Open Banking: Security Issues Remain Despite Growth

The growth of open banking continues to be limited by banks' aversion to risk and security concerns.

Open banking, the process whereby banks and other institutions allow customers to share financial data through application programming interfaces (APIs) with trusted entities, is growing around 8% yearly and continues to disrupt traditional financial markets, according to a new report. But amid data security concerns, banks continue to be risk averse and, although experimenting with new products, prefer business models where they own the relationship.

The July report, published by Barcelona-based startup Platformable, notes that the adoption of open banking/open finance continues. At the end of the second quarter of 2022, there were 1,578 open banking platforms making APIs available and a total of 5,564 API products, up from 4,831 the previous quarter. Still, banks continue to struggle with the user-friendliness of their APIs. Their APIs scored 41 out of 100 in an average developer experience rating.

Asia-Pacific and Latin America are witnessing the strongest growth in new open banking plat-forms, increasing 44% and 24% year-on-year, respectively, in the second quarter. But security issues continue to blight the industry. There were nine security incidents involving banks and fintechs in the second quarter, accounting for 30% of all security breaches.

In a separate analysis published in August, the US Federal Reserve Bank of Kansas City cited concerns over the role of data aggregators in the areas of data security, data privacy and competition. Open banking relies heavily on data aggregators to connect with financial institutions and extract consumer data. The Kansas City Fed described data aggregators as the “connective tissue for open banking.” But their systemic importance is undermined by a lack of competition.

According to the study’s authors, the necessity for scale and scope may favor only a few large aggregators. And the likely dominance of a few key players suggests a potential security breach could pose a significant risk, while possibly offering opportunities to monetize data further. The study adds that a lack of clarity over consumer disclosures may require regulatory monitoring and intervention.

Still, open banking’s place in consumer finance looks promising. A survey by Forbes Advisor found that 78% of Americans prefer to bank digitally.