The History of Open Banking: Industry, APIs and Payments

Open banking can be traced back as far as the 1980s, when experiments led by the German Federal Post Office began laying the groundwork for online banking and streamlined payments.

But, what led to the massive rise of open banking? This article covers the history of open banking, beginning with the early days and moving through to significant regulations like PSD2 and more.

Key Takeaways

Open banking began with early online banking experiments in the 1980s, led by institutions like Citibank and the German Federal Post Office.
The introduction of key standards such as the Home Banking Computer Interface (HBCI) in 1998 and subsequent directives like PSD1 and PSD2 played pivotal roles in shaping modern open banking and enhancing payment security.
Open banking has seen global expansion driven by technological advancements and regulatory support, significantly transforming the financial services landscape.

1980s: The Early Days in Online Banking

Decades ago, financial institutions started the journey of today’s financial transaction services by attempting to digitise personal banking. Banks recognised the potential of technology in improving customer experiences as early as the 1980s which led to dial-up services a.k.a. the birth of online banking. Citibank was the first to dive into this online financial world, with its online banking service, which allowed customers to make transactions from the comfort of their own homes. During the same period, the German Federal Post Office was conducting its own experiments, laying the groundwork for a streamlined financial payments system through a new online banking service tested by thousands of users.

These were the foundation for the global open banking market. The banking industry’s early embrace of electronic banking paved the way for a major shift in how bank customers interacted with their bank account, creating a new era in the financial industry that would eventually change personal banking forever.

1998-2002: The Rise of Home Banking Computer Interface (HBCI)

A major milestone in open banking history was set in 1998 when Germany launched the Home Banking Computer Interface (HBCI). Born out of the vision to create a unified electronic banking standard, HBCI showed the world what it meant to be a pioneer in fintech. As an open standard for electronic banking, it streamlined financial payments and democratised access to banking data, setting precedents for customer self-service machines and the banking industry at large. It worked by establishing standardised protocols for data transmission, including secure authentication methods like PIN/TAN systems. HBCI used encrypted messages to communicate between the user’s software and the bank’s server, ensuring that financial data is transmitted safely.

The introduction of HBCI brought change that quickly spread throughout traditional banks, reshaping their way of working. By integrating secure financial transactions and sharing screen display data, it forged a path toward an open banking legislation that would soon inspire payment integration initiatives across the globe. The PIN/TAN system added an additional layer of protection for bank customers engaging in online transfers, this was a giant leap for online banking. In 2002, HBCI evolved into the Financial Transaction Services (FinTS) forming a more sophisticated banking security system.

2004: SOFORT’s Creation and Impact

Online banking innovation continued with SOFORT in 2004, which saw a combination of HBCI and screen scraping that would redefine the landscape of digital payments (screen scraping is a process where a computer program extracts data from the display output of another program). SOFORT blended the security of HBCI with the efficiency of screen scraping, allowing customers to initiate payments securely and service providers to handle transactions effortlessly. The German Post’s early trials had paid off as SOFORT enabled customers to make digital payments by simply logging into their bank accounts, a convenience that was soon to become the norm.

SOFORT’s early entry into the market, predating the widespread adoption of PSD2, was a clear indicator of Germany’s leading role in financial transactions innovation. It showcased the country’s foresight in implementing account-to-account payment solutions and set the stage for future open banking developments that would sweep across Europe.

2007: The First Payment Services Directive (PSD1)

The First Payment Services Directive (PSD1) was introduced in 2007 by the European Commission. As a regulatory framework, PSD1 was designed to:

Create an efficient European payments market
Drive high-quality financial services
Promote competition among traditional banks and new payment service providers
Lay the foundations for the Single Euro Payments Area (SEPA) under the payments services directive

PSD1 transformed financial payments, making cross-border payments as easy as domestic ones.

PSD1 was not just about competition; it was also about consumer empowerment. By improving transparency and reducing execution times, it reassured bank customers that they were engaging with official payment service providers. The strengthened consumer refund rights under PSD1 strengthened the commitment to service provider permission and the protection of the end-users of financial services. The directive’s vision to level the payments industry playing field was clear, and the seeds it sowed would soon grow into a more diverse and dynamic financial services landscape.

2009: Giropay vs. SOFORT: A Case Study

The history of open banking is one of rivalry and legal contention, as evidenced by the dispute between Giropay and SOFORT in 2009. Giropay’s lawsuit against SOFORT for unfair competition and security concerns highlighted the complexities of innovation in the online banking sector. This legal battle was a defining moment, as it not only addressed the pressing issue of banking security system integrity but also paved the way for a more competitive and diverse landscape of alternative payment systems.

The legal dispute between Giropay and SOFORT acted as a catalyst for future financial transactions. The case brought to light the importance of fair competition and security in the fast evolving payments industry. It underscored the need for regulations that would protect both consumers and innovators, setting a precedent for the future of the European payment markets.

2010s: USA Developments in Open Banking

In the 2010s, companies like Plaid and Yodlee played a pivotal role in advancing open banking in the United States. They initially enabled apps to connect with user bank accounts through screen scraping, a method that evolved into more secure API integration. This transition provided the essential infrastructure for seamless financial data sharing, which significantly contributed to the growth of the open banking ecosystem .

API-driven connectivity became a cornerstone of financial innovation, allowing consumers to securely share their financial data with various apps and services. This capability spurred the development of numerous personal finance management tools, making it easier for users to budget, invest, and manage their finances .

The regulatory environment in the US posed unique challenges compared to Europe. Unlike the centralised regulatory approach seen within Europe, the US lacked a uniform framework for open banking. This absence led to a patchwork of agreements between banks and fintech companies. Although this decentralised approach presented challenges, it also fostered a diverse range of solutions tailored to specific consumer needs, navigating the complex regulatory landscape

2011: The Midata Initiative (UK)

The Midata initiative was launched by the UK government in 2011 as part of the Consumer Empowerment Strategy, “Better Choices, Better Deals”. This voluntary programme aimed to empower consumers by giving them access to their personal data in a portable, electronic format. It was designed to drive economic growth by promoting competition and innovation among businesses, so consumers could make better choices about products and services based on their own data.

By giving consumers easy access to their data, Midata aimed to rebalance the relationship between consumers and businesses. It involved big companies like Google and British Gas and emphasised the importance of data privacy and security. The goal was to create a transparent environment where consumers could manage their personal information efficiently and make better decisions, drive innovation and improve the market.

2013: The Open Data Initiative (UK)

In 2013 the UK government launched the Open Data Initiative to make government held data available to the public to drive transparency, innovation and economic growth. This was part of the UK’s commitment to the G8 Open Data Charter which set out the principles for data to be open by default. This meant creating datasets that could be reused by individuals, businesses and researchers to build new products and services and increase public sector transparency and private sector innovation.

The Open Data Initiative also saw the establishment of the Open Data Institute (ODI) founded by Sir Tim Berners-Lee and Sir Nigel Shadbolt. The ODI’s mission was to use open data to solve social, environmental and economic challenges. It provided training, consultancy and research and a global network of members who shared the principles of open data. This initiative aimed to leverage data to improve public services, support smart city projects, and drive sustainable economic growth.

2017: Formation of the CMA9 (UK)

In 2017, the Competition and Markets Authority (CMA) mandated the formation of the CMA9, a group comprising the nine largest retail banks in Britain and Northern Ireland. This initiative was part of a broader effort to enhance competition and innovation in the financial services sector by implementing the Open Banking initiative. The CMA9 were required to create and implement open-source APIs to facilitate the secure sharing of customer data with authorised third-party providers. This effort aimed to empower consumers and small businesses with better financial products and services, enhancing transparency and efficiency in the market.

2018: The Second Payment Services Directive (PSD2)

In 2018, the Second Payment Services Directive (PSD2) revolutionised the banking landscape. This legislation set out to dismantle the grasp banks had over user data and to create a more integrated European payments market. PSD2 was a cornerstone of open banking legislation and required financial institutions to grant authorised third-party providers access to banking data via open banking APIs.

The directive imposed strict requirements for online banking security, specifically Strong Customer Authentication (SCA), which was mandated in 2019. This not only enhanced security but also increased consumer confidence in the evolving ecosystem of financial services. The rise of account information service providers and payment initiation services under PSD2 led to a surge in innovative financial products, offering consumers new choices and better value.

2018: India Stack and Open Banking in India

Another key advancement in 2018 was India Stack, which represented a significant leap in India’s digital infrastructure. It comprises a set of APIs designed to enable presence-less, paperless, and cashless service delivery. This digital framework supports various applications, including digital identification through Aadhaar (a unique 12 digit identity number) and seamless digital payments.

A crucial element of India Stack is the Unified Payments Interface (UPI). UPI has revolutionised instant money transfers between bank accounts via mobile devices, becoming a cornerstone of India’s open banking initiatives. It simplifies transactions, making them faster and more accessible.

Global Expansion of Open Banking (2019-Present)

Brazil

In 2019, the Central Bank of Brazil launched its ambitious open banking project. The initiative aims to foster competition and innovation within the financial sector. The project mandates that banks share customer data with authorised third-party providers through secure APIs, rolled out in phases. Initially, it focuses on basic customer data, eventually expanding to include transactional data and payment services. This phased approach ensures robust security and consumer protection while enhancing transparency and consumer choice. By driving down costs and improving service quality, Brazil’s open banking initiative aims to boost financial inclusion and create a more competitive market.

Australia

Australia’s Consumer Data Right (CDR), introduced in 2019, represents a significant advancement in data empowerment and financial innovation. The CDR gives consumers greater control over their personal data, allowing them to share it securely with accredited third-party providers. Initially applied to the banking sector, the CDR framework has expanded to cover energy and telecommunications. In banking, it enables consumers to compare products more easily, switch providers with minimal hassle, and access personalised financial services. By fostering a competitive environment, the CDR encourages the development of innovative solutions that cater to individual consumer needs, enhancing overall market efficiency and consumer satisfaction.

Bahrain and Saudi Arabia

Bahrain took a pioneering step in the Middle East by introducing its Open Banking Framework in 2020. This framework mandates banks to open their data and services to licensed third-party providers via APIs, fostering a competitive and innovative financial landscape. Bahrain’s approach aims to modernise the financial sector, improve customer experience, and drive economic growth. By facilitating easier access to financial services, the framework aims to attract fintech startups and international investments, positioning Bahrain as a regional fintech hub.

In 2021, Saudi Arabia followed with its own Open Banking Policy, aligning with the country’s Vision 2030 agenda to diversify the economy and modernise the financial sector. The Saudi Central Bank (SAMA) oversees the implementation, ensuring that open banking services are rolled out securely and efficiently. This policy encourages banks to collaborate with fintech companies, promoting a more innovative and competitive financial ecosystem.

The Future of Open Banking

With a global market expected to be worth USD 43 billion by 2026 the future of open banking is bright. As open banking evolves it will bring new financial services, a better customer experience and more robust fraud prevention.

Open Banking is bringing a new world of financial freedom. It offers several benefits, including:

Streamlining the banking onboarding process
Improving cash flow with innovations like Variable Recurring Payments (VRPs)
Empowering SMEs with better financial forecasting tools
Enabling easier access to credit for both consumers and businesses
Giving consumers more control over their finances
Providing consumers with tailored financial products

Ozone API’s co-CEO, Huw Davies, provided insightful commentary on his predictions for the future of open banking. He provided several key predictions for 2024:

Open banking to gain traction in Latin America, the Middle East, and North America, driven by increased regulatory support and consumer demand.
Banks will leverage open APIs for innovative product distribution and seamless digital integration.
Embedded finance will become more prevalent, allowing financial services to be embedded into everyday digital platforms, enhancing accessibility.
Focus will shift towards creating personalised, data-driven financial products, ensuring a competitive edge for financial institutions.

Frequently Asked Questions

What sparked the creation of the Home Banking Computer Interface (HBCI) in Germany?

HBCI was developed in 1998 to provide an open standard for electronic banking, with the vision of ‘my bank in the living room’ driving its creation. This aimed to democratise financial information and guide the development of open banking in Germany.

How did the First Payment Services Directive (PSD1) impact the banking industry?

PSD1, introduced in 2007, had a significant impact on the banking industry by promoting competition, improving financial services, and enabling non-banks to carry out transactions, ultimately leading to a more integrated European payments market and laying the groundwork for SEPA.

What are the key provisions of the Second Payment Services Directive (PSD2)?

The key provisions of the Second Payment Services Directive (PSD2) include reducing banks’ monopoly over user data, mandating open banking API access, and requiring Strong Customer Authentication for online payments to create a more integrated European payments market.

How did the COVID-19 pandemic influence the adoption of open banking?

The COVID-19 pandemic accelerated the adoption. The pandemic made the need for accessible financial services undeniable.

What does the future hold for open banking?

Open banking should continue to grow, with a global market value estimated at USD 43 billion by 2026. As open banking grows, we will see more and more improvements in customer experiences, financial services, and anti-fraud measures, while also gaining greater financial freedom and management.