Open banking is a financial services model that allows third-party providers to access consumer banking data through secure application programming interfaces, enabling businesses to build applications and services that integrate directly with bank accounts. This system requires banks to share customer financial information with authorized external companies when customers grant explicit consent, fundamentally changing how financial data moves between institutions and technology providers.
For startups and entrepreneurs, open banking represents both an opportunity and a shift in competitive dynamics. Rather than building financial products from scratch or navigating complex partnerships with traditional banks, founders can now leverage standardized APIs to create payment solutions, lending platforms, and financial management tools. The model has gained regulatory backing in the European Union through PSD2 and in the United Kingdom through the Competition and Markets Authority, with various implementations emerging across North America, Australia, and Asia.
Table of Contents
- What Does Open Banking Actually Do?
- The Security and Privacy Architecture
- Building Products on Open Banking Infrastructure
- Common Implementation Challenges
- Key Steps
- Tips
- Conclusion
What Does Open Banking Actually Do?
Open banking enables secure data sharing between financial institutions and authorized third parties through standardized APIs. When a customer consents, their bank must provide access to account information, transaction history, and in some cases, the ability to initiate payments directly. This creates a technical infrastructure where fintech companies, accounting software providers, and other businesses can build services that previously required either manual data entry or expensive direct integrations with individual banks. Consider a startup building a cash flow management tool for small businesses.
Before open banking, the company would need to rely on screen scraping””a fragile method of extracting data from bank websites””or convince each bank to provide custom access. Plaid, a company acquired by Visa for over five billion dollars before the deal collapsed due to antitrust concerns, built its early business largely on screen scraping. With open banking regulations, that same startup can connect to standardized bank APIs, accessing real-time transaction data with customer permission. Xero and QuickBooks now use these connections to automatically categorize business expenses and reconcile accounts without manual input.
The Security and Privacy Architecture
Open banking operates on a consent-based framework where customers explicitly authorize what data gets shared and with whom. Banks cannot share information without active customer permission, and customers can revoke access at any time. The technical implementation typically uses OAuth 2.0 protocols, meaning third parties never see customer login credentials””they receive tokens that grant limited, specific access to approved data types. However, this architecture carries meaningful risks that entrepreneurs must understand.
Aggregating financial data creates attractive targets for attackers; a breach at a third-party provider could expose thousands of customers’ complete financial histories. Regulatory compliance adds operational complexity, as companies must meet strict security standards and undergo regular audits. The consent model also creates liability questions when customers misunderstand what they have authorized. In 2022, the UK Financial Conduct Authority found that many consumers did not fully comprehend open banking permissions, raising questions about whether consent was truly informed. startups building on open banking infrastructure must invest significantly in security, compliance, and clear user communication.
Building Products on Open Banking Infrastructure
Entrepreneurs can pursue several product categories using open banking capabilities. Account aggregation services consolidate multiple bank accounts into unified dashboards””Mint pioneered this approach, though it relied on less secure methods before open banking regulations. Payment initiation services enable direct bank transfers without card networks, potentially reducing transaction costs for merchants. Lending platforms use transaction data to assess creditworthiness beyond traditional credit scores, with companies like Kabbage analyzing cash flow patterns to underwrite small business loans.
The build-versus-buy decision matters significantly in this space. startups can connect directly to bank APIs, though this requires navigating different technical implementations across institutions and maintaining compliance certifications. Alternatively, aggregators like Plaid, Tink, and TrueLayer provide unified APIs that abstract away bank-specific complexity. Direct integration offers more control and potentially lower per-transaction costs at scale, while aggregators reduce development time and compliance burden. A fintech startup processing ten thousand transactions monthly might find aggregator fees acceptable; one processing ten million transactions would likely invest in direct connections to protect margins.
Common Implementation Challenges
Bank API reliability varies considerably, and startups often discover that theoretical open banking access differs from practical availability. Some institutions implement APIs minimally, offering slow response times or limited data fields. Others interpret regulations differently, creating inconsistent behavior across the banking ecosystem. A startup building a personal finance app might find that one major bank provides detailed merchant categorization while another returns only generic transaction descriptions, forcing product compromises or expensive data enrichment.
Customer trust presents another persistent obstacle. Despite regulatory safeguards, many consumers remain uncomfortable authorizing third-party access to their bank accounts. Monzo, the UK challenger bank, found that explaining open banking permissions clearly required significant design iteration””their early consent flows confused users about what data would be shared. Startups must invest in user education and transparent interfaces, recognizing that conversion rates through open banking authorization flows often run lower than entrepreneurs initially project. Testing with real users before committing fully to an open banking strategy helps identify these friction points early.
Key Steps
- Determine whether your product genuinely requires bank data access or whether alternative approaches like manual upload or card-based transactions could achieve similar outcomes with less friction.
- Evaluate aggregator providers against direct bank integration by analyzing your transaction volume projections, geographic requirements, and the specific data fields your product needs.
- Design consent flows that clearly communicate what data you will access, how you will use it, and how customers can revoke permissions, testing these flows with users unfamiliar with open banking.
- Build monitoring systems to track API reliability across different banks and aggregators, establishing fallback procedures for when connections fail.
Tips
- Start with a single use case and limited bank coverage before expanding, as the complexity of supporting multiple institutions and data types compounds quickly.
- Budget for ongoing compliance costs including security audits, penetration testing, and regulatory reporting rather than treating certification as a one-time expense.
- Maintain relationships with your aggregator or bank contacts, as resolving API issues often depends on having established communication channels before problems arise.
Conclusion
Open banking creates genuine opportunities for startups to build financial products that would have required far more capital and partnership complexity a decade ago.
The infrastructure enables faster development of payment solutions, lending platforms, and financial management tools by providing standardized access to bank data. However, entrepreneurs should approach open banking with realistic expectations about security responsibilities, implementation challenges, and customer adoption friction, investing appropriately in compliance and user experience rather than treating bank APIs as simple plug-and-play components.