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API In Banking: The Guide to Bank APIs

API In Banking: The Guide to Bank APIs
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8 min read

APIs or application programming interfaces have been around for decades in different forms, but today the word “API” in banking is usually used to refer to web APIs.

Web API technology is very popular, but in fact, there are not that many of them. They allow engineers to extend work by reusing existing code. They act as connecting elements between different technical systems. APIs connect multiple software components, making applications more user-friendly.

API accelerates the speed with which financial institutions may test and develop new ideas. What happens when multiple web APIs are used in one application? How far into the foreseeable future of financial service can this go?

Let’s find out!

What is banking API?

API banking enables the communication between external applications and electronic banking systems. If an individual has already completed the “Know Your Customer” (KYC) process with their bank, a third-party payment or banking services provider may have limited access to that user’s bank account. But, contrary to what most people think, a banking API can’t access a customer’s information without their permission.

Simply put, an API in the banking industry is the process of providing access to banking activities in the form of a web service that can be used by other companies, i.e. open-banking. The company works more smoothly as departments can interact more efficiently. APIs can also help create ancillary services for financial institutions. As a result, customers can use APIs to make transactions and view bank account information in real time without having to contact bank employees.

The benefits of API banking for banks

Open API can be classified into the following categories:

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

REST is a unidirectional architectural approach, and SOAP is a bidirectional communication language. REST and SOAP enabled banking to use a number of advantages, such as scalability, security, and fast data transfer. Enterprises can quickly and easily use many of the functionalities provided by open banks applications and websites by connecting them through APIs.

APIs are a great tool for international organizations as they fully enable cross-border financial transactions. Finally, the system simplifies scaling by allowing an unlimited number of customers data and payments to be processed from a single account number. This allows businesses to save time and money when processing mass payments.

The benefits of API banking for banks

Are you wondering how open API helps banks? By digitizing services through API banking, banks can better serve customers who live far from branches or prefer online banking.

According to the FDIC, in 2019, over 20% of all unbanked households used bank teller machines to access their accounts. But this number is decreasing because more people are checking their bank accounts online or through their phones.

In response to the COVID-19 outbreak, banks have been forced to accelerate their digital transformation using API finance. As more and more customers switched to online banking, financial institutions such as US Bank were forced to close hundreds of branches that year.

With the growth of online banking, the use of financial technology applications has increased. People flocked to digital online banks like Chime in 2020 as they were concerned about their financial fate and sought more affordable methods to receive their stimulus checks. Bank API integration is becoming a reliable replacement for their more expensive human counterparts. There is a trend away from cash transfers in favor of sending and receiving payments through apps such as Venmo and CashApp. Some fintech companies, such as Zeta, are targeting a specific demographic of users.

It is in the bank’s interest to establish connections with creative companies. What is open banking? If you want to connect with fintechs, a leading banking API provider can not only provide the necessary technical tools but also suggest reputable organizations that can bring revenue streams up. Partners in the fintech business, for example, can introduce you to new customers and serve as entry points into industries in which you are not actively involved. The success of your relationships is a mirror of your own success. With the help of fintech, you can increase your transaction fee income and capture a larger share of the deposit market.

Only a few financial institutions are actively considering application programming interface in banking with fintechs. However, as more high-profile deals emerge, more financial institutions (and investors) see the need to capitalize on this position.

The benefits of API banking for fintechs

There is no room for offline work in fintech. If your bank solution is highly specialized, you will attract consumers who are looking for it. If your fintech is a non-bank institution, it can’t, for example, offer deposit insurance. However, you can keep your deposits safe and secure FDIC protection by partnering with a larger, more reputable bank.

That mutually beneficial cooperation would be only possible for banks with API. Fintechs need a third party to interact with banks and each other. It would be quite difficult to build such an intermediate system yourself.

Your developers will have less work if you hire a reliable BaaS provider that additionally offers bank integration API development, and your users will benefit from a better experience. Look for a BaaS provider with relationships with a wide range of financial institutions and innovative technology companies.

Examples of API banking

Banking as a Service (BaaS) and embedded finance are two applications of API banking.

BaaS

Banking as a service BaaS providers can make it possible for banks and the most reliable fintech startups to work together on long-term projects.

Digital banking API allows financial institutions to provide their customers with state-of-the-art digital banking services such as online banking and mobile banking. Banks can provide their customers with better digital experiences that would be more expensive to create in-house by using APIs from a trusted source. Banks can connect their services to fintech apps by using application programming interfaces. This can help them get more customers.

Embedded finance

Embedded finance is one of the API banking use cases. It is an integration of banking or financial functions into otherwise functioning software. Here are some examples:

  • Customers can make purchases and payments in an app without leaving it. Transportation services Uber and Lyft as well as the Target app are two great examples.
  • With services like Klarna and Afterpay, it’s now easier than ever to pay for online purchases in installments.
  • Banking systems can be added to robo-advisors and other fintech apps where users regularly buy and sell money.

Open banking regulation

The concept of “open banking” has already taken root in the UK and is gaining momentum in the US. Open banking is the practice of giving other parties, like banks and fintechs, access to a customer’s banking and other financial information through open application programming interfaces.

What is the difference between using benefits of API in banking and open banking? Similarly, fintech companies and conventional banks can cooperate in data exchange and cross-selling to customers using an application programming interface. The open banking architecture, on the other hand, is characterized by democratizing access to such partnerships. Access via API to financial institutions’ services is now mandatory.

PSD2 is the legislation that regulates open banking API security. PYMTS notes that in the three years since PSD2 was implemented in the UK, there are signs that the openness of data flows between financial services organizations has led to significant innovation (and demand for that innovation) and better customer experience, and that more legislation may be passed in the future.

The United States is also moving towards benefits of API in banking, but on a different path than Europe. These advances are the result of resourceful private industry, not government regulation, that would force banks to become more open. This means that American banks and companies that make financial technology are free to work together on their own terms.

How open banking and bank APIs are boosting fintech growth

Given the desire of customers, competition in business, and the development of open banking, banks are under considerable pressure to start using, i.e., personal finance management API.

Mobile banking has become increasingly popular in recent years, but branch visits and ATM usage have been steadily declining. According to FDIC data published by the ABA Banking Journal, 34% of middle- and upper-income people under the age of 54 used mobile banking as their main way to do banking in 2019, up from 6% in 2013.

The general population is also eager to use fintech. According to eMarketer financial data, adoption of fintech services had gradually increased, rising from 16% in 2015 (when the first Business Index of Fintech Adoption study was conducted) to 33% in 2017 and 64% in 2019.

Banks are under fire not only from consumers but also from competitors. Stripe, for example, announced the participation of Goldman Sachs, Citibank, and Barclays in its banking API initiative in connection with the launch of its new service Stripe Treasury, which is offering customers advanced payments and issuing small loans to merchants in conjunction with Stripe Capital. Stripe provides standardized API access to the global banking capabilities of its network of partner banks, which currently includes Goldman Sachs Bank USA and Evolve Bank & Trust in the US.

API banking is one way other banks and smaller financial institutions are trying to catch up.

Conclusion

None of the Open Banking ecosystem’s components would be possible without Open Banking APIs.

API bank system is the primary way for banks to communicate with third-party programmers and give them access to customer data. This means that developers can create new solutions and products and services based on this information, which has far-reaching implications for the financial services sector.

It is very important to understand what banking as a service API is, how it works, and what opportunities it opens up. Open banking opens up a whole new world of financial possibilities.

Are you ready to use these opportunities? Let us assist you in creating top-notch finch solutions!

FAQ

What does API stand for in finance?

Application programming interfaces allow programs to exchange data and perform a series of coordinated actions. In banking, they help third-party platforms make new products by giving them safe access to financial services that already exist.

How does API in banking work?

APIs are widely used in the financial technology and banking sectors to facilitate the interaction between external applications and web-based financial services. If a person has already gone through the “Know Your Customer” (KYC) process with their bank, a third-party payment or financial services provider may have limited access to that person’s bank account.

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