Financial services have developed at a breakneck pace, resulting in fierce competition among financial technologies. These services in the digital age must be characterized by three words: rapid, efficient, and intuitive. It is no longer necessary to wait in queues to speak with a bank teller.
Consumers today want to manage their accounts using their smartphones, and banks want to earn their loyalty. What is the common ground? Using modern technologies to find new methods of doing things. Open banking offers both clients and financial institutions a once-in-a-lifetime opportunity to change the way people and businesses manage their money.
Open banking systems are technologies that allow customers to directly hold bank accounts without the involvement of several financial companies. It is a technology that changes the way a business interacts with its consumers by switching systems and processes, and it establishes new revenue-sharing ecosystems.
Open banking technologies have the potential to improve revenue streams in financial systems while also broadening the reach of clients to financial institutions. Open banking systems allow banks to monetize their infrastructure by moving into the backend as a service space (BaaS), allowing financial technology and other third-party companies to access essential functions.
According to PWC, 71% of SMBs (Small and medium-sized businesses) and 64% of people will use open banking by 2022.
Risks Associated with Open Banking System
Attacks on APIs: Attacks on application program interfaces (APIs) create distributed denial of service (DDOS), which can result in financial activities being disrupted. Cybercriminals research API systems in order to uncover security weaknesses.
Attacks on applications: Since most customers prefer mobile apps while utilizing open banking systems, fraudsters are focusing their efforts on the open banking application. The programs' passwords, usernames, and encryption keys may aid cybercriminals in retrieving sensitive banking data. Criminals can utilize this to impersonate clients and conduct various banking transactions.
Attacks against fin-tech companies: Different fin-tech companies have different levels of security and experience. Cybercriminals act like real banks or consumers in order to attack fintech systems, which are great targets for stealing customers' banking information.
Disaggregation and disruption: As the number of players offering financial services grows, the number of transactions processed by each organization decreases. The total activity will be seen through a limited lens, making it more difficult to spot suspicious or unusual behaviour.
Endpoints Security: The security of endpoints in banking systems is always a concern. API formats that are legitimate are used to safeguard third-party APIs. Endpoint security protection refers to the protection of various business networks accessed by distant devices such as tablets, laptops, cellphones, or other wireless devices.
Five Security Standards for Open Banking
What can be done to ensure that this new paradigm is safe? Many distinct API standards are being developed in different parts of the world to ensure that open banking can flourish and remain secure.
To regulate the transit, authentication, authorisation, and delegation of credentials, it is advised to implement some security standards. HTTPS, mTLS, OAuth 2.0, OpenID Connect, FAPI, and other standards are among the most popular. There is a high-level overview of these standards and how they fit into the open banking security puzzle in the sections below.
The need for Mutual Authentication over Transport Layer Security (mTLS) requires both clients and servers to produce and validate certificates. Validating server certificates using two-way authentication is a tried-and-true method that is widely used in the market. Replay, man-in-the-middle, and spoofing attacks can all be prevented with this method.
Over and above mTLS, there are other layers to consider. PSD2 mandates quality trust service providers (QTSPs) to adopt the eIDAS (electronic Identity, Authentication, and Trust Services) EU standard for electronic identification. This describes the use of the ASN.1 data format for carrying additional attributes.
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3) OAuth 2.0
In the world of APIs, OAuth 2.0 is quite common and well-known; most provers use it in some form. OAuth provides a set of security features that aren't available anywhere else. An app using the Twitter API, for example, does not need to know the user's password when using OAuth. Open banking efforts such as the Berlin Group and STET both support OAuth.
OAuth has yet to be adopted by other open financial institutions. It's vital to upgrade OAuth to add more security and features. OAuth 2.0 and mTLS should be used together and OpenID Connect comes into play here as well.
4) OpenID Connect
OpenID Connect is a layer of authentication that sits on top of OAuth and uses an ID token to give further confirmation of identity. It's described as "a basic identity layer on top of the OAuth 2.0 protocol" in the specification. This token, which comes in the form of a JSON Web Token (JWT), confirms the user's identity and provides a slew of additional services.
5) FAPI (Financial-grade API)
An OpenID Foundation profile, FAPI rests on OpenID Connect and offers additional protection to financial institutions. The standard increases security by segmenting TPP permissions and tightening behaviors.
FAPI is divided into four drafts: a Read and Write API Security Profile, a Read-Only API Security Profile, JWT Secured Authorization Response Mode for OAuth 2.0 (JARM), and Client-Initiated Backchannel Authentication (CIBA), which offers a new way to request a user's authentication.
Flow Chart for Implementation
A Third Party, a Bank Token Service, Open Banking APIs, and, at the heart of it all, an API Gateway are the four primary players in an open banking security configuration. There is a sample sequence for generating a key or certificate for a Third Party to call APIs:
- Proceed with the assumption that the Third Party has already been registered. They must first request access to a user account, which will most likely be done via an OAuth Code Flow.
- The Token Service verifies the user's identity after that. Multi-factor authentication is required by open banking standards for the Token Service.
- The user is now asked if they want the Third Party to have access to their data by the Token Service. An authenticator app, a pop-up, or a web page UI could all be used. PSD2 necessitates a cryptographically signed consent anyway.
- Following that, the Token Service issues a token to the Third Party as proof of permission. It is great to convert this to a Sender-Constrained Token, which allows only the person who owns the token to use it, hence increasing security.
- The token is then sent by the Third Party to the API Gateway. mTLS must be utilised because it is a Sender-Constrained Token.
- After that, the API Gateway validates the token, inspects it with the Bank Token Service, and obtains a value token, a JWT, which allows the API Gateway to enforce the sender and give coarse-grained access control holding scopes for certain policies.
- The APIs get this JWT, which contains the data and claims required to validate the request. To accept the request, the API authorisation makes a fine-grained access decision.
The process above depicts a secure approach for preventing sensitive data from being exposed to the outside world. The idea is to use open protocols to enforce sender-constrained access, which is then confirmed throughout the process using JWTs. From beginning to end, the user's direct affirmation is ensured.
Open Banking Systems Implementation
The following are some of the most important factors to consider while implementing open banking systems:
1) API Standard:
Banks and financial institutions must define an acceptable API specification to ensure that their internal data and services are exposed to the outside world. The open APIs reveal a variety of data and internal banking applications, such as ATM locations, currency rates, interest rates, and branch locations. Banks and financial organizations reveal all critical client account information through secured APIs.
2) API Security:
Banks and financial institutions must design a strategy to prevent unauthorized third parties from accessing secure APIs. When APIs are established and made publicly available, banks typically use numerous layers of security technology to safeguard the exposed APIs. Various open banking systems employ authorization mechanisms such as certificates based on third-party authorization, authentication, and OAuth2 tokens on a regular basis.
3) Customer Authentication:
When sharing sensitive customer data with third parties, the bank requires the customer's consent. To protect sensitive financial information, authentication is the combination of two or more factors of ownership, knowledge, and inheritance. Facial recognition data, fingerprints, voice, and SMS OTPs are some of the authentication factors utilized by banks and other financial institutions. Financial institutions and banks also employ strategies including mixed, delegated, and embedded procedures to protect sensitive data.
4) Transaction Risk Analysis:
Even though the transaction procedures are without risk, it is necessary to go through all of the authentication steps and offer consent when generating payments. If the amount of risk is low, the transaction risk analysis (TRA) refers to recognizing the level of uncertainty during transactions and allowing the consumer to bypass the authentication factors.
Banks must consider the platform's capacity, as well as the transaction risk analysis solutions deployed by banks and other financial institutions while using open banking technology.
5) Customer Consent Management:
Customer consent management entails granting the customer authority over their personal financial data. Decisions on consent management are made based on variables such as the level of sharing, the time period, and the goal. While sharing customer data with a third party, open banking systems should be capable of capturing, storing, and validating consent.
6) Third-Party Onboarding:
When open banking APIs are needed, customers typically subscribe to them. For third-party consumers, banks frequently provide signup forms.
Open Banking's Perks for Banks and Fintech Companies
Banks and fintech companies compete on a level playing field, thanks to open banking. As online banking becomes increasingly prevalent, some things will never be the same again. However, so far, the additional possibilities appear to outweigh the disadvantages.
The following are some of the most significant advantages:
1) Collaboration Potential
Banks and fintech companies can coexist: open banking does not imply that one has a competitive edge over the other. Open banking, on the other hand, facilitates collaboration between established financial institutions and fintech disruptors. Agreements to share data with fintech and other non-financial organizations open up the possibility of developing new, creative services.
2) New Business Concepts for the Banking Sector
Banks have grown more futuristic as a result of open banking. The client experience is dramatically transformed by adopting new forms of technology. Customers can use their mobile devices to access their accounts and data.
Voice assistants and augmented reality features will be included in banking institutions' interfaces in the future. To enhance the client journey, banks can develop these services on their own or work with fintech suppliers. Physical locations are almost unnecessary given that complete online banking is available.
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3) Assisting Customers with their Business Operations
Open Banking makes it easier to get answers and services that are suited to each individual's needs. Everything is simpler because of the infinite number of APIs that exist and can arise. Access to technology is all that is required. Operations are automated and time spent is reduced.
Traditional banking needs to adjust to the new market environment, in which banks are no longer the only actors. Those that try to adapt to new technology will have a better chance of long-term success.
It is safe to conclude that open banking is a foregone conclusion. The current ecosystem will be replaced by a set of digital tools. Banks must develop a new vision and determine their place in the new financial paradigm.
Fintech's progress will be fascinating to watch as long as the interests of clients are prioritized. Even while there is a natural apprehension about change, clients will benefit the most from open banking.