Open banking is crucial in developing and delivering new revenue-generating services that today’s customers require. Financial institutions (FIs) around the world are increasingly making Application Programming Interfaces (APIs) available to a growing number of Fintechs and other third-party technology providers, such as Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs), as part of open banking initiatives.
The primary concerns for anyone involved in the open banking environment are financial privacy and the security of consumers’ finances. According to research, 48 per cent of consumers had negative opinions about open banking due to data and cybersecurity concerns. Malicious third-party apps could gain access to a customer’s account, data breaches could occur, and fraud, hacking, and insider threats are all possibilities.
To secure their businesses, protect their customer relationships, and consumer privacy, financial institutions should indeed re-evaluate their data privacy and security practices in tandem with their open banking initiatives.
In this article, we deep dive into key security and privacy challenges around open banking and the proactive steps that every financial institution should take to intensify and strengthen its open banking initiatives.
1. Adherence to Regulations and Standards
It is essential that each participant in the FI ecosystem follows the same set of guidelines and adopts a standard that can be relied upon by all. Access to open banking APIs is only available to apps that have undergone an independent audit and proven that their processes and security controls meet the FCA’s standards.
They must do this regularly after the initial audit to maintain authorization. Simultaneously, open banking regulations, such as the European PSD2, and local and regional protection laws, such as the GDPR, establish equal rules for all and enforce a high level of security.
Adherence to compliance and regulations not only helps them provide security but also frees them up to focus on innovation can be aided by an industry-wide proactive defence strategy based on the evaluation of FIs (including banks, Fintechs, regulators, and government agencies), security controls, and compiled threat intelligence data.
2. Giving Control to the Customers
Customers should be fully conscious of how their data is being used, how they can handle it, how it is being stored, and how the business is regulated, according to open banking security. The rules have already been established. Financial services, such as FinTech apps, have recently become more proactive in informing customers about their data and encouraging them to interact with it. Promoting data accessibility and transparency builds trust and ensures users have control.
3. Know Your Customer
One of the most difficult challenges that open banking faces are detecting suspicious activities in transaction monitoring that indicate cybercrimes or money laundering. KYC (Know Your Customer) is a process that every bank must go through with every customer, both initially and regularly, to identify and verify their identity.
Banks must understand their platform consumers and the partners they are connecting with. This includes their identity, as well as more detailed information about the endpoint devices from which they’re connecting (to ensure they’re not vulnerable to hacking), geographical location, and other factors. All of this is required to safeguard sensitive data, the user journey, and comply with financial sector regulations. The first step in preventing financial crime and money laundering is rigorous customer identification.
4. Evolution of Advanced Authentication and Authorization methods
For the protection of APIs, content filtering is crucial. Financial institutions require a comprehensive vulnerability management strategy that considers people, processes, and technology. As well as frequent scanning measures to identify real-time or potential threats, risks and the ability to address them in near real-time.
Access control is the main justification for using API gateways, though. With the advent of biometrics technology and multi-factor authentication (MFA), there is a significant evolution in recent times. In addition to a strong password, which is also crucial, multifactor authentication mandates an additional step for users to log into their accounts. These may involve asking the account holder one more question, sending a text message to their phone, or using a biometric scan like a fingerprint to unlock the account. According to studies, MFAs successfully thwart 99.9% of all potential hacks.
Additionally, open banking made APIs more secure. Standards like OAuth 2.0 or OpenID Connect must be used to secure API access, and it is frequently necessary to maintain support for SAML for access control on existing solutions. Implementing Single Sign-on (SSO) and Identity and Access Management (IAM) add additional security layers.
An authentication system that combines artificial intelligence (AI) and human intelligence can also assist in addressing the issue of managing multiple passwords.
Furthermore, technological solutions such as biometrics tokens (OTP) can be beneficial. It can help banks improve security and provide a better customer experience by utilising more eﬀective processes and workflows.
5. Strong Data Encryption Techniques
Encryption is the stepping stone in ensuring data security. Data sharing in Financial Institutions should be permission-based or risk-based, with proper audit trails based on regulations and risk management standards. FIs can improve their security while running their operations more smoothly by using identity and authorization validation, Know-Your-Customer (KYC) capabilities, and fraud detection techniques.
While API management, security, and integration are the unsung heroes of open API implementations, speed and compatibility with bank infrastructure are critical to success. Banks can simplify processes for their customers and gain more control over security by implementing risk-based and permission-based security. Furthermore, it will assist banks in streamlining their security infrastructure and making it more efficient and customer-centric.
6. IT Security Governance
Cybersecurity is more than just robust. It constantly looks for threats, weak spots, scans for vulnerabilities, and flags problems before they even arise. This process is improved by information sharing between businesses and cooperative intelligence within the banking environment.
Increasing demands in Web Application Firewalls such as user experience and service networking, are causing traditional web applications to die. APIs are typically built as RESTful web services and use data formats that differ from those used by traditional web applications. As a result, the basic interaction paradigm between client and server has changed also protecting these APIs necessitates the development of new technologies.
FIs can increase the security of their operations by taking stringent measures like implementing strong customer authentication (SCA) through multifactor authentication (MFA), implementing risk-based MFA throughout the entire infrastructure, and enabling minimal role-based access.
7. Establish a secure digital platform
While implementing open banking, it is required to have a secure digital platform as banks must transfer and consume certain data with third-party providers. A secure digital banking platform serves as a central location for connecting, storing, working with, and securing your open banking data.
All of this is made possible by microservices such as security solutions, which can be easily built on the digital platform and are already integrated into the Macro Global Digital Banking Suite, Calculus.
8. AI & ML for Behaviour analysis
Artificial Intelligence has greater potential in open banking. Based on more data, it learns and creates a more realistic assessment of the customers and their transactions. Banks can forecast customer behaviour which helps the banks to serve best to their customers. It can also help them spot odd or suspicious activity.
Banks can assess and manage the behaviour of their third-party providers (TPPs) as well as capture the patterns with the aid of AI and ML-driven solutions. Real-time verification is necessary for real-time payments. Therefore, having access to advanced analytics, AI, and ML learning tools can aid FIs in identifying fraudulent and cybercriminal activity. It is not surprising that FIs are adopting new technologies more quickly than ever as it gives them the chance to improve their ability to adapt to any future changes. For instance, natural language processing (NLP) can be used to capture and process regulations, which can then be applied to gain a sizable competitive advantage. If an incident occurs, banks can track the transactions which is critical for risk and compliance.
ML can support the detection of abnormal behaviours in fraud and system breaches. Commencing with a sample set of data, the machine is trained to spot fraudulent activity, identify the fraud, and eventually predict and stop threats.
Both FIs and consumers have a lot to gain from open banking and to profit from it, FIs must maintain consumer confidence and safeguard private information.
9. Dismantling rigid organisational structures
Another significant challenge is less technical and more organisational, namely many companies’ SILO thinking. Who is the point of contact and decision-maker when multiple technologies converge to form one large whole? Is it the CISO, because security concerns impact IT infrastructure and application operations? Is it the Business Group, because integrated solutions have a substantial advantage and a shorter time to market? Is it necessary for Marketing to take the lead because intuitive user guidance and lesser bounce rates are, after all, the domain of marketing communications?
10 .Regular Control and monitoring
Once everything is in place, it is time to monitor and control. At this point, banks will typically set up alerts for access, users, transactions, locations, amounts, and other factors. If there are any anomalies, the bank will be notified.
The challenge of API security in a financial ecosystem is not simple. It necessitates a lot of work and the constant attention of the architects of a banking ecosystem. Open APIs are crucial to the growth of open banking, but they also raise more security issues.
Open API security is critical because it can prevent the leakage of previously inaccessible and even secret data points. Therefore, it’s crucial to have a secure system that can evaluate each open API in real-time and quickly and flexibly verify its security throughout its lifecycle.
Currently, only a select few organisations and experts have the necessary expertise to build a performant, future-proof security framework for open banking. Macro Global is one such organisation. MG’s Open banking and other financial software are built with the primary goal to establish secure, open, and reliable interactions between banks, customers, and businesses.
Start your journey toward open banking with API security.