Open Banking vs Open API
This blog is meant to provide a basic overview of the difference between Open Banking and Open API. It is mainly for readers seeking clarity between the two topics.
I like to point out that this blog states what the difference is between Open Banking and Open API from a High-level perspective. Therefore, if you are confused about what Open Banking and what Open API means, this blog will help to answer that question.
Quite a few times, I have come across circumstances where there was misunderstanding around Open API and Open Banking. You would be surprised how many people cannot spit the difference between the two. Therefore I have decided to create a post that describes what the actual difference is between Open Banking and Open API. So, let’s start with Open Banking.
What is actually Open Banking? I am assuming you already know what Open Banking is. Thus I am not going to dive into the details as it is out of the scope of this post, but if you like to find out more, here is a good video that will explain more about Open Banking in the UK context.
Let’s get started with the definition from Investopedia (https://www.investopedia.com/terms/o/open-banking.asp)
Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs)
In the past decades, some Regulators have started providing Open Banking guidelines to banks to follow. Guidelines are structured to give a gradual approach to how banks can share customer data with third parties. In the UK, Open Banking was introduced by Competition and Markets Authority ( CMA ), In Hong Kong, the Hong Kong Monetary Authority ( HKMA ), and in Singapore, the Singapore Monetary Authority ( SMA ), just to give you some examples.
Each country has taken a different approach to Open Banking. Some have piggybacked from the UK model, which has paved the road, others have come up with entirely new approaches. I want to highlight the nature of the approach, which I believe is relevant to understand open banking better. In essence, we can categorize the approaches in Mandatory and Market-driven depending on the markets.
A typical example is the UK market, where the regulator mandates the directive on open banking, and banks must comply with it by a given date. This type of approach is usually structured into phases.
A typical example is Hong Kong, where the open banking guidelines are proposed as a reference and not as a compulsory commitment for the banks. So, in this kind of context, banks may have already developed APIs for certain services and shared them with a range of partners without the need to follow regulatory guidelines.
A key difference between the two approaches that I like to highlight is the fact that the Mandatory approach seems to be a better fit to support competition among banks as responsibility is spread among ecosystem players. Whereas, the market-driven approach is a more cautious approach where the banks still drive the conversation and make key decisions on which third party partner will be consuming the API as liability still lies entirely on banks.
Ok, what is Open API? Quoting Wikipedia:
An open API (often referred to as a public API) is a publicly available application programming interface that provides developers with programmatic access to a proprietary software application or web service … … … In contrast to a private API, an open API is publicly available for all developers to access. They allow developers, outside of an organisation’s workforce, to access backend data that can then be used to enhance their own applications.
I like to spend a few words first on what is an API. The technology used is similar to the one we use every day to browsing the web. The most common type of API is REST API, and it gets fed to us via HTTP and JSON. Here is a great video from Mule Soft that explains straightforwardly what an API is.
Now that we know what an API is, I like to focus on what is Open API. Given that the concept is quite abstract per se, I will explain by leveraging existing examples that most of you have probably had a chance to see. A typical use case of Open API is Facebook authentication. For instance, when you download an app from either Apple Store or Google Play Store, you may be asked at the login to use your facebook account to access the app.
From Facebook prospective, they have created an effortless onboarding process through a portal that lets developers register and request an API key that developers can then use to access Facebook API. The key is an identifier that is unique for each developer and helps facebook understand who is requesting the API access.
Some roles and principles have to be followed by developers on how they can consume those APIs.
How does Open API help facebook? Open APIs allow developers to come up with new use cases around facebook data. This allows Facebook to offer its users ways to access or view their facebook content on third parties applications.
How does it help developers? They can leverage out of facebook data without the need for building their own social media platform or re-engineer processes that have already been developed by Facebook.
How does it help the user? It adds a better user experience. In fact, in our example, the user does not need to remember a new password or filling a new registration form to access the newly download mobile app.
The number of applications that can be built around Open API is numerous, and therefore, it is an excellent opportunity for a developer to get creative and leverage from a large data holding platform like facebook to have contents available from the beginning.