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According to forecasts, the open banking market is expected to reach $135.17 billion USD by 2030 – achieving a CAGR of almost 28%. It’s clear open banking is a key component of growth strategies, but aside from evolving government regulations and increased accessibility, why is the financial services industry pursuing open banking initiatives? Read on to find out what exactly open banking delivers to companies and customers, how it works, where it can be best applied and the role of third-party applications.
What is open banking?
Open banking is a financial services model in which banks and other financial institutions give selected third-party providers (like fintech apps) access to their systems (and customer data) through application programming interfaces (APIs). The goal is to move from closed, bank‑centric data silos to a networked ecosystem where data can move securely between banks, FinTechs and other providers to integrate new features and functionalities that enable the creation of new services.
How does open banking work?
The key is secure, trusted APIs, which make it possible for providers to interact and exchange information that banks and customers have given consent to share. It is the same idea behind Google Maps and Uber – a user gives certain permissions to an app (location) so that a service (directions, a lift) can be provided. In a banking context, standard permissions include:
- Reading account information (balances, transactions, account details)
- Initiating payments directly from an account (e.g., paying an e‑commerce merchant or transferring money from one account to another).
Crucially, access is always permission‑based: when authorizing a specific app or service, a customer’s consent can be limited in scope and duration and withdrawn at any time.
In practice, open banking works as a consent-based data and payments “pipe”: you approve an app or service, your bank authenticates you, then securely exposes specific data or payment capabilities to that app via APIs using tokens instead of passwords. Tokens are secure, non-sensitive digital placeholders that represent a customer’s actual bank account details. In this way, providers can plug directly into your bank, in real time, without screen‑scraping or manual uploads. But what does this look like in practice?
How do banks authenticate third party apps?
Before issuing access tokens, banks authenticate third‑party apps (TPPs) by requiring regulatory registration and technical identification using digital certificates (often QWAC/QSealC), mutual TLS and OAuth2/OpenID Connect. This ensures that only vetted organizations with valid cryptographic credentials can interact with a bank’s open‑banking APIs.
Open banking authentication process
Two authentication layers
First, there is organizational authentication: a bank checks that an app’s operator is a licensed TPP (or equivalent) that’s registered with a regulator or scheme directory.
Second, there is technical client authentication on each connection, where the TPP proves its identity using certificates and protocol-level mechanisms such as OAuth2 client authentication and mutual TLS.
Certificates and registration
In the EU PSD2 model, TPPs obtain qualified eIDAS certificates: QWAC (for website/TLS authentication) and often QSealC (for signing requests), which encode their regulated roles and permissions. Banks (ASPSPs) validate these certificates against trusted authorities and PSD2 directories to confirm the TPP’s identity and roles (AIS, PIS, etc.) before accepting API traffic.
API calls and tokens
When an app calls a bank’s API, it typically establishes a mutual TLS session using its QWAC or other client certificate so the bank can cryptographically verify which TPP is connecting. On top of that, the TPP authenticates as an OAuth2 client (often using mTLS-bound client credentials) to obtain access tokens, and may sign HTTP requests with its QSealC so the bank can prove which TPP sent which request.
Tokens and ongoing access
Finally, access to customer accounts only happens via short‑lived, scope‑limited tokens tied to that authenticated client and, in modern profiles like FAPI, are cryptographically bound to the TLS session or a proof key (DPoP) to prevent token theft and replay. If a certificate expires, is revoked, or the TPP loses its regulatory status, a bank rejects TLS and token requests, cutting off the app’s access even if it still holds old tokens.
Regional variations
While PSD2 in Europe explicitly mandates QWAC/QSealC and eIDAS-based identification, other regions (for example many non‑EU markets) use similar patterns with scheme-issued or CA-issued client certificates plus OAuth2/OpenID Connect security profiles such as FAPI. The exact certificate types and directories differ, but the core idea is the same: only pre‑vetted, certified apps can gain access.
Benefits and real-world use cases of open banking
For customers, open banking can mean better visibility over all accounts in one place, access to more personalized products and often cheaper or more convenient payment options. For banks and FinTechs, it enables new business models and partnerships, supports faster onboarding and verification and drives innovation in areas like payments, savings and investment services, while creating new revenue streams.
Common real-world uses include:
- Personal finance and budgeting apps that aggregate accounts from multiple banks and categorize spending automatically.
- Faster, account‑to‑account payments at online checkouts without cards, using a bank’s payment API directly.
Smarter lending and credit scoring based on real transaction data and cash‑flow rather than only traditional credit bureau data.
Open banking risks and challenges
While research indicates that fraud rates for open banking are lower than the industry average (.013% compared to .045%), financial institutions obviously need to prioritize security. Indeed, given that more parties can access financial data, open banking raises questions about data privacy, security and liability if something goes wrong, so regulation and strong security controls are critical.
There are also challenges around the standardization of APIs, customer trust and ensuring that consent is meaningful and understandable, rather than hidden in long terms and conditions. The biggest risks include data breaches and leaks, phishing and denial-of-service (DoS) attacks. There’s also the danger of TPP misuse, like using data for unwanted purposes, or becoming overly dependent on a TPP and falling into vendor lock-in.
For banks and other financial institutions, the gains that can be achieved through open banking far outweigh the risks. What’s essential is teaming up with a technology parter who has engineering expertise and domain knowledge. That’s why companies turn to Software Mind. Over 25 years of experience empowers our team to deliver outcomes that align technical and business goals for measurable business impact. Fill out this form to get in touch with our experts and find out how we can support your growth strategies.
FAQ
What is open banking?
Open banking is a financial services model in which banks and other financial institutions give selected third-party providers (like fintech apps) access to their systems (and customer data) through application programming interfaces (APIs).
What are the advantages of open banking?
For customers, open banking supports financial management by securely integrating apps that enable faster and easier payments and personalized financial offers. For businesses, open banking streamlines operations, reduces costs and enables real-time data exchanges which support decisions.
Are there risks with open banking?
As with most technology, there are risks, mostly connected to data. Whether leaked, hacked or mismanaged, data security remains a risk, especially as regards third-party vulnerabilities.
How can open banking be made secure?
Along with establishing strong, internal policies and governance, companies can secure open banking by implementing strong authentication (MFA, biometrics), API security (OAuth2.0, TLS encryption) and adhering to industry and regional regulations.
What is the role of APIs in open baking?
Application Programming Interfaces (APSs) are essentially to open banking as they enable banks to share customer financial data with third-party providers. This is how banks can provide new services and enrich offers. APIs create standardized, secure connections that enable customers and banks to view balances and make payments.
About the authorJakub Dymek
Software Delivery Director
An experienced delivery director with a history of working in the financial services industry. Jakub has project management, leadership and graphic design skills. A comprehensive understanding of operations, combined with a master's degree from the Cracow University of Economics, enables Jakub to manage teams of different sizes on a variety of projects at Software Mind.
