What is open banking?

Open banking is a financial framework that enables banks to securely share customer account data with authorized third-party providers through standardized APIs, giving consumers control over their financial information and fostering innovation in financial services. This regulatory-driven model allows customers to consent to sharing transaction history, account balances, and spending patterns with licensed fintech companies and financial service providers.

Open banking enables financial institutions to modernize lending operations through enhanced data access and streamlined integration capabilities with third-party technology platforms.

What challenges do banks face when implementing open banking?

Banks encounter significant operational and competitive challenges when adopting open banking frameworks, yet these obstacles highlight why strategic implementation remains crucial for competitive positioning.

• Infrastructure Investment Requirements: Implementation requires substantial IT infrastructure investments to ensure API security, regulatory compliance, and system integration capabilities. Banks must upgrade legacy systems, implement robust cybersecurity measures, and maintain ongoing technical support for third-party integrations, creating significant upfront and operational costs.
• Customer Relationship Erosion Concerns: Many institutions worry about losing direct customer relationships as third-party providers gain access to account data and payment initiation services. Banks fear that customers may develop stronger loyalty to fintech applications rather than their traditional banking relationships, potentially reducing cross-selling opportunities.
• Escalating Security and Fraud Risks: According to Juniper Research, online payment fraud will exceed $206 billion cumulatively through 2025, creating heightened security concerns for banks managing third-party integrations. Banks must invest heavily in advanced fraud detection systems and real-time monitoring capabilities to protect against sophisticated threats targeting API vulnerabilities
• Customer Trust and Adoption Barriers: Building customer confidence in data sharing remains challenging, as many consumers express concerns about privacy and security when authorizing third-party access to their financial information. Banks must invest in education and transparent communication to overcome customer reluctance.
• Inconsistent User Experience Management: Ensuring a consistent user experience across different platforms becomes complex when customers access banking services through multiple third-party applications. Banks lose direct control over user interface design and customer service quality, potentially impacting brand reputation.

Despite these challenges, forward-thinking institutions leverage open banking to enhance their own lending platforms with real-time data insights, streamlined customer verification, and improved risk assessment capabilities, ultimately strengthening their market position.

Which non-financial sectors are leveraging open banking data?

Open banking adoption is expanding beyond traditional finance into climate tech, with companies like Doconomy using customer data to measure and manage carbon footprints. Healthcare platforms leverage these capabilities for payment verification and affordability checks for medical services. Real estate companies integrate the framework for mortgage applications and rental payment processing. E-commerce platforms use financial data for personalized financing options and fraud prevention during checkout processes. Insurance companies employ the technology to assess risk profiles based on actual spending patterns rather than traditional credit scores. Supply chain management platforms incorporate these payment capabilities for automated invoice payments and working capital optimization. This cross-industry adoption creates new opportunities for white-labeled lending platforms to serve diverse market segments with tailored financial solutions.

How does open banking differ from embedded finance?

Open banking allows third parties to access customer financial data through secure APIs, while embedded finance integrates complete financial services directly into non-financial platforms. The former focuses on data sharing and account connectivity, enabling businesses to verify customer information and initiate payments. Embedded finance creates seamless in-app financial transactions by integrating services like lending, payments, and insurance into existing customer journeys. Data sharing APIs serve as the foundation for embedded finance solutions by providing the access layer. Where one model requires users to connect separate apps or services, embedded finance eliminates platform switching by offering financial services within existing workflows. For lending technology providers, API-based data access enables enhanced underwriting and account verification, while embedded finance allows loan products to be offered directly at point-of-sale or within business applications. Both models complement each other in comprehensive digital lending strategies.

Key takeaways

• Banks face substantial implementation challenges including infrastructure costs, security risks, and customer relationship concerns, yet open banking adoption remains essential for competitive positioning against fintech lenders and maintaining market relevance
• Successfully navigating open banking challenges enables enhanced lending capabilities through real-time data insights, streamlined customer verification, and improved risk assessment that strengthen underwriting decisions and reduce operational costs
• Non-financial sectors from healthcare to supply chain management are leveraging open banking data for specialized applications, creating new market opportunities for lending technology providers to serve diverse industry verticals
• Understanding the distinction between open banking’s data-sharing foundation and embedded finance’s integrated service delivery helps banks develop comprehensive digital lending strategies that maximize both customer acquisition and operational efficiency