Why secure federated identity is foundational to open ecosystems and payments

By Ramanathan (Ram) Narayanan, chief technology officer at ProofOfID

Open Banking, Open Payments, and Open Data ecosystems are built on API-driven interactions that enable customer-authorized access to financial data and payment initiation across multiple independent entities, including banks, third-party providers (TPPs), fintechs, and payment service providers (PSPs). While APIs define how systems interact and exchange data, they do not establish trust. The ability of these ecosystems to operate securely and at scale depends on secure federated identity governed by a shared trust framework.

From a technical standpoint, every Open Banking or payment interaction must satisfy a consistent set of controls: authentication of the end user, identification of the requesting client, verification of consent scope, and assurance of authentication strength. Secure federated identity enables these controls to be enforced through standardized identity assertions rather than repeated credential exchanges. Identity is established by a trusted identity provider, typically a regulated financial institution or an accredited identity service, which issues cryptographically protected tokens that relying parties can independently verify and trust.

This model is embedded directly into major Open Banking and payment frameworks. Under PSD2 in the EU, TPPs are identified using eIDAS-qualified certificates, while Strong Customer Authentication (SCA) ensures that payment initiation and data access are bound to high-assurance user authentication. Federated identity allows PSPs to rely on these authentication outcomes without directly handling customer credentials, enabling secure cross-institutional payment flows while preserving customer privacy.

In the UK, Open Banking mandates OAuth 2.0 and OpenID Connect profiles aligned with Financial-grade API (FAPI) standards. Banks act as identity providers, authenticating customers and issuing tokens that TPPs use to initiate payments or access data within tightly defined consent scopes. Trust is governed through participant accreditation and standardized security profiles rather than fragile bilateral agreements, a critical requirement for scaling payments safely.

The importance of federated identity becomes even more pronounced in real-time payment ecosystems. Brazil’s Open Finance framework, which includes instant payments via Pix, relies on strong authentication, standardized consent management, and reusable identity assertions to support high transaction volumes across hundreds of participants. Without federated trust, such a payment scale would require extensive duplication of identity, fraud, and risk controls, significantly increasing cost and complexity.

Technically, modern open payment ecosystems rely on standards such as OAuth 2.0, OpenID Connect, and FAPI 2.0. These controls include mutual TLS, signed authorization requests, proof-of-possession tokens, and strict token lifetimes. Together, these mechanisms mitigate phishing, token replay, and man-in-the-middle attacks, ensuring that authentication strength, consent, and transaction context remain cryptographically bound throughout the payment lifecycle.

In payments specifically, federated identity underpins authorization, fraud prevention, dispute resolution, and liability management. It allows payment service providers to trust identity and consent signals issued elsewhere, rather than rebuilding risk decisions for every transaction. In Open Data scenarios, the same principles enforce least-privilege access, auditable consent, and regulatory oversight. Across jurisdictions, the pattern is consistent: open ecosystems scale only when secure federated identity and trust are treated as core infrastructure.

At ProofOfID, we focus on building this trust layer for payments and Open Finance. Our platform allows identity to be verified once and securely reused across participating institutions through cryptographically verifiable assertions, all while giving consumers control over when and how their identity is shared. For payment ecosystems, this results in lower fraud, less friction, clearer liability boundaries, and faster partner onboarding, without sacrificing security or compliance.

If you’re attending Open Banking Expo Canada on March 5, Ram and the ProofOfID team would be happy to discuss these challenges and solutions in more detail. Stop by the ProofOfID booth A3 to meet me and the team, and discover how federated identity can boost trust, security, and scalability across Open Banking and payment ecosystems. Visit proofofid.io for more details.

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