When you’re talking to people outside of the fintech industry about open banking, not many of them know the term or its implications. Makes sense. We don’t often think about how the things around us work. Think of the internet: how many people know that the internet, including the networks powering our Wi-Fi, wouldn’t exist without thousands of kilometres of actual cables at the bottom of the oceans? Similarly, not a single person I’ve met outside of the fintech environment knows how they get approved for personal loans so quickly, or how they get those beautiful dashboards in their budgeting app, or how they can buy their movie tickets through their bank so easily. In this article, I'll take what often feels remote and complicated (open banking, PSD2 APIs, account information, and payment initiation) and show you how it actually works in real life.

First things first, let’s get our glossary straight. Open banking is a secure system that lets you share your financial data with authorised apps, banks, and institutions, such as your budgeting app. It also lets you make payments directly from your bank account through authorised providers. Open banking uses APIs instead of passwords, and it only works if you give your clear permission. In the European Economic Area (EEA + Norway, Iceland, and Liechtenstein), Payment Services Directive 2 (PSD2) governs and regulates these, practically requiring banks to provide APIs to third parties.

There are two things you can access with open banking: account information and payment initiation.

Payment initiation is easier to explain because it practically speaks for itself. With Payment Initiation Service (I’ll call it PIS from now on), you can initiate payments directly from your bank account. From a consumer’s point of view, picture buying a ticket to a legendary band’s concert, where every wasted second could cost you that ticket. Instead of typing in your card details, you simply click your bank’s icon and pay. From a business’s point of view, open banking payments are useful because funds settle almost instantly, success rates are higher, the process is more secure, and there are no hidden processing fees. And if you’re a retailer, instant settlement means you can ship items right away instead of waiting for the money to arrive. Pretty cool, right?

As for account information, the use cases in that area are unlimited. Since I started working with open banking in 2023, I have seen new unexpected use cases appear every year. As of now, authorised Open Banking APIs can access an account holder’s full name, IBAN, real-time balances, and transaction histories. This kind of data, and everything you can do with it, is what drives such innovation.

Every single data point unlocks something different. For example, accessing the full name and IBAN allows businesses to speed up Know Your Customer (KYC) onboarding and anti-money laundering checks. When a customer connects their bank account, the business can instantly compare the name on the account with the details the customer provided, verifying that the person actually owns the bank account. This helps catch identity fraud before it causes damage.

Real-time balance data completely changes how we handle risk. A lender or a subscription business can use the API to verify available funds at the exact moment a payment is triggered. That, on its own, prevents failed payment fees, which might seem like not a big deal, but when you have over 100k users with subscriptions, it comes to a very significant amount saved monthly.

Then, transaction histories, which are another key building block, are widely used in automated credit decisioning. Instead of waiting days for credit checks and manually submitted bank statements, digital lenders and banks can scan up to a year of historical income and spending patterns to approve loans in seconds.

The lending example likely already resonates with most people's personal experience with open banking, but let’s look at one more use case widely used by us, ordinary consumers. Imagine an app that connects to all your different bank accounts using Open Banking APIs. It uses your name and IBAN to securely verify who you are, keeps an eye on your real-time balances across multiple banks and cards, and fetches your transaction histories to track your monthly spending. If it notices you are spending too much on subscription services or that a major bill is coming up next Monday, it notifies you. Giving you an automated and stress-free overview of your entire financial life in one place.

Open banking is really closer to us than we think it is.

It’s that invisible cable on the bottom of the ocean that influences our daily lives. Every time you track your budget, skip typing your card number, or receive a loan in a matter of seconds, you are relying on these hidden cables/infrastructures. PSD2 APIs, Open Banking, and TPPs: these terms may all sound very confusing and techy, like they're not made for the rest of us to understand. But underneath all these terms, the simple reality is that it’s just a bridge to give you more control, speed, and less friction with your own money. So, perhaps next time you buy a ticket somewhere or use your budgeting app, you will know exactly how that magic trick works!