Open banking is changing finance. Since PSD2 enforcement in Europe in 2018, banks are mandated to securely share data with licensed third-party applications. But with more openness comes the need for better security of sensitive data.
In this guide, we’ll explore the security measures that make open banking safe, the regulations in place to protect users, and why security remains a top priority for everyone involved in the open banking ecosystem.
What Makes Open Banking Secure
Open banking relies on secure connections, customer consent, and strict regulations to protect data. Through APIs (Application Programming Interfaces), banks can share customer data with authorised third parties, but only with clear permission from the user. This allows third parties to build personalised financial services.
Three main principles support open banking security:
1. Strong Customer Authentication (SCA): Under PSD2 regulation in Europe, users engaged in open banking must authenticate their identity using at least two verification factors, such as a password and a fingerprint. This dual layer of security reduces the risk of unauthorised access.
2. Data Encryption: All data shared through open banking is encrypted, meaning it’s converted into a secure code that only authorised parties can read. Encryption keeps information safe during transfers, protecting it from potential cyber threats.
3. Customer Consent and Control: Users must give explicit permission before any data is shared. This ensures that users know exactly what information is shared, with whom, and for what purpose.
Key Security Measures in Open Banking
Open banking providers use several security measures to keep data safe. Let’s take a look.
Regulated APIs
APIs are at the heart of open banking, allowing data to flow between banks and third-party apps. To keep APIs secure, open banking providers follow strict protocols, and APIs are regulated under PSD2. Regular testing and monitoring also help detect and prevent unauthorised access, ensuring that APIs stay protected.
Tokenisation
Tokenisation is a process that replaces sensitive information with unique identifiers, or “tokens.” These tokens have no value outside of the secure transaction, so if they are intercepted, they cannot be used by attackers. Tokenisation is especially useful for payment initiation, as it protects the user’s bank details while allowing transactions to proceed securely.
Fraud Detection Systems
Open banking providers typically use advanced fraud detection systems to identify and prevent suspicious activity. By monitoring transaction patterns and analysing data, these systems can detect unusual behaviours and flag potential threats.
Data Minimisation
Data minimisation is a security practice that limits the amount of information shared through open banking. Only the data necessary to perform a specific function is shared, reducing exposure and protecting user privacy. For example, a budgeting app might only access transaction history, not account balances or personal identification details.
Regulatory Standards Supporting Open Banking Security
PSD2 is a European Union regulation that mandates secure data sharing in open banking. It requires banks to open up customer data to authorised third parties, but only with the customer’s consent. PSD2 SCA, mentioned above. This directive is central to maintaining open banking security across Europe, and its update – PSD3 – is currently in draft.
GDPR is a European data protection law that ensures users have control over their personal information. Under GDPR, open banking providers must handle customer data responsibly, ensuring transparency and giving users the right to know how their data is used..
How Open Banking Providers Ensure Ongoing Security
Maintaining security in open banking is an ongoing effort. Providers take several steps to keep up with evolving threats and stay compliant with the latest regulations.
- Regular Security Audits: Providers conduct audits to evaluate their security protocols, identifying potential weaknesses and making improvements.
- Incident Response Plans: In case of a data breach or security incident, providers have response plans to contain the issue, notify affected users, and resolve it quickly.
- User Education: Many providers educate users on open banking security, offering tips on safe practices, such as enabling MFA and recognising phishing attempts.
- Partnership with Banks and Regulators: Open banking providers collaborate with banks and regulatory bodies to stay ahead of emerging threats and ensure compliance with security standards.
Future of Open Banking Security
The future of open banking security will likely see further advancements in both technology and regulation. Here are some trends to expect:
- Biometric Authentication: Methods like fingerprint and facial recognition are likely to become more common in open banking, offering an additional layer of security.
- AI-Powered Fraud Detection: Artificial intelligence already helps providers analyse transaction patterns and detect fraud more accurately.
- Keeping up with Regulatory Standards: As open banking grows, regulations will likely evolve to address new security needs, ensuring that the industry keeps pace with potential risks.
Final Thoughts
Open banking security is central to the success of the open banking ecosystem in Europe and beyond. By enforcing strict data protection measures, requiring customer consent, and staying compliant with regulations, open banking providers create a secure environment for data sharing and payments.
