Is Open API the same as Open Banking?

February 5, 2024
min read
Open APIs allow financial institutions to connect with third party providers

As open banking continues to take Europe by storm (and soon, the world), consumers and businesses are finding themselves with a lot more terms to grapple with. 

Some of these are relatively easy to remember – PSD2, for example, refers to the directive that oversees and regulates open banking in Europe; RTS refers to the technical standards that dictate security measures in open banking (See more terms in our glossary here). 

But some are harder to understand especially when, frankly put, they sound so similar. 

Two terms that many people find hard to tell apart are Open Banking and Open API. 

Open Banking and Open API share some commonalities and they work together, but they are not the same thing. 

Read on to find out why:

What is Open Banking?

Before understanding the difference between open banking and open APIs, it’s important to understand the meaning of the more frequently used of the two: open banking. 

Open Banking refers to the practice of companies – like lenders – securing consent from a customer to view the customer’s financial data directly from their bank account.

Under open banking, the customer gives consent to the company and the company then connects with the customer’s bank, which shares the customer data. That data can include everything from transaction history, to salary, to information about the account holder. 

All of this helps the company understand the customer’s financial health and creditworthiness and thus, make an informed decision about how (and if) they should work with the customer. 

Read more about the benefits of open banking here.

How do APIs come into play?

API is the shortened version of the term Application Programming Interfaces, and it refers to the actual technology that connects the company to the customer’s bank in order to view their data. After getting consent from the customer, the company will make an API “call” to the bank, requesting the data. The bank will respond via API with the data to view (not access).

Open vs. Private APIs

Simply put, private APIs are the APIs institutions like banks will use internally to communicate and share data within their own system. They are not accessible outside of that system. 

Meanwhile, Open APIs are used by banks and other financial institutions to securely share data and communicate with entities outside of their system. 

When understanding the difference between Open Banking and Open APIs, the key thing to take away is: open banking uses open APIs

Open APIs are the APIs that banks and Third Party Providers (like lenders) use to connect and view that customer data. They are private and secure and for use by verified entities (see more on who uses APIs here). They are called “open” APIs because, unlike private APIs, they are accessible to entities outside of a particular financial institution. 

For more updates and analysis on open banking, follow Kontomatik on LinkedIn

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