December 07, 2022
The world is becoming increasingly reliant on online services. It was magnified when the COVID-19 pandemic hit, limiting mobility. Although in-person processes were still available, they became inconvenient for users because of pandemic-related mandates. Fortunately, digital platforms, especially in the financial sector, gave consumers ways to use their funds in remote transactions.
According to Juniper Research, the total number of digital banking users will exceed 3.6 billion by 2024. That is an expected increase of 54% from the 2.4 billion records in 2020.
This trend and rising competitive pressures are driving the banking and e-commerce space transformation. Functions like open banking are becoming more common, supporting industries in delivering more convenient and positive user experiences to their customers.
Open banking is a new practice where financial institutions and non-banking financial companies (NBFCs) open up the access and use of consumer banking information and other data to third-party service providers. This process aims to give users more mobility and better management of their resources.
This capability brings power and control back to the customer and allows them to use regulated financial products and services that depend on banking data and functionality with ease. Open banking can streamline the lending process, facilitate the use of new payment methods, and provide the public with better ways to invest their funds.
Open banking relies on application programming interfaces (APIs). These are the links that allow one program to connect with another. Simply, APIs are the instructions that direct how a third party app can access data from the bank.
The main advantage of using APIs is they provide a highly secure way of transferring data between parties. With them, the user – the owner of the data – is the only person authorized to grant the connection between the bank and the third-party provider. It means that the open banking functionalities only operate when the user chooses to do so.
Authentication is a key aspect of the open banking system. Digital identity verification is critical to ensure that no one other than the actual client permits the sharing of their banking details to third parties.
In response to this need for security and identity verification in open banking, authorities implement standards and regulations to uphold the integrity of the process. So aside from electronic know-your-customer (eKYC) requirements, financial institutions are now also required to employ strong customer authentication methods.
Payment Services Directive 2 (PSD2)
While the Open Banking Strategy provides guidelines on the necessary elements to enable the mobility of users’ bank accounts, it focuses more on the standardization of APIs. From the aspect of safety and security of consumer data and activities, banks have to rely on other frameworks like the revised Payment Services Directive 2 (PSD2) for guidance.
This EU regulation introduced security requirements in electronic payments processing to protect customers’ data. It aims to make e-payments safer while supporting the innovation and adoption of new technologies.
Moreover, the recognition of Third-Party Providers (TPPs) is notable in this provision. It indicates the acknowledgment of the European Union and industries of the advantages open banking can offer.
TPPs are the authorized online service providers who are part of the open banking mechanism. They interact with financial institutions to provide supplementary or alternative services to consumers. Using APIs, they can access the customer’s online payment accounts or make payments on their behalf if given permission.
The two main types of TPPs are Payment Initiation Service Provider (PISP) and Account Information Service Provider (AISP). AISPs are service providers that can view or retrieve specific details from a customer’s account. They are companies that offer money management tools and provide loan application capabilities.
Meanwhile, PISPs are entities that allow individuals to make online payments without the need for debit or credit cards. They are authorized to initiate payments from or to the user’s bank account. Examples of PISP applications include financial management tools and business solutions that facilitate real-time bank transfers.
To securely link banks to TPPs and establish trust among the parties (i.e., consumers, banks, and fintech), PSD2 requires the adoption of authentication frameworks. Particularly, the policy requires the use of multi-factor payment authentication.
Following the strong customer authentication (SCA) requirement, customer verification should be based on two of the following elements: knowledge, possession, and inherence. Knowledge refers to something the user knows – password or PIN. Possession is something they own: an ATM card, mobile device, or token. Finally, inherence indicates something that they are, using fingerprint or facial recognition for biometric authentication.
Using SCA in open banking architectures ensures a doubled-up measure to prove the claimed identity of the user granting the open banking permission. In effect, it reduces the risks of fraud and increases user trust. Additionally, it promotes confidence in online financial services and encourages the population to engage more in e-commerce and other digital activities.
LoginID – the Authentication Solution for Open Banking Systems
Open banking has the potential to transform the competitive ecosystem and customer experience in the banking industry. With it, banks and tech companies have more freedom to meet the digital demands of modern consumers. Banks should plan their open banking strategy to employ robust authentication measures to keep ahead of the rising competition.
LoginID is a FIDO2-certified passwordless authentication solution that supports open banking and finance operators by providing a positive and consistent customer experience. LoginID aligns with global regulatory frameworks like PSD2, GDPR, Open Banking, and FS-ISAC.
LoginID specializes in biometric authentication that is more secure and reliable than the traditional method of using passwords. It also allows banks to confirm transactions using a biometric digital signature. With its low code and simple API, integration is easy and delivers a seamless user experience. Customers can complete their open banking transactions quickly, conveniently, and securely.
Level up your open banking strategy with LoginID and enjoy the benefits of higher customer satisfaction and user trust. Get started by getting in touch with our experts today at email@example.com. Or you may also register an account to get immediate access to LoginID’s authentication solution. It's free to try.