What is an open banking API? How apps and accounts connect

Examining how consumer-permissioned data is shared between financial institutions and popular apps and services.

October 25, 2023

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Nihar Nanavaty

Nihar focuses on the growth of Plaid’s products and FI partnerships across the fintech ecosystem. He's passionate about democratizing access to the resources needed to unlock financial freedom while writing, traveling, and taking many pictures in his free time.

There has been a noticeable shift in recent years that has greatly expanded consumer access to financial services. With the exponential growth of open banking APIs within the finance technology (aka fintech) ecosystem, consumers have a vast array of innovative financial services and applications at their disposal to quickly and securely share their data.

Open Banking APIs have enabled strong industry disruption—opening the door for thousands of new financial apps and services that have changed the way millions of people interact with their finances every day. 

In fact, 88% of US consumers reported using a fintech service, while the fintech industry is estimated to hit $1.5 trillion in annual revenue by 2030, further confirming this mass adoption of what was once considered fringe. All of these new financial possibilities and seamless user experiences would not exist without the underlying capabilities of open banking API technology. 

In this article, we’ll cover what open banking APIs are, how they work, why so many companies use them, and the future they are unlocking for us all.

First, what is an API?

API stands for application programming interface. APIs connect and share data between disparate software systems, allowing otherwise siloed data to be used across many applications.

A popular way to think about this is the “restaurant” analogy:

  • The menu at your go-to diner will show all the available dishes, ingredients, and prices. Similarly, API documentation gives developers various functionality, endpoints, use cases, parameters, responses, and more to facilitate your implementation. 

  • Your order is then communicated with the waiter. This is equivalent to sending an API request. 

  • The kitchen is where the magic happens. Chefs take your order and prepare it with the necessary ingredients. Once an API receives the request, it can process it and perform the actions needed to prepare the response. 

  • Once the food is ready, your order is then brought to your table. The API response can range from data sets to specific results. Typically it looks like a list of items, a single item, or some queried information. 

Consider travel websites like Hotwire, Expedia, and Kayak. When you enter your search parameters, the site uses its API connections to a wide variety of hotels, airlines, and car rental companies to aggregate the most useful information based on your search and connect you for booking. The site is not only connecting disparate data but making it readable and useful to you in real time. 

Examples of financial services built with the robust power of APIs include peer-to-peer lending marketplaces, used-car payments platforms, or industry-leading rewards platforms—the possibilities are endless as more problems are solved with fintech innovation. 

What is an open banking API?

In the ever-evolving financial landscape, there are different kinds of APIs with a growing list of use cases.

Open banking APIs help users connect their bank accounts to various financial services. These APIs have unlocked a new realm of data access by enabling thousands of apps and disruptive financial services to be built using safe and secure connections to consumer-permissioned data. Financial Institutions are increasingly using open banking APIs to share consumer data with applications and aggregators in a secure manner.

How do open banking APIs work?

With open banking APIs, banks build dedicated endpoints to enable third-party applications—such as app developers or data aggregators—to access consumer-permissioned data. Financial institutions give encrypted access to the third party in order to keep customer data secure and ensure that it’s accessed only with their customers’ permission. These connections allow applications to carry out vital customer functions such as account balance checks, transaction history lookups, and account and routing number verification. 

Data aggregators (including Plaid) act as an “API bridge” between fintech applications and financial institutions. Because data aggregators connect with a plethora of financial institutions, fintech applications have less work and maintenance to worry about. Instead, they leverage the data aggregator as a direct integration, seamlessly enabling customers to connect accounts from any financial institution to do things like create a budget, buy a car, or fund a brokerage account. 

Note: Plaid is a financial data aggregator that provides value-add products on top of data access, including payment processing, identity verification, payment risk reduction, full-stack onboarding, and more. 

An open banking API that allows someone to connect their bank account to fund a brokerage app would function like this:

1. A financial institution establishes dedicated FDX API endpoints for other parties to call in order to obtain specific types of consumer-permissioned information. This allows data aggregators to integrate with the bank's APIs to access financial account data such as account numbers, balances, and transaction history.

2. Developers from the brokerage app then integrate with the data aggregator’s API. This gives them the ability to allow customers to link accounts through any financial institution that’s also connected through the aggregator’s network. 

3. When a trading app customer wants to connect their bank account to fund their account on the app, their bank will authenticate them by prompting them to enter their bank account’s credentials (username and password). If successful, their bank will create an encrypted API token between themselves and the data aggregator which includes a unique identifier—which means the aggregator doesn’t have to store the credentials. This token creates an ongoing connection between the bank account and the aggregator.

4. Once a token has been created between the bank and the aggregator to establish a new customer’s credentials, the aggregator creates another token. The trading app will use this new token to make API calls to the data aggregator. When these API calls are made, the aggregator uses the bank API to fetch the financial data needed to perform the requested customer action, such as funding the brokerage app or moving money from the app to their bank account.

Why use open banking APIs?

Beyond creating innovative financial services and gaining access to large markets, reasons to use open banking APIs include:

Safe access to user-permissioned data

When a business uses a Plaid API to connect customer data to financial services, they are confident that the customer has given permission for their account data to be accessed. Additionally, security practices that meet or exceed industry standards are followed in order to protect their customers’ financial information.

Fast, efficient, and cost-effective financial access

Compared to traditional financial services that require people to comb through files in disparate data systems, open banking APIs provide the same services in a much more efficient and cost-effective manner. 

For example, a customer applying for a loan may need to provide bank statements and income history to qualify. With an income verification API, the customer can share that information programmatically, directly from their account. This saves both the customer and the lender ample time and resources.

This speedy way of sharing financial information helps both banks and fintechs tailor financial services to their customers’ unique needs. APIs expedite services that once took significant time and resources to provide, making them more cost-efficient and user-friendly. 

Future-proofing financial services

New fintechs are constantly entering the market. As of June 2023, there are 335 fintech unicorns (companies with an over $1B valuation). Most of these companies are built atop financial APIs and are constantly iterating to improve their use cases and products.

Traditional banks are also increasingly relying on Open Banking APIs to power new apps and services, and many are partnering with API-based fintechs to do so. Over 91% of banks expect to partner with fintech companies to increase their speed-to-market and ability to serve their customers. To achieve this, banks, aggregators, and the fintech companies they partner with will continue to foster this global rise of open banking APIs. 

Those building services with APIs are working with technology and infrastructure that is constantly iterating and growing over time, which will only lead to deeper innovation and niche product development as the industry continues to evolve.

Accelerate your open finance journey: Empowering customers with data connectivity

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How does Plaid support open banking with APIs?

With connections to over 8,000 apps and services and 12,000 financial institutions, Plaid supports data partners of all sizes—from banks large and small—to fintechs, neobanks, and others. 

Plaid’s Core Exchange is an easy-to-implement open banking API solution that aligns with the Financial Data Exchange (FDX) API specifications and meets consumers' expectations for data connectivity. Core Exchange connects financial institutions to Plaid’s network of over 8,000 applications while also enabling interoperability with other data aggregators and FDX-compliant organizations.

For open banking customers, Plaid’s Privacy Controls enables control over their financial data, from initial connection to ongoing oversight. In addition, Permissions Manager allows data partners to build their very own permissions portal for their customers, giving them greater visibility and control over their data-sharing connections made through Plaid.

A consumer-first world, driven by APIs

In the past, consumer’s choices on where to go for financial services were limited. In today’s fintech-powered environment, consumers have endless choices through a financial ecosystem built on open banking APIs. 

Consumers can now seamlessly switch between mobile banking, personalized budgeting tools, and investment and trading platforms that are all connected to their financial accounts. Thousands of new financial tools that emerged from this API revolution have filled gaps in financial needs and created unique ways for financial freedom to thrive. 

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

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