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How does open banking protect users’ data?

Open banking allows the convenience of accessing a wide range of financial services tailored to users’ needs. However, with it comes a natural concern: Is it secure?

In this article, we’ll look in-depth at how open banking works, explore the potential risks and shed light on the robust security measures in place to protect your or your customers’ financial information.

How does open banking work?

The concept of open banking is based on the sharing of financial data between traditional banks and third-party providers (TPPs). It is done so through the Application Programming Interfaces (APIs), which we can imagine as these technological bridges connecting different systems. With customers’ consent, banks share their data to enable optimised payment processing and personalised services.

One of the examples of open banking is Payop’s Pay-by-Bank solutions. It allows your clients to make online payments directly from their bank accounts without entering sensitive information.

You can find more information on the fundamentals of open banking in our article: Understanding open banking: A comprehensive guide.

Risks of open banking

All this sounds quite promising. But naturally, such data sharing raises questions about security. So, let’s tackle the four main risk points of the concept:

  1. Data privacy: The extensive data exchange across different platforms causes reasonable concerns regarding data privacy in open banking. In the absence of a unified regulatory framework, it can be difficult to manage and ensure mutual respect for data privacy by all stakeholders.
  2. TPPs vulnerabilities: Any weaknesses in the TPPs’ systems have the potential to expose critical customer data, posing a significant security risk.
  3. Fraudulent activities: Cybercriminals may exploit the increased data sharing to impersonate customers/banks or manipulate users into divulging sensitive information.
  4. Technical vulnerability: Since the heart of open banking are APIs, any system malfunctions or integration errors can disrupt the smooth operation of services and make them vulnerable.

Security measures in open banking

To understand whether these potential threats are a problem, we will examine how open banking deals with them.

Customer control

In open banking, customers have primary control over their data. They, and only they, decide what information providers can access, for how long and for which purpose. The level of access can also be adjusted according to the user’s preference or withdrawn completely. This grants transparency and trust among all parties involved.

Any such transfer of information is strongly authenticated. Open banking employs strict customer identification using multi-factor authentication (MFA) and biometrics to prevent all sorts of crime.

Strict requirements for third-party providers

The essence of open banking hinges on the cooperation of traditional financial institutions with TPPs. This partnership is highly regulated and involves strict requirements for providers.

To access open banking APIs, they must pass a thorough verification process. This includes undergoing checks and audits to establish the following:

  • compliance of the system and security measures with the standards set by financial regulators,
  • adherence to the regulatory requirements of a particular region (for example, PSD2 and GDPR for Europe),
  • the ability to detect and prevent scams and respond to cyber-attacks.

Such checks are carried out systematically, so providers are obliged to update their systems as new requirements arise.

Reliable API

When a TPP requests your customers’ data, it must go through the bank’s API. These are the cornerstones of open banking and are built with security in mind. Reliable and secure, APIs use encryption protocols to safeguard data during transit, making it extremely challenging for fraudsters to intercept and misuse information.

More on encryption in this article.

Transaction risk analysis

Transaction risk analysis uses advanced algorithms to monitor transactions in real-time. It considers such factors as issuer, acquirer, location, time, spending habits, and other behavioural patterns to identify any unusual and suspicious activities.

If a transaction is marked as low-risk, it can be allowed to bypass some of the authentication steps. Transactions falling into the high-risk category, on the contrary, undergo additional levels of verification and authentication. This real-time analysis allows to react quickly in case of a security breach and prevent fraud.


While concerns about open banking security are reasonable, the industry has responded with effective measures to ensure the protection of users’ data. Strict regulations, customer control mechanisms, reliable APIs, and transaction risk analysis collectively create a solid foundation of open banking security.

So, while it’s wise to stay aware of risks, there’s no reason to deny yourself the unparalleled convenience of open banking.

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