How Does the FinTech and Banking Sector Use APIs?

Sudeep Srivastava January 12, 2024
Unlocking the Power of APIs in FinTech: A Comprehensive Guide

The financial landscape has undergone a remarkable transformation in recent years, all thanks to the explosive growth of FinTech. This sector is projected to reach a market size of a whopping $699 billion globally by 2030. Several factors have contributed to this historic rise, including strategic market timing, the introduction of innovative services, and even the influence of social distancing measures during the pandemic. However, interconnection is one vital element that stands out as the backbone of this financial evolution.

In today’s financial ecosystem, interconnection among various entities has reached unprecedented levels. Mobile applications, traditional banks, payment processors, credit card companies, and lenders have collaborated to deliver enhanced user services. Now, the powerful technology that is at the core of all these financial interactions is called Application Programming Interface, or API.

APIs in the FinTech ecosystem have established their presence and are set to grow further. In the past decade, companies hesitated to adopt APIs due to a lack of understanding about their potential benefits and the concern for risks. However, today’s financial sector leaders have greater confidence in APIs’ advantages, such as enhancing business automation, scalability, and acceleration.

As FinTech businesses now continue to innovate and look for ways to improve their overall efficiency and customer experience, the integration of APIs has become an integral part of their strategies that is paving the way for continued growth in this digital ecosystem.

This blog will help you understand everything related to APIs in FinTech and how they benefit the industry. So, let’s dive headfirst into the details below. API-fueled FinTech app

What are FinTech APIs?

Banking APIs are standardized protocols facilitating secure communication between a bank’s server and mobile devices. They empower customers to engage with banking personnel via the bank app with just a simple internet connection.

For instance, think about your personal finance app. It uses Open Banking API to connect to your bank and fetch your account balance in real time.

Have you ever wondered how your wallet app can effortlessly access and manage the money in your bank account? Or how your credit card transactions are swiftly approved when you shop on Amazon? The complex procedures that work on the backend to make these experiences possible depend on APIs’ sophisticated functionality. These technological enablers operate behind the scenes, ensuring your digital financial interactions’ efficient and secure functioning.

Due to the widespread usage of open banking, APIs in FinTech have also become mainstream, and they are being used to issue commands to third-party service providers.

Given the sensitive nature of financial transactions and data, banking APIs must implement robust authentication and state-of-the-art security encryption measures to safeguard sensitive information.

On the backend, these APIs establish essential connections between developers and payment networks. Their primary role is to fetch and present billing details, making them pivotal bank as a Service (BaaS) ecosystem components.

How BaaS works?

According to a global McKinsey survey, 88% of organizations believe APIs have gained importance in the last two years. In addition, more than 81% consider them a priority for business and IT. Large banks dedicate approximately 14% of their IT budget to API initiatives.

Thus, one can simply say that APIs offer a convenient, fast, and secure way for customers to access financial services. Furthermore, they are adaptable for various sectors, including traditional banking and emerging fields like banking as a service, platform as a service, and embedded finance.

So, why are APIs becoming essential in the FinTech sector? Well, building banking APIs  enables banks, payment companies, and merchants to expand their services, cater to customer preferences, and stay competitive. Consumers can also benefit from the APIs by conducting financial tasks on the go. In addition to this, they make it faster, easier, and more cost-effective for developers to create financial apps and services.

[Also Read: A Complete Guide to API Development – Importance, Working, Tools, Terminology and best Practices]

How do Banking APIs Work?

FinTech APIs act as digital intermediaries to facilitate communication and data exchange between multiple financial technology systems and external applications. Here’s a detailed description of how they work:

Working of Banking APIs

Request and Authentication

A request is generated when a user engages in a financial transaction or interacts with a FinTech application. To ensure security, API banking technology usually demands authentication, which may involve tokens, keys, or other credentials to verify the user’s identity and permissions.

Data Retrieval and Processing

The API forwards the request to the FinTech system or server, which undergoes processing. This processing can include accessing databases, performing calculations, or interacting with third-party services like banks or payment processors.

Data Exchange

Once the FinTech system has processed the request and obtained the necessary data, it sends a response back through the API. This response could include financial information, transaction confirmations, or other relevant data.

Integration

The mobile application on the receiving end then integrates this data into its user interface and displays it to the user or simply uses it to perform additional actions.

Error Handling and Security

FinTech APIs have strong error-handling mechanisms to address validation errors, server failures, and incorrect requests. In addition, API banking integration also requires implementation of various security measures like encryption to safeguard sensitive financial data.

Continued Monitoring

Continuous monitoring of API-based banking usage is essential to guarantee optimal performance, maintain security standards, and adhere to regulatory requirements.

Benefits of APIs in FinTech

API banking services offer beneficial opportunities for both app developers and users, delivering a range of advantages for each. Let us look at the benefits of APIs in banking in detail below:

Benefits of APIs in Banking

Boost Overall Cost-Effectiveness

Offering various banking services is expensive or cost-prohibitive for banking institutions. This is where we see one of the benefits of APIs for FinTech.

Open API development has proved to be a lifesaver since users can now enjoy numerous services via different FinTech API integrations. For instance, a user can easily save his banking information in third-party bookkeeping software, tracking every crucial information about the transaction in one place.

By leveraging FinTech API integrations, banks can offer services to their users without the need for extensive infrastructure investments. In addition to this, customers can benefit from simplified financial management and access to a wide range of services through third-party applications. This efficient collaboration allows the banks and FinTech providers to optimize resource allocation and minimize operational costs.

Promote Data Sharing for a Better Experience

Previously, banks were reluctant to share user information and rather selective when it came to sharing the data. However, this has changed, primarily in the European Union, due to PSD2(Second Payment Services Directive). Now, users with full control of their data can demand banks to share their data with their desired third-party provider. And how is this facilitated? – With the help of open APIs.

Future-Proof Asset

Since FinTech app development is rising, the role of APIs in the banking industry is unlikely to become obsolete. Hundreds of FinTech startups are emerging, which shows that the customer demand is plenty for businesses to keep striving to offer improved services by integrating APIs and more.

Higher Competition Means More Services

The emergence of APIs has increased the competition in the market to the benefit of customers. Due to this, the prices in the financial industry are decreasing, juxtaposed with the variety of services offered. For instance, users can use financial services aggregators to compare offers between banks and other institutions. Moreover, they now have access to the facilities that were only available in branches before.

Fast and Efficient Operations

By adopting an API-empowered methodology, banks can serve their clients quickly and proficiently and provide them with a seamless experience. APIs empower clients to manage banking transactions through mobile banking, online banking, and wallet services on their devices in no time and safely from any place.

So, the clients need not physically visit the banks to go through with the transactions, thus saving their important time.

With practically 90% of transactions occurring today outside the physical bank branch, they can save significant resources and expenses, subsequently assisting with improving their financial health and well-being.

Augmentation of Product Portfolio

APIs in banking are helping FinTech and banking organizations to expand their product portfolio. They provide them the necessary means to offer complementary products such as insurance or products that they co-create with their partners and financial tech and innovation firms. Such portfolio growth is possible because of the flexibility of APIs that connect with varying frameworks and provide exchange across businesses and industries.

APIs are additionally enabling banks to offer non-financial products alongside financial items. For instance, Emirates NBD, a bank owned by the Dubai government, empowers its cardholders to access hospitality, entertainment, and retail items through its API-driven e-shop.

Now that we know the FinTech industry’s API banking benefits, let’s move on to API banking use cases. In addition to this, we will also help you understand multiple API banking examples for utmost clarity.

Use Cases of APIs in FinTech

Exploring the applications of APIs in the banking industry unveils multiple practical situations where they make a big difference. Let us look at the use cases of APIs in FinTech in detail below:

Use Cases of APIs in FinTech

Price Comparison Websites

Price comparison websites like MoneySuperMarket have embraced the APIs in the FinTech economy to become a direct online distributor of financial products. The website has built API service layers to power its sites and allows commercial partnerships to grow. The company has a single view of its customers across their key interactions, allowing them to provide better services and experiences to the customers.

Peer-to-Peer Currency Exchange and Lending

P2P network innovation was born out of the sheer need and demand for process simplicity, especially regarding transactions. Now, thousands of P2P payment apps by financial institutions offer numerous services.

Now, this concept has finally found its calling in currency exchange. Since the orders of buying and selling currencies are distributed among the interested clients (with some orders canceling out others, such as an order to buy dollars to be canceled with a future sale from another user), it gives plenty of opportunities to FinTech companies to expand.

FinTech startups like TransferWise have found ways to eliminate the intermediaries in this process with their new API. One of the widely known examples of FinTech API, TransferWise API offers tools and guarantees open and modular APIs independent of providers- something that has allowed many banks to integrate and offer this service to its users.

As for lending, these P2P platforms became a boon instantly as they arrived in the market. This helps connect lenders and borrowers to negate the need for intermediaries. LendingClub is a popular platform known to offer an API to execute searches, perform orders, configure lending portfolios as an investment, and monitor loans.

Investment Management

Before open banking, it was challenging for financial advisors to gather the client’s information to offer optimized services. However, now, investment management APIs offer access to the portfolio information of individuals, eliminating the need to guess or cobble together a picture of clients’ assets and net worth from numerous sources.

Open Banking Ventures

ING is among the few organizations entertaining the concept of launching various independent ventures focusing on creating new products, later to be integrated with the help of APIs. They offer three products: Yolt – a personal finance management aggregator; Payconiq- a digital wallet; and a financial service aggregator. Moreover, the company also figured out how to connect with external developers via an API-based developer portal.

API Market Platforms

Seeing the unprecedented popularity of APIs, banks like BBVA took the initiative – BBVA’s API Market. This platform offers several kinds of APIs, tools, and various other services, making it easy for developers to build a partnership with the bank in commercial opportunities. Another major player competing in the same field is TrueLayer, a FinTech startup aiming to become a leading financial API development provider.

Payment Processing APIs

Since it is the age of complete globalization, where even startups are reaching out to an international clientele, there is a high need for more developed modes of accepting payments. In this regard, diversity always plays to the benefit of the parties involved.

The APIs for payment processing increase the options for merchants to accept payments easily. This facilitates the payment process and streamlines the checkout process in terms of online shopping.

The checkout experience plays a prominent role. For instance, eBay used to employ PayPal in its portal. However, it switched to Adyen since its APIs rendered a seamless checkout experience. It is a web-based Terminal API operating behind any point-of-sale system. Unlike PayPal, Adyen APIs allow users to stay on the page while navigating the checkout process.

Regulation Services

FinTech and RegTech go hand in hand nowadays, especially when it comes to involving third-party open APIs. When offering numerous banking and financial services, it is a priority to always confirm the user’s identity. This is non-negotiable since the whole open banking ecosystem depends on the data of users that they have allowed to be shared. So, the institutions must offer robust verification.

In this case, RegTech APIs can offer solutions in this regard. They offer a range of programs, from biometric identification to iris scanning to KYC programs. It helps avoid repetitive form filling and renders a better user experience. One of the top FinTech API examples is Trulioo, which offers an API that verifies customer data with the help of a JSON interchange.

White Label Services

In the market, many branded APIs are owned by major firms already. Nonetheless, other white-label APIs are also available for banks and other FinTech companies to use. These widely known APIs for banking allow the stakeholders to utilize the benefits they offer without needing to develop their platforms and programs.

Some firms use APIs in banking or grant permission to access their cloud-based exclusive BaaS technology. Similarly, one of the common examples of FinTech API is Starling’s API which allows users to easily integrate into the UK and European payment schemes to access Faster Payments and SEPA. The Starling bank has now expanded its FinTech API Marketplace to allow small businesses to combine banking transactions with the cloud computing platform. With its API, businesses and FinTech app developers can build products with this ecosystem and instantly reach Starling Bank’s client base.

Gaming

A critical part of making effective games is the process of ensuring winners get rewards quickly. Dependence on net banking and manual techniques was not ideal for progressive gaming organizations. Another one of the famous FinTech API examples is RazorpayX that has assisted gaming organizations Mobile Premier League, RummyCulture, Pokersaints, and many others to transfer rewards promptly and easily.

Smart Contracts

The decentralized applications address a change in outlook, where applications are executed through a P2P network utilizing smart contracts. For instance, a hotel room card reader may connect with an API to confirm the customer’s credentials and report effective room access. Said data would self-execute an API call to finish the authoritatively agreed payment.

How Can Companies Unlock the Full Potential of Banking APIs?

Luke Hammock quoted

Unlocking the full potential of APIs requires careful consideration in several key areas:

API Implementation Strategy

Organizations should decide which APIs to implement and what would be their implementation sequence.

Monetization Strategy

Organizations should determine how to monetize external APIs effectively.

Alignment between Business and IT

Organizations should maintain alignment between business objectives and IT in API prioritization and governance.

In order to successfully leverage the potential of APIs for FinTech ventures,  IT leaders should prioritize building API capabilities and encourage business ownership of API programs. This approach establishes effective governance and allows the  APIs to stand prominently on the organization’s roadmap, further enabling a tech-driven business model.

Stakeholders must also address customer queries by identifying the necessary skills and talent for a successful API for banking program. In addition to this, they should consider technical aspects such as API architecture and deployment of an API management platform. A holistic approach that consists of a valid strategy, operating model, technology, and people is essential for realizing the API vision.

APIs are crucial for FinTech success

Future of API in FinTech

After witnessing the current reception and usage of APIs in FinTech, the future seems promising, reflecting the API integrations between established businesses and larger communities- something that will probably be hosted on third-party infrastructure.

This is probably because FinTech startups and enterprises are looking for ways to save businesses from failure.

For instance, future banking APIs may help banks connect with e-commerce websites, facilitating the process of online payments. Moreover, they might integrate with brick-and-mortar banks and stores to help offer financing and lending options at POS locations.

It is vital to understand that choosing the right digital solutions provider is a necessity if you wish to leverage the potential of APIs for FinTech business. Appinventiv has worked with various FinTech business models and can simplify and customize API banking solutions. We are an expert FinTech software development company that provides quality app development services to clients around the globe.

We have years of expertise in simplifying and tailoring API integration platforms to precisely align as per your unique requirements. We understand that each FinTech venture is distinct and has its own attributes, thus, our customized solutions ensure seamless  FinTech API integration, data security, and enhanced functionality.

Get in touch with our experts to empower your business to thrive in the ever-evolving world of finance.

FAQs

Q. What is Open Banking?

A. Open banking is a system in which financial institutions open their APIs (Application Programming Interfaces) to allow third parties to access users’ data, which is then used to design new services and applications around it, offering transparency options to account holders.

Q. What is an API in banking?

A. API in banking is a collection of rules and protocols that enable software applications to communicate and exchange data. This facilitates the integration of financial services and applications, resulting in enhanced customer experiences and operational efficiency.

Q. How does API work in banking?

A. APIs in banking act as a standardized means for secure communication and data exchange between multiple software systems, including banking applications and third-party services. APIs in FinTech enables banks to provide customers with account access, payments, and financial data sharing through multiple channels. APIs also facilitate collaboration with FinTech partners to enhance service offerings.

THE AUTHOR
Sudeep Srivastava
Co-Founder and Director
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