Data Privacy in Open Banking

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Introduction

Open Banking has transformed Financial Services by enabling third parties to access bank data and providing customers with more personalised financial services. 

It's a concept that originated from the EU's Payment Services Directive 2 (PSD2), which mandated banks to open up their data to authorised third parties, fostering competition and innovation. 

It wasn’t just regulation that drove the need for a new way of working.  Open Banking came about through a confluence of consumer demand for more control, the need for greater competition and innovation in the Financial Sector, concerns about data security and privacy and the desire for greater financial inclusivity.

This new paradigm propelled the industry forward with enhanced services and customer experiences, but also introduced complex challenges in data sharing and privacy, as it necessitates sharing sensitive financial information with multiple external entities.

It might have started in Europe and the UK, but the ideas of Open Banking (and Open Data as a whole) translate across every nation. In the same way that data protection and privacy regulations have taken the world by storm, open banking will redefine the global financial landscape. It will promote accessible, transparent and personalised financial services, reflecting the contemporary ethos of data democratisation and customer-centricity.

Let’s look at a quick example - purchasing stocks and shares.  

Historically, you’d need to open an account with a broker like Hargreaves Lansdown, fund the account, wait for the money to clear, instruct the broker and then wait for the buy order to go through.

Now, Open Banking has facilitated the creation of apps like Trading 212, which simplifies this entire process into 4 easy steps: open the app, specify the amount to transfer, authorise the transfer and purchase the shares.  The Trading 212 application connects directly to your bank account using TrueLayer’s API, sends a push notification to your phone asking for consent to collect the funds, you authorise the transfer in your mobile banking app (for security purposes) and the process is complete - all in a matter of minutes.

The difficulty for FinTech and Financial Services companies now lies in striking a delicate balance: leveraging the opportunities of Open Banking while vigilantly guarding against data privacy risks.

Key Takeaways

  1. Data Privacy and Security are Central to Open Banking: The shift towards Open Banking requires heightened vigilance in protecting customer data. It's essential to maintain customer trust and meet regulatory standards in this new open data environment.
  2. Rising Security Concerns and Solutions: As Open Banking relies heavily on APIs, securing these data pathways is crucial to prevent cyber threats. Innovative security measures are required to mitigate risks associated with the increased data accessibility.
  3. Balancing Innovation with Compliance: Companies must innovate while ensuring compliance with evolving data protection laws. Strategic integration of technology and adherence to regulatory frameworks are key to sustainable growth in the Open Banking sector.

Security Challenges in Open Banking (And How to Resolve Them)

Open Banking's continued potential lies in its data-driven nature. However, new vulnerabilities emerge with every data point shared and application granted access. 

API Security in Open Banking

APIs (Application Programming Interfaces) are the pathways through which data flows between Financial Institutions, third-party providers and consumers.  They are the backbone of Open Banking, enabling the seamless, real-time exchange of financial data.  

However, the very feature that makes APIs indispensable - their ability to provide direct access to sensitive financial data - also makes them a prime target for cyber threats. 

94% of respondents to Salt Security’s recent State of API Security Report survey stated they had some security issues with their production APIs over the past year and, additionally, 31% had experienced a sensitive data exposure of privacy incident in the same timeframe.

To counter this, implementing multi-layered security protocols, including advanced authentication methods, encryption standards, and regular API security audits, becomes imperative. 

The security of these APIs isn't just a technical requirement but a cornerstone in maintaining the trust and confidence of consumers and partners in the Open Banking ecosystem. 

In an article in Security Week, VP of Salt Security, Michelle McLean, says that “...open banking is also a great example of why APIs are such an attractive target for bad actors – the highly lucrative financial data APIs transport in open banking applications make them worth the time to look for business logic flaws.”

The Salt Labs data backs up her points. By the middle of 2022, API attacks as a whole had increased by 681% and unique attackers attempting malicious activity against financial/insurance institutions had increased by 244%.

Open Banking Data Breaches

The expanded attack surface, largely due to the interconnected nature of Open Banking APIs, opens a gateway for malicious actors. In an instant, sensitive financial information can be exposed, leaving customers reeling and reputations shattered. 

For example, back in 2017, Venmo’s completely unsecured API leaked over 207 million transactions that gave threat actors access to the full names, transation notes and values of users. 

And, in 2021 Experian exposed the credit scores of almost every American citizen through their Experian Connect API - which was left unsecured on their website.

Data breaches not only trigger regulatory and legal repercussions but also inflict irreparable damage on customer loyalty and brand image. According to a report by Varonis, the average cost of a data breach was $4.45 million in 2023.

The interdependence between API security and the broader data security landscape is evident here. A breach in API security can quickly escalate into a fully-fledged data breach. Securing APIs effectively protects the entire data lifecycle in the Open Banking system.

In addition to these risks, FinTech/FinServ companies face a near-constant barrage of other threats such as phishing, ransomware, and APTs. Additionally, 74% of cybersecurity breaches involved a human element, making continuous cybersecurity training and awareness programs critical strategies to safeguard against human error.

Bias and Discrimination 

As AI weaves itself into the fabric of Open Banking tools, it brings with it the risk of biased algorithms perpetuating discrimination. Algorithmic biases based on financial history or spending patterns can unfairly disadvantage certain demographics, raising ethical concerns and potentially triggering regulatory intervention. 

The De Nederlandsche Bank explains that “although fairness is primarily a conduct risk issue, it is vital for society’s trust in the financial sector that financial firm’s AI applications, - individually or collectively - do not… disadvantage certain groups of customers.”

This issue of bias extends beyond data privacy concerns to the realm of ethical AI use. Financial institutions must ensure that their AI algorithms, powered by data aggregated through Open Banking APIs, are designed and continuously monitored for fairness and non-discrimination. 

In a study by Barlett et al (2019), they found that “while FinTech algorithms discriminate 40% less than face-to-face lenders, Latinx and African-American groups paid 5.3 basis points more for purchase mortgages and 2.0 basis points more for refinance mortgages, compared to Caucasian counterparts.”

Adopting principles of ethical AI and transparent algorithmic processes is not just a compliance requirement; it's a commitment to uphold the values of equity and fairness in the digital banking world. By addressing these biases proactively, financial leaders can foster an inclusive Open Banking environment that benefits all stakeholders.

Compliance and Strategic Integration in Open Banking

Open Banking is evolving quickly. One of the biggest challenges for businesses is balancing compliance with multiple regulatory frameworks while also strategically integrating advanced technologies to promote growth.

Navigating Compliance in Open Banking

The successful implementation of Open Banking hinges on navigating a labyrinth of compliance requirements and technology integration. This means not only understanding the nuances of regulations like PSD2 but also effectively integrating new technologies into existing systems. 

The complexity here lies in aligning API interfaces with legacy systems and ensuring that these integrations comply with both regional and global data protection standards. 

A strategic approach involves regular compliance audits, investing in scalable tech solutions, and fostering partnerships with tech providers who understand the intricacies of financial regulations.

Strategic Best Practices for Senior Leaders

For senior leaders, striking the right balance between innovation and data protection is a strategic dance. Prioritising customer data security in every innovation decision is paramount. 

This includes conducting thorough risk assessments before adopting new technologies and ensuring that all innovations are compliant with data protection laws. 

We recommend that you implement a proactive Privacy By Design initiative where you embed data privacy from the beginning of product/software development and throughout the entire lifecycle.  This will ensure that you remain compliant with the necessary regulations, reduce the risk of breaches and identify potential risks early in development.

Additionally, fostering a culture of continuous learning and adaptability within the organisation can help in staying ahead of the rapidly evolving digital finance landscape.

Data Privacy Compliance in Open Banking

At Zendata, we have a strong track record of supporting businesses in Financial Services and FinTech with their data privacy and compliance initiatives.  We’ve developed cutting-edge privacy solutions that work across your entire data lifecycle to effortlessly maximise security and minimise risk.  

Our no-code, AI-powered data security and privacy compliance platform integrates Privacy by Design across your entire data lifecycle to help you navigate the complexities of the regulatory landscape.

We can help you to: 

  1. Streamline Regulatory Compliance: Automate adherence to global data privacy laws, significantly reducing the risk of compliance breaches and associated fines, and simplifying the management of regulatory requirements across different regions.
  2. Enhance Your Data Security Posture: We provide a robust framework for data discovery, classification and masking, allowing businesses to strengthen their overall data security posture and protect sensitive information from unauthorised access and breaches.
  3. Mitigate Risks Proactively: Gain advanced capabilities for risk identification and prevention in data management and software development, enabling businesses to proactively address vulnerabilities and secure data assets before they are compromised.
  4. Optimise Operational Efficiency: Zendata integrates seamlessly into existing IT infrastructures and development workflows, optimising operational efficiency by reducing manual data management tasks and enabling a focus on strategic initiatives.
  5. Build and Maintain Customer Trust: Ensure the secure and compliant handling of personal data. Zendata helps businesses build and maintain trust with their customers, which is essential for long-term customer relationships and brand reputation.

Conclusion

With the EU’s introduction of new legislative proposals for a third Payment Services Directive (PSD3) and the USA’s introduction of Open Banking principles from Q4 2024, there is no doubt that Open Banking is an evolving area that will continue to change over the coming years. 

Unlocking the potential of Open Banking while safeguarding data privacy is not a one-time achievement, but a continuous journey.

For businesses, success in this field hinges on maintaining customer trust, enhancing data security and protecting user’s privacy. 


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Data Privacy in Open Banking

January 5, 2024

Introduction

Open Banking has transformed Financial Services by enabling third parties to access bank data and providing customers with more personalised financial services. 

It's a concept that originated from the EU's Payment Services Directive 2 (PSD2), which mandated banks to open up their data to authorised third parties, fostering competition and innovation. 

It wasn’t just regulation that drove the need for a new way of working.  Open Banking came about through a confluence of consumer demand for more control, the need for greater competition and innovation in the Financial Sector, concerns about data security and privacy and the desire for greater financial inclusivity.

This new paradigm propelled the industry forward with enhanced services and customer experiences, but also introduced complex challenges in data sharing and privacy, as it necessitates sharing sensitive financial information with multiple external entities.

It might have started in Europe and the UK, but the ideas of Open Banking (and Open Data as a whole) translate across every nation. In the same way that data protection and privacy regulations have taken the world by storm, open banking will redefine the global financial landscape. It will promote accessible, transparent and personalised financial services, reflecting the contemporary ethos of data democratisation and customer-centricity.

Let’s look at a quick example - purchasing stocks and shares.  

Historically, you’d need to open an account with a broker like Hargreaves Lansdown, fund the account, wait for the money to clear, instruct the broker and then wait for the buy order to go through.

Now, Open Banking has facilitated the creation of apps like Trading 212, which simplifies this entire process into 4 easy steps: open the app, specify the amount to transfer, authorise the transfer and purchase the shares.  The Trading 212 application connects directly to your bank account using TrueLayer’s API, sends a push notification to your phone asking for consent to collect the funds, you authorise the transfer in your mobile banking app (for security purposes) and the process is complete - all in a matter of minutes.

The difficulty for FinTech and Financial Services companies now lies in striking a delicate balance: leveraging the opportunities of Open Banking while vigilantly guarding against data privacy risks.

Key Takeaways

  1. Data Privacy and Security are Central to Open Banking: The shift towards Open Banking requires heightened vigilance in protecting customer data. It's essential to maintain customer trust and meet regulatory standards in this new open data environment.
  2. Rising Security Concerns and Solutions: As Open Banking relies heavily on APIs, securing these data pathways is crucial to prevent cyber threats. Innovative security measures are required to mitigate risks associated with the increased data accessibility.
  3. Balancing Innovation with Compliance: Companies must innovate while ensuring compliance with evolving data protection laws. Strategic integration of technology and adherence to regulatory frameworks are key to sustainable growth in the Open Banking sector.

Security Challenges in Open Banking (And How to Resolve Them)

Open Banking's continued potential lies in its data-driven nature. However, new vulnerabilities emerge with every data point shared and application granted access. 

API Security in Open Banking

APIs (Application Programming Interfaces) are the pathways through which data flows between Financial Institutions, third-party providers and consumers.  They are the backbone of Open Banking, enabling the seamless, real-time exchange of financial data.  

However, the very feature that makes APIs indispensable - their ability to provide direct access to sensitive financial data - also makes them a prime target for cyber threats. 

94% of respondents to Salt Security’s recent State of API Security Report survey stated they had some security issues with their production APIs over the past year and, additionally, 31% had experienced a sensitive data exposure of privacy incident in the same timeframe.

To counter this, implementing multi-layered security protocols, including advanced authentication methods, encryption standards, and regular API security audits, becomes imperative. 

The security of these APIs isn't just a technical requirement but a cornerstone in maintaining the trust and confidence of consumers and partners in the Open Banking ecosystem. 

In an article in Security Week, VP of Salt Security, Michelle McLean, says that “...open banking is also a great example of why APIs are such an attractive target for bad actors – the highly lucrative financial data APIs transport in open banking applications make them worth the time to look for business logic flaws.”

The Salt Labs data backs up her points. By the middle of 2022, API attacks as a whole had increased by 681% and unique attackers attempting malicious activity against financial/insurance institutions had increased by 244%.

Open Banking Data Breaches

The expanded attack surface, largely due to the interconnected nature of Open Banking APIs, opens a gateway for malicious actors. In an instant, sensitive financial information can be exposed, leaving customers reeling and reputations shattered. 

For example, back in 2017, Venmo’s completely unsecured API leaked over 207 million transactions that gave threat actors access to the full names, transation notes and values of users. 

And, in 2021 Experian exposed the credit scores of almost every American citizen through their Experian Connect API - which was left unsecured on their website.

Data breaches not only trigger regulatory and legal repercussions but also inflict irreparable damage on customer loyalty and brand image. According to a report by Varonis, the average cost of a data breach was $4.45 million in 2023.

The interdependence between API security and the broader data security landscape is evident here. A breach in API security can quickly escalate into a fully-fledged data breach. Securing APIs effectively protects the entire data lifecycle in the Open Banking system.

In addition to these risks, FinTech/FinServ companies face a near-constant barrage of other threats such as phishing, ransomware, and APTs. Additionally, 74% of cybersecurity breaches involved a human element, making continuous cybersecurity training and awareness programs critical strategies to safeguard against human error.

Bias and Discrimination 

As AI weaves itself into the fabric of Open Banking tools, it brings with it the risk of biased algorithms perpetuating discrimination. Algorithmic biases based on financial history or spending patterns can unfairly disadvantage certain demographics, raising ethical concerns and potentially triggering regulatory intervention. 

The De Nederlandsche Bank explains that “although fairness is primarily a conduct risk issue, it is vital for society’s trust in the financial sector that financial firm’s AI applications, - individually or collectively - do not… disadvantage certain groups of customers.”

This issue of bias extends beyond data privacy concerns to the realm of ethical AI use. Financial institutions must ensure that their AI algorithms, powered by data aggregated through Open Banking APIs, are designed and continuously monitored for fairness and non-discrimination. 

In a study by Barlett et al (2019), they found that “while FinTech algorithms discriminate 40% less than face-to-face lenders, Latinx and African-American groups paid 5.3 basis points more for purchase mortgages and 2.0 basis points more for refinance mortgages, compared to Caucasian counterparts.”

Adopting principles of ethical AI and transparent algorithmic processes is not just a compliance requirement; it's a commitment to uphold the values of equity and fairness in the digital banking world. By addressing these biases proactively, financial leaders can foster an inclusive Open Banking environment that benefits all stakeholders.

Compliance and Strategic Integration in Open Banking

Open Banking is evolving quickly. One of the biggest challenges for businesses is balancing compliance with multiple regulatory frameworks while also strategically integrating advanced technologies to promote growth.

Navigating Compliance in Open Banking

The successful implementation of Open Banking hinges on navigating a labyrinth of compliance requirements and technology integration. This means not only understanding the nuances of regulations like PSD2 but also effectively integrating new technologies into existing systems. 

The complexity here lies in aligning API interfaces with legacy systems and ensuring that these integrations comply with both regional and global data protection standards. 

A strategic approach involves regular compliance audits, investing in scalable tech solutions, and fostering partnerships with tech providers who understand the intricacies of financial regulations.

Strategic Best Practices for Senior Leaders

For senior leaders, striking the right balance between innovation and data protection is a strategic dance. Prioritising customer data security in every innovation decision is paramount. 

This includes conducting thorough risk assessments before adopting new technologies and ensuring that all innovations are compliant with data protection laws. 

We recommend that you implement a proactive Privacy By Design initiative where you embed data privacy from the beginning of product/software development and throughout the entire lifecycle.  This will ensure that you remain compliant with the necessary regulations, reduce the risk of breaches and identify potential risks early in development.

Additionally, fostering a culture of continuous learning and adaptability within the organisation can help in staying ahead of the rapidly evolving digital finance landscape.

Data Privacy Compliance in Open Banking

At Zendata, we have a strong track record of supporting businesses in Financial Services and FinTech with their data privacy and compliance initiatives.  We’ve developed cutting-edge privacy solutions that work across your entire data lifecycle to effortlessly maximise security and minimise risk.  

Our no-code, AI-powered data security and privacy compliance platform integrates Privacy by Design across your entire data lifecycle to help you navigate the complexities of the regulatory landscape.

We can help you to: 

  1. Streamline Regulatory Compliance: Automate adherence to global data privacy laws, significantly reducing the risk of compliance breaches and associated fines, and simplifying the management of regulatory requirements across different regions.
  2. Enhance Your Data Security Posture: We provide a robust framework for data discovery, classification and masking, allowing businesses to strengthen their overall data security posture and protect sensitive information from unauthorised access and breaches.
  3. Mitigate Risks Proactively: Gain advanced capabilities for risk identification and prevention in data management and software development, enabling businesses to proactively address vulnerabilities and secure data assets before they are compromised.
  4. Optimise Operational Efficiency: Zendata integrates seamlessly into existing IT infrastructures and development workflows, optimising operational efficiency by reducing manual data management tasks and enabling a focus on strategic initiatives.
  5. Build and Maintain Customer Trust: Ensure the secure and compliant handling of personal data. Zendata helps businesses build and maintain trust with their customers, which is essential for long-term customer relationships and brand reputation.

Conclusion

With the EU’s introduction of new legislative proposals for a third Payment Services Directive (PSD3) and the USA’s introduction of Open Banking principles from Q4 2024, there is no doubt that Open Banking is an evolving area that will continue to change over the coming years. 

Unlocking the potential of Open Banking while safeguarding data privacy is not a one-time achievement, but a continuous journey.

For businesses, success in this field hinges on maintaining customer trust, enhancing data security and protecting user’s privacy.