Developing an open banking app presents unique security challenges. With millions of active users and billions in transactions processed each year, open banking has become a critical part of the financial ecosystem. However, as adoption grows, so do concerns around data protection, fraud prevention, and regulatory compliance.
Ensuring robust security in open banking applications is not just a technical necessity, iit is a fundamental requirement to build trust, prevent financial crime, and maintain regulatory compliance. Developers must focus on securing APIs, implementing strong authentication measures, and following the latest regulatory guidelines to protect consumers and businesses alike.
This guide explores the key security risks, best practices, and regulatory considerations for developing secure open banking apps.
Why Open Banking Security is Critical
Open banking enables direct data sharing and payment processing between banks, third-party providers (TPPs), and consumers through APIs. Unlike traditional banking, which relies on card networks and intermediaries, open banking transactions happen directly between bank accounts. This structure reduces transaction costs and fraud risks but also creates new security challenges.
Security in open banking is governed by a combination of regulatory standards, strong authentication methods, and encryption protocols to safeguard financial data. The Financial Conduct Authority (FCA), Payment Systems Regulator (PSR), and Open Banking Implementation Entity (OBIE) set strict requirements to ensure that banks and fintechs operate within a secure framework.
Strong authentication measures, such as Strong Customer Authentication (SCA), play a key role in preventing unauthorised access and fraudulent transactions. Data encryption, real-time fraud monitoring, and API security protocols further enhance the safety of open banking applications.
Key Security Risks in Open Banking App Development
Despite its inherent security advantages, open banking applications remain a target for cyber threats. Developers must address potential vulnerabilities in API security, compliance, and fraud prevention.
API Security: The Foundation of Open Banking
APIs are the backbone of open banking, enabling data exchange and payment initiation between financial institutions and third-party providers. However, poorly secured APIs can expose sensitive financial information to attackers. Unsecured endpoints, weak authentication mechanisms, and insufficient encryption create opportunities for cybercriminals to exploit the system.
To protect against these risks, open banking APIs should be secured using OAuth 2.0 and OpenID Connect for authentication. Data should be encrypted in transit and at rest using TLS 1.2 or higher, and access should be restricted through role-based authorisation. Regular penetration testing and security audits should also be conducted to identify vulnerabilities before they can be exploited.
Regulatory Compliance and Data Protection
In the UK and Europe, open banking is regulated under the Revised Payment Services Directive (PSD2), which mandates SCA, secure API standards, and consumer data protections. Financial institutions and fintech companies must comply with these regulations to operate legally and maintain user trust.
In 2025, regulatory oversight is expanding to include additional consumer protection measures and fraud prevention strategies. The Joint Regulatory Oversight Committee (JROC) has been tasked with strengthening security frameworks, while the Data (Use and Access) Bill aims to establish a long-term regulatory structure for secure data sharing.
To remain compliant, developers must ensure that their applications enforce SCA for all transactions, encrypt customer data, and follow API security standards outlined by the FCA and Open Banking UK.
Preventing Fraud and Identity Theft
Open banking applications are a prime target for fraudsters attempting to gain unauthorised access to financial accounts. Common fraud tactics include credential stuffing attacks, account takeovers, and fake transactions.
Developers can mitigate these risks by integrating biometric authentication methods, AI-powered fraud detection, and real-time transaction monitoring. Machine learning models can be used to identify suspicious activity, such as unusual login locations or abnormal transaction patterns, and trigger additional verification steps before processing payments.
Implementing Strong Customer Authentication (SCA) for Maximum Security
SCA is a critical security requirement under PSD2 and Open Banking UK regulations, designed to reduce the risk of fraudulent transactions. It requires users to authenticate themselves using at least two out of three security factors:
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Something they know – such as a password or PIN
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Something they have – such as a smartphone or hardware token
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Something they are – such as a fingerprint or facial recognition
By enforcing SCA for all transactions, open banking applications significantly reduce the likelihood of unauthorised access. In the UK, BankID, MitID, and GOV.UK Verify are commonly used authentication methods that comply with SCA standards.
Recent reports indicate that fraud rates are three times lower for transactions that use SCA compared to those that do not. Additionally, the European Banking Authority estimates an 87% fraud detection success rate for SCA-secured payments.
The Role of Variable Recurring Payments (VRPs) in Open Banking Security
One of the most significant developments in open banking security is the introduction of Variable Recurring Payments (VRPs). VRPs allow consumers to set up recurring payments directly from their bank accounts without relying on stored card details.
Unlike traditional direct debits, VRPs provide greater consumer control over payments. Users can specify spending limits, control how often payments are made, and revoke authorisation at any time. This reduces the risk of unauthorised charges and fraudulent transactions.
The FCA and PSR have identified VRPs as a key priority for 2025, with planned expansions for use in utility payments, government transactions, and e-commerce. As VRPs become more widely adopted, developers must ensure their applications support secure, user-controlled recurring payments in compliance with FCA guidelines.
Future Trends in Open Banking Security
The future of open banking security is closely tied to advancements in smart data, digital identity verification, and cross-border interoperability.
The Data (Use and Access) Bill is set to drive the UK towards a smart data economy, where consumers can securely share financial information with authorised third parties in exchange for more personalised financial services. This will require open banking applications to adopt enhanced encryption protocols and stronger identity verification methods.
Digital identity solutions, such as eIDAS in the EU and BankID in the Nordics, will play a crucial role in ensuring that open banking transactions are both secure and convenient. Developers should explore biometric authentication and decentralised identity solutions to enhance security while improving the user experience.
Additionally, as more than 60 countries adopt UK open banking standards, cross-border payments and data sharing will become a focus. Ensuring interoperability between different regulatory frameworks and security protocols will be critical for the next phase of global open banking expansion.
Building a Secure Open Banking Application
Security must be embedded into every stage of open banking app development, from API design to authentication, fraud detection, and compliance monitoring.
Developers should prioritise API security using OAuth 2.0 and encryption, implement SCA for all transactions, and leverage AI-driven fraud detection to monitor payment activity in real time. Compliance with PSD2, FCA, and Open Banking UK security standards is essential for maintaining consumer trust and avoiding regulatory penalties.
As the industry moves towards smart data-driven financial services and global open banking interoperability, security will remain the foundation of success. Businesses that invest in secure-by-design app development will be best positioned to lead in the evolving open banking ecosystem.