or build one inside the company depends on many factors and will ultimately depend on your business needs and resources. But comparing buying vs building will help you make an informed decision.

Find out which option can benefit your business the most - Open banking: buy vs build.

Making the most of Open Banking with kevin.

kevin. is one of the best examples of how Open Banking can benefit companies and their consumers all around Europe. Since 2018, we have offered innovative payment solutions with maximum security for a fair price - something that traditional banks haven’t been able to offer their clients.

Moreover, kevin. covers different types of payments by offering innovative solutions for mobile, web, and point of sale payments. With kevin., every company can benefit from the new ways of banking by giving their clients the best customer experience.

kevin. provides payment infrastructure to companies of all sizes and all across Europe. Read our blog to find out how Decathlon, the world’s largest sports goods retailer, is already reaping the fruits of Open Banking and has managed to cut the abandoned cart rates by half with kevin.

Frequently asked questions

What is Open Banking?

Open Banking is banks sharing consumer data with authorised third-party service providers. The data is shared via APIs and is only accessible once consumers give explicit consent.

Who regulates Open Banking?

Open Banking has different regulators in different countries. For example, in the UK, it's regulated by the Financial Conduct Authority (FCA). In the EU and EEA, it follows regulations drafted by the European Central Bank (ECB) and the European Banking Authority (EBA).

Why is Open Banking important?

Open Banking is important because it revolutionises the banking industry by opening the market to more financial companies. It increases existing revenue streams and expands customer reach for financial institutions while placing the customer and security at the core of the service.

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