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A comprehensive guide to open banking for software companies: Covering its fundamentals, the transformative power of APIs, the intricacies of AIS & PIS, the implications of PSD3, the state in the EU, safety measures, and bridging to the open finance frontier.
What Is Open Banking?
Open banking is the regulated practice of sharing financial data between different financial institutions, third-party service providers, and customers. This provides transparency around an individual’s or entity’s financial situation, and enables seamless financial interactions. Open banking releases the control banks previously had over their customers’ financial information. In doing so, it allows consumers and businesses alike to benefit from a much broader range of services.
Open banking is facilitated via APIs (application programming interfaces), which enable secure sharing of financial data between all the different parties. This opens up a myriad of opportunities for TPPs (third-party providers) to develop and offer innovative new products, without compromising customer data security.
What Are the Benefits of Open Banking?
Open banking benefits both consumers and businesses by joining up their financial landscapes. This facilitates easier financial management and A2A (account-to-account) transactions. With customers no longer restricted to their own banks’ digital services, they can utilize the full range of financial applications available.
These bring benefits such as:
- faster, cheaper transactions with less room for error
- easier opening of new accounts
- greater efficiency
together with a host of other conveniences made possible through having a comprehensive view across all banking-related matters.
At the same time, open banking adds the reassurance of enhanced security and control. This is because open banking is built on robust security protocols and encryption standards that ensure consumers have control over the data they share.
Market for fintech innovation
For software companies that want to get in on the action, open banking presents an extensive international market for innovative new applications. By embedding open banking APIs in their own solutions, accounting software editors can enable a variety of services, such as automatic accounting or streamlined invoice reconciliation. With authorized access to financial data from banks and other financial institutions, accounting software editors can develop new products that provide end users with valuable insights, personalized experiences, and improved financial management capabilities.
What are open banking APIs?
Open banking APIs (application programming interfaces) are sets of rules and protocols that allow authorized third-party software developers to securely access and interact with financial data and services provided by banks and other financial institutions. These open banking APIs, which are developed by banks, allow third parties access to account information and payment initiation.
By enabling the exchange of information and functionality between different systems, open banking APIs open the door to collaborative development of new applications and services within the open banking ecosystem.
Different API formats within the EU
Open banking APIs must adhere to an industry standard protocol. However, there is no single mandatory standard or data format throughout Europe for how APIs are executed. So, while software developers can leverage open banking APIs to realize a wealth of opportunities, they ideally also need to team up with a pan-European open banking aggregator to harmonize the differences between the various banks’ APIs.
What are AIS and PIS?
AIS (Account Information Service) and PIS (Payment Initiation Service) are open banking functionalities defined within PSD2 (the Second Payment Services Directive). Performed by APIs, these are the gateways to obtaining financial information and initiating payments, and also the basis on which additional services can be developed.
AISPs aggregate and provide access to customers’ financial information, including account details, transaction history, balances and more, from all their different accounts. This data may then be used as input for all kinds of applications for:
- automated accounting
- invoice management
- payment reconciliation
- personal finance management
- budgeting
- financial analytics
- account aggregation
PISPs initiate payment transactions directly from users’ bank accounts, without the need for a credit or debit card. This can be added to with applications or services for:
- invoicing
- obtaining secure online payments
- direct transfers and other payment options
Both AIS and PIS present an abundance of opportunities for accounting software editors to develop and offer innovative complementary products. However, AISPs and PISPs are subject to regulatory oversight and must be licensed in accordance with PSD2’s strict security and data protection requirements.
What Is PSD3 and Its Main Impacts for B2B and Open Banking?
Open banking in the EU is currently governed under PSD2. PSD3 is a proposed evolution of PSD2 put forward by the EC (European Commission) on 28 June 2023.
This revision of the Directive will:
- allow PSPs to share fraud-related data between them
- allow e-money providers/wallets and payment institutions to directly access the clearing and settlement payment system
- recognize the role of API aggregators
- recognize the advent of premium APIs and the need for all parties to have a sustainable business model
A new Payment Services Regulation
The PSD3 proposal is complemented by a new PSR (Payment Services Regulation). This PSR will apply throughout the EU, and therefore eliminate the need to transpose certain rules into national law, harmonizing many rules which currently differ across Europe.
The PSR will place several new obligations on PSPs, including the requirement to perform IBAN Name validation for all regular credit transfers and to provide PSUs with a dashboard where they can see who has access to their bank account.
Current Status of Open Banking in the EU
According to Konsentus, the European open banking market is showing signs of maturity and consolidation. Findings for Q2 2023 from their Third Party Provider Open Banking Tracker include a decrease in the number of TPPs since Q1, driven by smaller entities exiting the business or shifting their strategic focus.
Is Open Banking Safe?
With its strong emphasis on security and data protection, implemented through strict regulatory guidelines, open banking is considered very safe for all parties involved.
Stringent security requirements mandate the use of SCA (Strong Customer Authentication), secure APIs and protocols, and robust data protection measures. By putting users in control of permissions, open banking creates an environment that users and businesses can trust.
How Can Software Companies Enter the Open Banking Segment?
To develop viable open banking products, software companies need to:
- Gain a clear understanding of open banking principles and region-specific regulations
- Identify relevant opportunities and use cases
- Establish relationships with financial institutions
- Develop secure products that handle sensitive customer data properly
- Stay up-to-date with evolving regulations and standards
Managing complexity
For software companies that prefer to focus on their core competence, the solution is to partner with a PSD2-licensed open banking aggregator, such as Ponto, that takes care of regulatory compliance, harmonization of different APIs, and integration of different accounting automation formats.
What Is the Difference Between Open Banking and Open Finance?
Open banking is essentially a subset of open finance. While open banking covers the sharing of customer banking data with authorized TPPs, open finance is the broader concept of sharing and integrating financial data from multiple sources including investments, insurance, lending, payments, and other financial products and services.
Open finance promotes interoperability and integration among various financial institutions and services to enhance consumer control, convenience, and personalized experiences, giving customers a holistic view of their financial lives.
By comparison, open banking aims to foster competition, innovation, and consumer choice specifically within the banking sector. This is achieved by enabling authorized third parties to develop innovative services and applications using the data provided.
A broad spectrum of opportunities for software developers
Open banking and open finance share the same ideals of promoting increased data access, collaboration, and innovation within the financial industry. This means open finance is another hugely attractive area for accounting software developers to get involved with, as automation of accounting activities will require integrations with an increasing number of data sources such as:
- payment service provider (PSP) information
- credit card statements
- payroll slips
- expenses
- sales and purchase invoices
- information about savings and investment accounts
