APIs, or application programming interfaces, have been a part of the technology landscape for many years. However, when it comes to banking, the term "API" typically refers to web APIs. Despite their widespread use, the number of these interfaces available is limited. They allow engineers to streamline their work by reusing existing code and serve as a bridge between various technical systems, making the overall application experience more user-friendly.

By using APIs, financial institutions can test and develop new ideas at a much faster pace. But what happens when multiple web APIs are integrated into a single application? And what potential does this technology hold for the future of financial services? Let's delve deeper and discover the answers to these questions.



API banking: enabling seamless app-bank interactions

Banking API facilitates the communication between electronic banking systems and external applications. Third-party payment or banking services providers may access a user's bank account if they have completed the "Know Your Customer" process with their bank, but only with the user's permission. In simple terms, a banking API provides a web service that grants access to banking activities to other companies, also known as open-banking. By enabling efficient interaction between departments, APIs enhance a company's operations. Additionally, APIs can generate ancillary services for financial institutions, empowering customers to make real-time transactions and view account information without the need to contact bank employees.



The advantages of API banking for financial institutions

API banking offers several categories of services including:

• Core banking services for deposits, loans, and cross-border SME transactions;
• Plug & Play services for trading, accounting, and oAuth authentication;
• Cards, Wallets, and Transfer services including SDK, multi-currency support, fraud monitoring, and other services;
• Acquiring services such as mobile and alternative phone payments, NFC solutions, online card acquiring, and others.

APIs use either REST or SOAP communication protocols, both of which provide benefits such as scalability, security, and fast data transfer. Financial institutions can easily incorporate the functionalities offered by open banks by connecting through APIs, making their services more streamlined and accessible.

Moreover, APIs enable seamless cross-border financial transactions, making it a useful tool for international organizations. The system also simplifies scaling by processing a large amount of customer data and payments from a single account number, saving businesses time and resources



The advantages of API banking for banks

Have you considered how open API can benefit banks? By utilizing API banking, banks are able to improve their services for customers who reside far from branches or prefer online banking.

According to the FDIC, in 2019, over 20% of unbanked households accessed their accounts through bank ATMs. However, this number has been decreasing as more people are turning to online or mobile banking.

The COVID-19 pandemic has accelerated the adoption of API finance in the banking industry. With a significant increase in online banking, financial institutions were forced to close many branches, and US Bank was no exception.

As online banking gains popularity, the use of financial technology apps has also increased. People are opting for digital banks like Chime and moving away from traditional banking methods, particularly with the rise of payment apps like Venmo and CashApp. Fintech companies like Zeta are targeting specific user demographics.

Banks stand to benefit from establishing partnerships with fintech companies. A leading banking API provider can not only provide the necessary technical tools but also recommend trustworthy organizations that can increase revenue streams. Fintech partners can introduce banks to new customers and serve as entry points into untapped industries. The success of these partnerships reflects the success of the bank. By collaborating with fintech, banks can increase their transaction fee income and capture a larger share of the deposit market.

Although not all financial institutions are yet considering API integration with fintechs, the growing number of high-profile deals is attracting the attention of financial institutions and investors who recognize the potential of this field.



Partnering with banks via API: the key to success for fintechs

The rise of fintech has made it imperative for companies to embrace digital transformation and operate entirely online. Specialized fintech solutions can attract consumers in search of niche offerings, but without FDIC protection, they cannot offer deposit insurance. A solution to this challenge lies in partnering with a reputable bank that provides FDIC protection.

API banking offers a way for fintechs to collaborate with banks and with each other, as it enables third-party interactions. Building a complex intermediate system from scratch can be challenging, but outsourcing to a trusted Backend as a Service (BaaS) provider that specializes in bank API integration and development can simplify the process.

To ensure a seamless user experience, it's essential to find a BaaS provider that has strong relationships with a wide range of financial institutions and cutting-edge technology companies. This way, the developers can focus on building innovative solutions, and the users can enjoy the benefits of advanced technology.



Exploring the advantages of API banking: BaaS and embedded finance applications

API banking has become a major player in the financial industry, offering innovative solutions to both banks and fintech startups. Banking as a Service (BaaS) and embedded finance are two prominent applications of API banking, each providing unique benefits and opportunities for growth.

Banking as a Service (BaaS)
BaaS (Banking as a Service) has the potential to bridge the gap between banks and fintech startups, allowing for long-term collaboration on innovative projects. With the help of digital banking APIs, financial institutions can provide customers with cutting-edge online and mobile banking services, delivered through a trusted third-party source. By integrating their services with fintech apps using APIs, banks can expand their customer base and enhance their digital offerings.

Embedded finance
Embedded finance is another application of API banking, where financial functions are seamlessly integrated into existing software. For instance, customers can make purchases and payments directly within the app they are using, as seen in the case of ride-sharing apps like Uber and Lyft or the Target app. Services like Klarna and Afterpay have made it easier than ever to pay for online purchases in installments. Additionally, banking systems can be integrated into robo-advisors and other fintech apps where users frequently buy and sell assets.



Open banking and API in finance

Open banking is a rapidly growing concept in the UK and gaining popularity in the US. It refers to the practice of allowing other organizations, such as banks and fintechs, to access a customer's financial information through open APIs. This enables both fintech companies and traditional banks to exchange data and cross-sell to customers using APIs. The open banking architecture prioritizes democratizing access to such partnerships, making API access to financial institutions' services mandatory.

The PSD2 legislation regulates the security of open banking APIs. Since its implementation in the UK, PYMTS reports that the openness of data flows between financial services organizations has led to significant innovation and improved customer experience, and it's possible that more legislation may be passed in the future.

In contrast, the US is moving towards utilizing APIs in banking through private industry rather than government regulation. This means that American banks and fintech companies are free to collaborate on their own terms, without being forced to become more open.


Open banking & API advancements drive fintech growth

Open banking is revolutionizing the financial industry, with APIs playing a crucial role in its growth. In recent years, the open banking sector has seen significant investments and growth, driven by global regulatory changes and increasing customer demand for digital financial services.

As mobile banking gains popularity and branch visits decline, API banking is becoming a key way for banks and financial institutions to keep up with the competition. API technology enables banks to provide their customers with state-of-the-art digital banking services, such as online and mobile banking, through fintech partnerships.

Fintech adoption is also on the rise, with the percentage of people using fintech services increasing from 16% in 2015 to 64% in 2019. Banks are facing pressure from consumers and competitors to adopt API technology and offer advanced digital financial services. Companies like Stripe, for example, have partnered with major banks to offer API access to their global banking capabilities.

Open banking and API advancements are driving the growth of the fintech industry and enabling banks to offer improved digital financial services to their customers.



Conclusion

The backbone of the Open Banking ecosystem is the use of APIs.

By providing access to customer data through APIs, banks are able to collaborate with third-party developers to create new and innovative financial solutions and services.
It's crucial to be well-informed about the concept of banking APIs and the possibilities it presents for the financial industry. Open banking opens up an array of opportunities for both customers and businesses alike.

Are you ready to tap into these opportunities? Let us help you bring cutting-edge fintech solutions to life!



FAQ

What is the meaning of API in finance?
API stands for Application Programming Interface, which enables software applications to interact and share data with each other. In the context of finance, APIs allow third-party platforms to securely access existing financial services offered by banks, thus enabling the creation of new products and services.

How does API work in banking?
APIs play a crucial role in the fintech and banking industries by facilitating communication between external applications and web-based financial services. With the customer's consent, a third-party financial service provider may be granted limited access to their bank account information if they have already completed the "Know Your Customer" (KYC) process with their bank.