What is an API in open banking?

APIs allow two applications to talk to each other. Read on to find out how they make open banking possible.

Some have said that application programming interfaces (APIs) are the foundation of open banking. It certainly is hard to imagine modern open banking without them. APIs are a kind of software that allows two applications to talk to each other. In open banking, they make possible the sharing of information between a bank and the third parties that provide financial products and services to the bank's customers.

APIs provide a secure method of communication between an online banking system and another party. They provide access to personal bank data that allows developers in the financial technology (fintech) industry to build applications tailored to the financial institution and its customers. Many of these applications expand banking services well beyond what a financial institution would be capable of providing its customers on its own. Thus, it is easy to see how APIs can help banks develop new business markets and generate new revenue streams through third-party partnerships.

Open banking APIs may be classified into private APIs, partner APIs and open APIs. The customer's financial institution implements and maintains private APIs on its own networks. Business partners of the financial institution can build partner APIs. Open APIs provide information to third parties that aren't partners of the financial institution and don't work directly with them. Using that information, those third parties can build applications that put them in a position to become partners with the bank.

APIs have become particularly important to open banking in the UK, where banks are legally required to share account information with authorized third parties such as account aggregators and payment initiators. No such legal requirements exist in America, but U.S. banks already are taking the initial steps toward developing open-banking platforms.

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