What Is Open Banking? A Guide

Open banking is ushering in a new era of connectivity for the financial industry.

By enabling secure data sharing between financial institutions and third-party providers, open banking transforms how consumers and businesses manage their finances.

For businesses, this framework is an opportunity to launch innovative services and improve financial decision-making. And with the value of global open banking transactions estimated to reach $330 billion by 2027, its influence on the financial landscape will only grow.

However, open banking does introduce certain challenges, from data privacy concerns to evolving regulatory demands. So, to capitalize on the potential of open banking, you need a clear understanding of how it works — and how it can benefit your business.

Open Banking Definition

Open banking is a financial services model that enables financial data sharing between consumers, financial institutions and authorized third-party providers through secure application programming interfaces (APIs).

Previously, data was siloed within individual financial institutions, making it difficult to exchange information securely and collaborate across platforms. Now, businesses and consumers can give consent to third-party providers to access their financial information, creating opportunities for more personalized and efficient financial experiences.

How Open Banking Works

Open banking relies on APIs to share financial data between financial institutions and authorized third-party providers. These APIs dictate how applications communicate to ensure data is requested, transmitted and received securely.

For example, a personal finance app could use APIs to retrieve a user’s transaction history in real time. Or a payment processing API might allow an e-commerce site to offer direct bank payments at checkout.

Let’s take a closer look at how APIs support various business functions:

B2B Payments API

B2B payment APIs streamline the B2B payment process by enabling secure, real-time data exchange between payment processors, businesses and financial institutions. Businesses can offer flexible, integrated payment options to accelerate vendor payment timelines while reducing manual processes.

Embedded Commerce Platform API

Embedded commerce APIs help developers integrate financial services into non-financial applications with less complexity and cost. For example, an online retailer can embed payment processing and recurring billing features into their e-commerce platform. This allows customers to set up automated payments while improving cash flow predictability for the merchant.

Commercial Payments API

Commercial payment APIs help businesses automate the accounts payable process. These APIs support buyer and supplier management, custom file mapping and customizable alerts to reduce processing costs for B2B transactions.

SMB Payments API

Payment APIs for small and mid-sized businesses provide comprehensive support to streamline financial operations. Businesses can access instant card proceeds, manage transactions and offer flexible payment options — even to vendors who don’t accept certain payment methods directly.

Consumer Payments API

Consumer payment APIs offer secure solutions tailored for consumer finance businesses. These APIs support key functions such as fund collection, storage and disbursement while enabling features like account reconciliation and transaction monitoring.

Benefits of Open Banking

Open banking creates an interoperable framework for financial services to exchange data and collaborate more effectively. Here are some of its key advantages:

Improves Financial Transparency

With real-time data integration, businesses and consumers can combine financial information from different accounts into a single, comprehensive view. This provides more centralized financial oversight without the need to monitor multiple banking platforms.

Enhances Customer Experience

Data sharing supports the seamless financial experiences today’s customers expect. For instance, a merchant might embed a payment option that allows customers to pay directly from their bank accounts for added convenience.

Customizes Financial Services

The ability to share financial data with third-party platforms creates new opportunities for customized financial services tailored to specific goals. For example, a small business could integrate multiple accounts in an expense management platform to identify spending patterns and cost-saving strategies.

Facilitates Faster Payments

Rather than relying on intermediaries, a business can leverage APIs to enable direct account-to-account transfers. This helps eliminate the bottlenecks of traditional payment workflows to minimize delays and improve settlement times.

Encourages Data-Driven Decisions

By consolidating financial data from various sources, businesses can better identify trends in their financial performance. This level of insight is essential for accurate revenue forecasting to reduce financial risks and improve cash flow management.

Supports Regulatory Compliance

Open banking provides standardized frameworks for data-sharing and security. This helps businesses meet regulatory requirements and reduces the risk of non-compliance penalties.

Automates Processes

Businesses can streamline manual tasks in the accounts payable process, like data entry, automated invoice processing and invoice matching when they use APIs to integrate accounting and payment systems. This supports error reduction and improves accuracy, freeing up resources to focus on strategic initiatives.

Streamlines Operations

Open banking minimizes inefficiencies caused by siloed systems. Seamless data sharing across platforms means businesses can synchronize financial workflows to reduce errors and enhance operational efficiency.

Challenges of Open Banking

While open banking offers opportunities for innovation, there are also challenges that businesses must prepare to address, including:

Data Privacy Concerns

The nature of data sharing increases the attack surface for unauthorized access and data misuse. To protect sensitive information, transparent data policies and strong security measures, such as encryption and authentication for APIs, are essential.

Regulatory Compliance Uncertainties

As open banking evolves, businesses must stay up to date on changing regulatory requirements. This requires consistent investment in relevant technology and expertise to maintain compliance and avoid penalties.

Cybersecurity and Fraud Risks

Without appropriate preparation, data sharing can amplify the risk of cyber threats and fraud. Businesses must remain aware of potential vulnerabilities, such as identity theft or account takeovers, to proactively implement safeguards for customer data.

Integration Issues With Legacy Systems

Many financial institutions face hurdles when adapting legacy systems to support open banking APIs. Modernization efforts require strategic planning to address compatibility challenges and minimize operational delays.

Dependency Risks

Businesses that rely on third-party services for core financial functions risk disruptions if offerings change or become unavailable. Contingency plans are essential to avoid costly disruptions if providers discontinue services or alter their terms unexpectedly.

Open Banking Use Cases

Open banking offers valuable use cases for businesses to streamline operations and improve the customer experience. These are some practical applications:

Financial Management

Businesses can use third-party financial management tools for tasks like budgeting and expense tracking. Access to consolidated financial data offers a holistic view of their financial health to make informed decisions.

Risk Assessment

Businesses can integrate their financial data with third-party software to monitor transaction and account activity. This allows them to track spending patterns and address potential risks before they escalate.

Invoice Payments

Open banking can streamline historically labor-intensive manual invoice processes. Functions like direct account-to-account transfers and real-time payment tracking help reduce errors, accelerate payment cycles and improve cash flow efficiency.

Identity Verification

With instant access to customer financial data, businesses can validate identity credentials more accurately. This reduces fraud risks and supports regulatory compliance while creating a smoother onboarding experience for customers.

Payment Reconciliation

Businesses can use third-party solutions to simplify payment reconciliation. Payment solutions can access transaction data to automatically match payments with invoices, helping reduce manual effort and improve accuracy.

Payroll

Open banking streamlines payroll management by automating data transfers and payments. Businesses can integrate banking platforms and payroll systems to ensure accurate disbursements and reduce administrative workload.

Treasury Payments

Comprehensive financial data can help businesses enhance their treasury management strategies. Along with transaction data, treasury teams can access account balances and payment statuses to oversee cash flow, liquidity and risk.

Enhance Customer Experience

Open banking creates new opportunities for personalized financial experiences. With data sharing, businesses can integrate seamless payment options and customized financial insights to improve customer satisfaction and loyalty.

Is Global Open Banking Safe? A Look at Regulations Worldwide

As open banking evolves globally, regions are taking distinct approaches to regulatory oversight. Below is a brief overview of regulatory frameworks across major markets.

PSD2 in Europe

Under the revised Payment Services Directive (PSD2), account servicing payment service providers (ASPSPs), such as banks, must enable secure data access for third-party providers through an API-enabled interface. This regulation provides the legislative foundation for open banking in Europe, with the goal of enhancing innovation, security and consumer control in the payments sector.

FDX and Open Banking Standards in the U.S.

Currently, the U.S. does not have a formal regulatory framework comparable to the PSD2 in Europe. Instead, regulations are shaped by initiatives led by regulatory agencies and industry groups.

Section 1033 of the Dodd-Frank Act grants consumers the right to access their financial data and securely share it with third parties. Additionally, the Financial Data Exchange (FDX), a non-profit industry standards body, has established voluntary technical standards for APIs to promote secure data sharing and interoperability.

The Consumer Financial Protection Bureau (CFPB) is the primary body overseeing the development of open banking in the U.S. In October 2024, the CFPB finalized its Personal Financial Data Rights rule under Section 1033, which aims to enhance consumer control over financial data and establish stronger privacy and security measures for data sharing with third-party providers.

Emerging Regulations in Asia-Pacific (APAC)

Countries in the Asia-Pacific (APAC) region are adopting diverse open banking frameworks. Australia, for example, enacted its Consumer Data Right (CDR) in 2019, which grants consumers control over their financial data and allows them to securely share it with accredited third parties. To provide Consumer Data Right services, providers must complete a rigorous accreditation process with the Australian Competition and Consumer Commission (ACCC).

Other markets, such as Hong Kong, have introduced voluntary frameworks that encourage financial data sharing. The Hong Kong Monetary Authority (HKMA) launched an Open API Framework, outlining four phases of implementation to encourage secure data sharing and improve customer experience.

The Future of Open Banking

With open banking set to expand, businesses should prepare for new opportunities and challenges. Here are a few key trends we can expect to see going forward:

AI and Machine Learning

AI and machine learning are set to play a crucial role in the future of open banking. By supporting key processes like transaction categorization and fraud detection, these banking technologies can enhance security and organizational decision-making.

Data Security and Privacy

As open banking evolves, ensuring robust data security and privacy measures is critical. Financial institutions and third-party providers must adopt strong encryption, authentication and compliance frameworks to protect sensitive information.

Increased Adoption

Open banking will likely accelerate the adoption of more integrated and data-driven financial services. Going forward, businesses should be prepared to leverage API technologies to unlock new revenue streams and improve financial decision-making.

Embedded Finance

Open banking will help drive the expansion of embedded finance by providing secure, real-time access to financial data through APIs. This allows businesses to integrate payment solutions, lending options and other financial services directly into their platforms for more engaging customer experiences.

Leverage Open Banking for Your Business

Open banking is revolutionizing how businesses manage financial data and connect with customers. However, to fully capitalize on its benefits, businesses need robust API solutions that facilitate secure, seamless data sharing.

Priority offers a comprehensive suite of APIs designed to help businesses integrate financial services with ease. Whether it’s automating accounts payable or embedding financial capabilities into existing platforms, our API solutions provide the flexibility and control your business needs to stay ahead.