What is open banking? A guide to the future of finance

Traditionally, financial data was siloed within banks, making it difficult for consumers to access, share, or use their own financial information. This lack of connectivity made it challenging for consumers to get a high-level view of their finances, made transferring money harder, and limited financial access for some consumers. 

That is rapidly changing due to open banking, a global shift that is redefining how financial data flows. Open banking breaks down financial barriers by enabling secure, consumer-permissioned data sharing, empowering people to see their complete financial picture in real time, move money quickly, and access a broader range of financial products. 

Open banking is also fueling innovation among fintechs and financial institutions, unlocking new opportunities for smarter, faster, and more inclusive financial services.

This guide explains open banking and how it works. We'll start by defining open banking, exploring who uses open banking software, and discussing how external forces, such as regulations, can impact open banking and the financial products and services that leverage it.

Open banking definition

Open banking is defined as a system that allows consumers to securely share their banking, transaction, and financial data with third-party providers through standardized APIs. With consumer permission, banks, fintech companies, and financial institutions can exchange data in real time, creating a more connected and efficient financial ecosystem.

For example, a budgeting app can use open banking to access a customer's spending history and automatically categorize transactions to see how much the customer spends on groceries in a month. Similarly, a lending platform can retrieve real-time income and cash-flow data for a more accurate underwriting process. 

Open banking increases financial transparency, improves access to services, and fosters innovation across the financial industry by allowing seamless, secure data sharing.

Who uses open banking?

Open banking platforms are used by a wide range of businesses and consumers to simplify financial transactions, enhance security, and unlock new opportunities. Fintech companies leverage open banking to provide services like buy now, pay later (BNPL), budgeting apps, investment platforms, and automated savings tools. 

Banks and companies in the financial services industry can use open banking to offer more personalized products and seamless digital experiences. Consumers often use open banking through apps that provide control over their financial data.

Benefits of open banking

Open banking benefits all participants in the financial ecosystem—consumers, financial institutions, and fintech companies—by enabling third-party data sharing. This connection improves security, streamlines transactions, and fosters greater financial control.

Thanks to open banking, consumers have more control over their financial data, such as which third-party apps can access their data and when to turn permissions on and off. They also spend less time juggling data from multiple sources. 

Open banking helps financial institutions see how their customers use fintech, which gives them a better understanding of changing customer needs. API-driven data sharing also reduces the reliance on outdated manual processes and improves data management.

Fintechs can deliver a better user experience by leveraging open banking. Real-time access to banking data also allows fintech apps to improve the customer experience by offering services like instant funding, automated savings, and streamlined payments.

Examples of open banking services

Open banking powers a wide range of financial services by enabling secure, real-time data sharing between banks and fintechs. Some of the most common applications include buy now, pay later (BNPL) services like Affirm and faster transaction posting. 

Affirm uses open banking to determine a consumer’s ability to repay in real time, creating a seamless buy now, pay later (BNPL) experience. By partnering with Plaid, Affirm securely connects to a bank account to evaluate factors like cash flow and account balances. This approach helps expand financial access for consumers—especially those with limited financial history—and allows Affirm to offer BNPL options at checkout. 

An example from the U.K. is Moneybox, which uses open banking to enhance its Payday Boost feature. This lets customers instantly transfer funds into their savings, investments, and retirement accounts. By integrating Plaid’s Variable Recurring Payments (VRP), Moneybox eliminates the five-day delay associated with traditional direct debits. As a result, users see their savings on payday rather than waiting nearly a week.

Other open banking examples include:

• Budgeting apps can use open banking data to track spending in real time, automatically categorize transactions, and provide users with a clearer financial picture.

• Lending platforms leverage open banking to assess income and cash flow in real time, enabling faster loan approvals and expanding credit access. 

• Brokerage apps can use open banking payments to allow investors to fund their accounts instantly, reducing delays and ensuring they don’t miss time-sensitive investment opportunities.

• Subscription management tools can monitor recurring payments and account balances, helping users avoid overdrafts and cancel unused subscriptions.

Open banking explained: how open banking technology works 

Open banking is driven primarily by API connectivity, which enables financial institutions and fintech companies to securely and seamlessly share financial data. 

An application programming interface (API) is software that allows different programs to share data securely. In open banking, APIs provide a standardized, secure way for consumers to connect their bank accounts to financial services like budgeting apps, investment platforms, and payment processors.

Here is how the process generally works: 

1. Financial institutions provide API access: Banks and other financial institutions set up API endpoints. Most use FDX, which is the standard API specification for open banking. This allows approved third parties to securely access consumer-permissioned financial data, such as account balances, transaction history, and account numbers. 

2. Apps integrate with aggregators: Instead of connecting directly to every bank, fintech developers often integrate with a data aggregator’s API, gaining access to a network of financial institutions. This allows account aggregation from multiple banks within a single app.

3. Customer authentication: When, for example, a user wants to fund their brokerage account, the app prompts them to authenticate with their bank by entering their login credentials. Once verified, the bank generates an encrypted API token that uniquely identifies the customer but does not expose their credentials. 

4. Data access and transactions: After authentication, the aggregator accesses the permissioned data from the bank and generates a second token, which the brokerage app uses to make API calls to the aggregator for financial data. Each time a transaction occurs—whether funding the brokerage account or withdrawing money back to the bank—the app requests updated account information via the aggregator, which fetches the necessary data from the bank’s API.

This tokenized system improves the security of open banking data and reduces risks while enabling users to manage their money efficiently across different financial platforms.

How is open banking fueling new business models? 

Open banking is fueling the fintech industry and creating more innovation opportunities for traditional banks. Creating direct integrations with multiple financial institutions requires extensive resources—ones that most startups or small businesses simply do not have access to. 

However, thanks to the API-driven open banking system, it is easier than ever to develop partnerships between financial institutions, fintech companies, and non-financial businesses. This allows businesses to share data and developers to dream up new ideas while keeping customers' data secure.

Open banking regulations 

Robust open banking frameworks have been implemented in countries across the globe. For instance: 

In 2018, the EU introduced the revised Payment Services Directive (PSD2), which established measures to drive innovation, increase competition, and protect consumers. Licensed apps and services now access the same permissioned consumer financial data as the financial institutions where the data was generated.

In 2020, the U.S. The Consumer Financial Protection Bureau (CFPB) released an Advanced Notice of Proposed Rulemaking (ANPR) on Dodd-Frank Section 1033. The CFPB restated that consumers have a right to access their own data under Section 1033 and explored the challenges to the open banking system. 

In October 2024, the CFPB released its financial data rights rule. 

Ongoing considerations for the open banking industry

While open banking unlocks greater financial access, innovation, and consumer control, it also comes with specific considerations that fintechs and financial institutions must address, including: 

• The regulatory environment: The CFPB has reaffirmed the importance of consumer data rights under Dodd-Frank Section 1033. The industry will have to adapt to new compliance requirements and closely monitor evolving regulatory dynamics. 

• Security: While industry and regulators are shifting to require secure APIs, secure data sharing requires that financial institutions and fintechs leverage robust security measures. These measures include token-based data access, security partners or vendors, and cutting-edge practices to protect consumer data and continually update against new threats. 

• Industry adoption: Not all banks have fully embraced APIs, which can limit data access. Groups like the Financial Data Exchange (FDX) are working to create a more unified system. There is more work to do, but today, more than 76 million consumer accounts are leveraging FDX APIs.

Despite these challenges, open banking continues to gain momentum. As regulations become more clear and security technologies evolve, open banking is poised to increase financial inclusion, foster innovation, and empower consumers to have more control over their financial lives.

How Plaid supports open banking for fintech and financial service companies 

Plaid connects with more than 8,000 apps and services and 12,000 financial institutions, allowing Plaid to support open finance in multiple ways. Over 3,000+ financial institutions (>75% of total traffic) are already on secure API connections through Plaid, with another 4,000+ on track to migrate in the coming years.

Plaid’s Core Exchange aligns with the Financial Data Exchange (FDX) API specifications and meets consumers' expectations for data connectivity. It helps financial institutions build an FDX-aligned API that allows their customers to connect to Plaid’s network of over 8,000 applications.

Plaid’s Privacy Controls give open banking customers more control over their financial data, from initial connection to ongoing oversight. In addition, Permissions Manager allows data partners to create customized permissions portals for their customers, providing greater visibility and more control over their data-sharing connections made through Plaid.

Plaid's App Directory provides financial organizations with real-time insights into the apps their customers connect to. Businesses can monitor app connections and verify that apps have completed Plaid’s onboarding process. This helps simplify risk management. 

A consumer-first world, driven by open banking 

In the past, consumers had limited choices for financial services. Today, thanks to open banking, consumers have a near-endless supply of options to meet their financial needs. Consumers can now effortlessly switch between mobile banking, budgeting apps, and investment platforms and access their financial data wherever they need it most. 

The rise of API-driven financial tools has also bridged critical gaps in personal finance, offering more people access to financial services and empowering them to take control of their financial lives.  

Learn more about Plaid’s Open Finance suite and the evolving power of open banking.