The explosive growth of embedded finance and open banking initiatives is creating both challenges and new opportunities in financial services. Now, the global embedded finance market is expected to reach $7.2 trillion by 2030, according to the World Economic Forum. For hedge funds, alt funds, and other investment firms, this represents both a profound opportunity and a significant security risk. These financial services groups must learn to harness the power of APIs while safeguarding their most sensitive assets with API security.
The stakes have never been higher. 94% of financial services companies experienced an API security incident in the past year, according to Bob’s Guide, with an average of 47 attacks per month targeting these critical digital pathways. Meanwhile, CIO Influence data shows that API usage has increased by 167% across industries in the past year. As a result, APIs have become the “new frontline of cybersecurity” in an interconnected financial ecosystem, Bob’s Guide describes, where a single compromised interface can serve as a gateway for attackers to access sensitive client data, manipulate transactions, or disrupt core services.
The Open Banking Revolution: Opportunities and Vulnerabilities
Market Forces Driving Change
The emergence of “coopetition”—a strategic blend of selective competition and essential collaboration—is reshaping how financial institutions approach innovation. The World Economic Forum emphasizes that “the banks-versus-fintech narrative is outdated,” noting how fintechs bring agility and problem-solving capabilities while banks offer scale, trust, and capital. This shift is exemplified by deals like Astra Tech’s subsidiary Quantix securing $500 million from Citi, World Economic Forum notes, demonstrating how collaboration between traditional financial giants and fintech disruptors can drive both financial inclusion and competitive advantage.
For investment firms, this transformation presents unique challenges. Unlike traditional retail banking, hedge funds and alt funds must balance the benefits of open banking with the need to protect proprietary trading strategies, client confidentiality, and regulatory compliance across multiple jurisdictions. The regulatory momentum continues to build, with PSD3 compliance expected by 2027 or 2028, creating direct implications for investment firm API strategies and third-party data sharing protocols.
The Expanding Attack Surface
BAI’s recent State of Application Strategy report reveals that financial services now manage approximately 601 APIs on average, with enterprise organizations handling thousands more. This proliferation creates an exponentially expanding attack surface—particularly concerning the fact that 45% of financial organizations are only now adopting API discovery capabilities to identify “zombie APIs” and “shadow APIs” that remain hidden and exposed within their digital ecosystems, according to the report.
The threat landscape has evolved considerably beyond traditional perimeter-based attacks as well. As Forbes notes, cybercriminals increasingly target APIs because they can have “hidden security issues, like exposing unprotected user data or weak authentication requirements.” The financial impact is severe—API breaches tend to leak 10 times more data than traditional attacks, and the cost of cyberattacks has more than quadrupled since 2017, with numbers rapidly growing across the financial sector, according to the article.
Authentication Frameworks: Building Financial-Grade API Security
Advanced OAuth Implementation and FAPI Standards
The foundation of robust API security lies in implementing authentication frameworks that go far beyond basic API keys. OAuth 2.0 and OpenID Connect provide essential standards for managing user consent and granting specific, limited access to data, but the financial services industry requires more stringent controls. As Bob’s Guide emphasizes, implementing “strong authentication mechanisms like OAuth 2.0 and OpenID Connect” with “granular authorization checks” ensures that authenticated users can only access explicitly permitted data and functions.
The Financial-grade API (FAPI) profile of OpenID Connect represents the gold standard for investment firms handling sensitive financial data. Forbes details how financial-grade security requires “an authorization server that supports standards like FAPI as well as an API gateway,” supported by public key infrastructure (PKI) for data encryption. FAPI 1.0 Advanced mandates mutual TLS, certificate-bound tokens, and cryptographic client authentication—requirements that may seem complex but are essential for protecting high-value transactions and sensitive client information.
Zero Trust Architecture Implementation
In their recent article on API security in Financial services, the IEEE Computer Society advocates for a comprehensive approach where financial institutions must “assume that no user, device, or application can be trusted by default.” This Zero Trust framework mandates strict verification for every access request, ensuring only authorized and authenticated entities can interact with APIs. For investment firms, this approach is particularly vital for securing sensitive data flows between microservices and third-party partners.
Multi-factor authentication (MFA) remains a cornerstone of this approach, though KPMG notes that “in enterprise environments, enabling MFA is not always easy to implement” due to downstream operational considerations. The solution lies in implementing sophisticated authentication methods, including passwordless WebAuthn protocols and OpenID Connect Client Initiated Backchannel Authentication (CIBA), where authentication can be initiated on one device and carried out on another to prevent interception attacks.
Encryption Standards and Data Protection
Advanced Cryptographic Protocols
Transport Layer Security (TLS) 1.3 implementation with mutual TLS represents the minimum acceptable standard for financial-grade API protection. Forbes emphasizes that “[JSON Web Token (JWT)] assertion and Mutual TLS (MTLS) that uses transport layer security (TLS) certificates for authentication bind a token to the client application to which it was issued.” This token binding allows verification that tokens are sent from their intended clients, preventing numerous attack vectors, including token theft and replay attacks.
Data protection extends beyond transmission security to encompass sophisticated tokenization strategies. The concept of “phantom tokens”—which contain reference data instead of personally identifiable information or credentials—provides an additional layer of protection against credential theft. Forbes details how “pairwise pseudonymous identifiers (PPID) increase user privacy by providing a unique user identifier per client,” while establishing parameters like session time length can limit attacker capabilities.
Advanced Token Management
Investment firms must implement comprehensive token lifecycle management protocols that go beyond basic refresh token handling. This includes using HTTP POST to send sensitive data in request bodies rather than URI-based parameters that can leak to logs and be exploited by attackers. The implementation of Pushed Authorization Requests (PAR) and JWT Secured Authorization Response Mode (JARM) provides additional layers of protection by relaying parameters using encrypted JSON Web Tokens.
Advanced Threat Detection and Response
Real-Time Monitoring and SIEM Integration
KPMG’s approach to API security emphasizes the critical importance of establishing baselines to identify deviations indicative of attacks. Their methodology involves monitoring for “statistical anomalies in API traffic” using Security Information and Event Management (SIEM) systems to detect “unusually high spikes in traffic for a particular API call” or “unauthorized access to API endpoints from countries where services are restricted.”
The sophistication of modern attacks requires equally sophisticated detection capabilities. KPMG’s investigative experience reveals that attackers often spend significant time in reconnaissance, with “periods of activity which pre-dated known attacker activity” suggesting extensive preliminary testing and method refinement. This underscores the need for continuous monitoring that can detect low-and-slow attacks and subtle behavioral anomalies.
AI-Powered Detection and Automated Response
The integration of artificial intelligence and machine learning into API security represents a critical evolution in threat detection capabilities. As CIO Influence notes, “AI Agents that leverage APIs to automate processes, make intelligent decisions, and interact autonomously with systems and users” are becoming essential for detecting real-time transaction anomalies and offering intelligent response capabilities.
Rate limiting and throttling mechanisms provide essential protection against Distributed Denial of Service (DDoS) and brute-force attacks. Bob’s Guide recommends implementing “rate limiting [to] help protect against these threats by capping the number of requests an API will accept from a single user or IP address within a specific timeframe.” However, these controls must be dynamic and intelligent, capable of distinguishing between legitimate high-volume trading activities and malicious attack patterns.
Compliance and Regulatory Alignment
Navigating Multi-Jurisdictional Requirements
The regulatory landscape for API security continues to evolve rapidly, with implications that extend far beyond traditional banking regulations. The IEEE Computer Society notes that “with the advent of Europe’s Revised Payment Services Directive (PSD2), the bar was raised on the importance of improving payment services for consumers,” leading to increased API usage and corresponding security requirements.
Investment firms must prepare for PSD3 implementation while simultaneously addressing U.S. regulations. This includes the Consumer Financial Protection Bureau’s Section 1033 requirements under the Dodd-Frank Act.
The challenge for investment firms lies in managing compliance across multiple jurisdictions while maintaining operational efficiency. As the IEEE Computer Society emphasizes, “knowing where the business is going will determine what regulations need to be followed in the future, whether near or far.” This requires not just current compliance but strategic planning for emerging regulatory requirements that may impact API architectures and security protocols.
Audit and Documentation Frameworks
KPMG recommends that organizations “document all API calls and their purpose thoroughly” while implementing comprehensive security testing protocols. This includes integrating static and dynamic application security testing (SAST/DAST) with continuous integration and continuous delivery (CI/CD) pipelines, ensuring that security validation occurs whenever code changes.
The IEEE Computer Society stresses the importance of maintaining “an accurate inventory” of all APIs, tracking their current state, usage patterns, and update requirements. This inventory management becomes particularly critical for investment firms that may have acquired APIs through mergers and acquisitions, where legacy systems and shadow APIs can create unexpected vulnerabilities.
Strategic API Security Implementation for Investment Firms
Technology Investment Priorities and Infrastructure Modernization
The path forward requires strategic technology investments that balance security requirements with operational efficiency. Kiplinger emphasizes that “financial services firms need to embrace the latest technologies to achieve better business outcomes,” noting that “conventional methods of allocating IT funds, which mainly revolve around upkeep and small-scale enhancements, are no longer adequate.”
The BAI report highlights a critical challenge: 95% of financial services organizations struggle with issues related to multicloud deployments, with management complexities and security concerns topping the list of challenges. For investment firms, this presents both a challenge and an opportunity—those who successfully navigate hybrid multicloud environments while maintaining robust API security will gain significant competitive advantages.
Investment priorities should focus on API gateways, advanced security platforms, and comprehensive monitoring tools. Kiplinger notes that successful implementations require “an integrated, holistic vision with input from all stakeholders” rather than fragmented initiatives that dilute overall impact. This means ensuring that Chief Information Officers, Chief Data Officers, and Chief Risk Officers collaborate on unified API security strategies rather than pursuing separate initiatives.
Organizational Readiness and Vendor Selection
The IEEE Computer Society emphasizes that organizations should “let experts design and implement APIs” because “APIs are proliferating in terms of technologies used and advancing in how quickly they change.” This may involve full-time in-house personnel or trusted external advisors, but the critical factor is ensuring that all stakeholders—including Compliance, Risk Management, and Operations—are involved in the API security planning process.
Building internal API security expertise requires ongoing investment in training and development. The rapidly evolving threat landscape demands teams that can adapt quickly to new attack vectors and regulatory requirements. Organizations must also establish clear roles and responsibilities for API security, ensuring that accountability extends across technical, business, and compliance functions.
The Path Forward for API Security
The convergence of embedded finance growth, regulatory evolution, and sophisticated threat landscapes has created what can be described as an ‘API security renaissance.’ Success in this new environment requires more than implementing individual security controls—it demands a fundamental shift in how investment firms approach technology architecture, vendor partnerships, and risk management. The World Economic Forum’s observation that “collaboration, not competition, will define the winners of the financial future” applies directly to API security strategy. Firms that build robust security frameworks while maintaining the flexibility to adapt to emerging opportunities will thrive.
Option One Technologies: API Security Specialists for Financial Firms
For investment firms ready to navigate this transformation, partnering with specialized technology providers can accelerate the journey from vulnerability to competitive advantage, ensuring that API security becomes an enabler of growth rather than a barrier to innovation. Contact one of our experts to explore your API security options today.
