APIs in banking – Everything You Need to Know

Inez Bartosińska

With the increasing technological advancement, customers’ demands are growing too, which is why we can notice a significant development of all the banking systems we use daily. For example, users require access to a wide range of payment options and fast, hassle-free transactions when making a purchase. Banks and other financial institutions respond to these requirements by using technological solutions such as API. What are APIs in banking? How banks and customers can benefit from them? Finally, what is the future of the financial industry? In this article, you will find everything you need to know about this topic.

What is service design?

API is an abbreviation that stands for Application Programming Interface, and we can explain it as an intermediary software that allows two or more applications to interact with each other. In a way, API works as a messenger that sends a request to the provider or request acceptor so they can respond. It is defined at the source code level for software components such as libraries or applications. Its main task is to provide the accurate specifications of subroutines, data structures, object classes, and the required communication protocols. In addition, modern APIs aim at being more standardized and enhancing security, so they adhere to widely used and available standards such as HTTP and REST.

Let’s take a real-life example. Everyone is familiar with Uber, or at least its concept; still, not everybody is aware of how this application works. The app allows end-users to view themselves on a map and book a cab nearby. To make such a product work, you need specific information such as accurate maps. So, instead of creating a new map, Uber uses an alternative called Google Maps API. They allow access to accurate map data at a fixed price. Thus, in this case, an API is about accessing information stored in 3rd party databases. 

What a Banking API is?

Many people may have heard about PSD2. It is an EU directive imposing new obligations on banks and financial institutions. PSD2 has commonly introduced the concept of open banking and, with it, the idea of open APIs. So, Application Programming Interfaces can be defined as a software solution that enables external suppliers to access certain information about the bank’s customers, such as the status of an account or payment status. It works thanks to a set of tools, protocols, and routines that enable banks to synchronize their databases with third-party providers. Therefore, it can solve some specific banking issues, such as a high number of failed payments and changing or canceling purchases on short notice. 

What is API payment?

To put it simply, API payment allows end-users to make purchases without leaving the company’s website to make a payment. It integrates with existing digital processes to connect the application’s checkout system to a payment acquiring network. What does it mean for your business? You get to interact with your customers in more than one place and have real-time payment data to make better marketing decisions. Moreover, you will improve your customer’s experience by providing them with various payment options and assuring them their data is safe and secure. 

Examples of APIs in Banking

APIs are widely used in many branches of the banking industry. Let’s see some examples of them. 

BaaS: banks can provide digital Banking as a Service solution such as online or mobile banking. For example, BBVA, one of the largest financial institutions in the world, has launched an open platform that, with the use of APIs, allows third-party providers to offer financial services without incorporating the whole suite of banking services. 

Embedded finance: it refers to built-in financial or banking tools in non-financial applications. Thus, end-users can enjoy embedded lending apps like Afterpay or very convenient services such as swift payments in apps like Bolt and Uber.

Proprietary digital products: HSBC is a British multinational investment bank, financial services holding company, and the second-largest bank in Europe. In response to the UK’s open-banking regulations, they implemented APIs in an app called Connected Money. It enables customers to monitor and control their financial data in a single place.

The benefits of API banking for banks

Open banking is a key to improving financial services and increasing customer engagement on many levels. However, none of that would be possible without the use of APIs. So, let’s see what advantages they bring to the banks. 

  • Improved customer service

Digitalized services serve people better, especially those who live far away from bank branches. This is because they can access their resources and manage them digitally in a blink of an eye. Also, based on their actions and resource level, customers get offers tailored to their needs.

  • Viable cooperation opportunities

APIs in banking can help banks stay ahead of their competitors by allowing them to make agreements with fintech and non-financial service institutions. Thus, as a banking institution, you get to access various clients and increase your transaction fee income. 

  • Customer engagement

Banks and financial institutions can improve customer engagement by enabling them to operate their finances in a secure way that adapts to current market needs. In addition, by getting clients more involved, you can scale up the revenue. 

How do a bank’s customers benefit from APIs?

Not only banks can benefit from APIs. As a client, you will get a whole new spectrum of possibilities too. So, what benefits can you expect? 

  • Streamlined payments

End-users are presented with an opportunity to pay with digital wallets. As a result, what used to be a long process now can be a swift and easy transaction made with just a few clicks. 

  • Better control of finances 

With API Banking solutions, customers can track and control all their finances in one place. Moreover, applying for a business loan or checking creditworthiness won’t involve so many administrative obstacles.

  • Customized offers 

Based on the bank’s database and information gathered about its customers, financial institutions can offer better products and services tailored to specific needs. Thus, as a client, you will only be presented with opportunities that meet your expectations.

API Banking Integration Platforms

While API allows the connection between data pipelines, apps, and devices to create an online business infrastructure, API banking integration platforms enable companies to share the data between numerous APIs. 

Let’s say you run a business and need APIs for various things, for example, to manage an e-commerce platform, internal operations, and marketing. API integration platforms will enable you to integrate all those APIs. Moreover, such platforms usually come in pair with a team of in-house experts who will support you in growing your business. 

Improvado is an example of an API banking integration platform that centralizes your marketing data in one place and helps you with data transformation or cross-channel normalization.

How the PSD2 directive change the rule on the financial market?

Every bank in European Union is obliged to follow the rules established by the PSD2 directive. It was implemented a few years ago to regulate how online banking services interact with consumers and traditional banking. The rules concern online payments, loans, insurance, cryptocurrency transactions, credit card offers, and more. 

Every financial institution is obliged to obey those principles, so end-users are always provided with the same service quality. Thanks to the PSD2 directive, it was possible to create a digital banking industry that enables innovative, secure, and easy-accessible banking services. It had a tangible impact on the financial market as it resulted in every bank having open APIs. In addition, the solution brought a possibility to cooperate with TPPs. Thus, when they request to obtain the bank’s data to provide a service, banks are obliged to share the information in a way defined by the directive. 

Besides, with the PSD2, banks don’t have to rely entirely on fintech institutions to create a new digital product; they can invent and implement their own ideas and become one more rival in the financial marketplace.

What is API in FinTech?

FinTech or Financial Technology is a term that describes companies or programs which use technology to provide current financial services to their customers. FinTech solutions were alternative to traditional banking for a long time, and then APIs stepped in, becoming yet another option. API is what allows programs to communicate with each other. Thus, in FinTech and banking, APIs enable such communication between FinTech apps and bank servers. 

Can Open Banking APIs compete with FinTech?

Even though APIs are the alternative to FinTech companies, they can provide even more efficient solutions for the financial industry if they team up. FinTech, when combined with APIs, provides streamlined services such as apps that help create and monitor user’s budgets, payment processing programs, or even blockchain technologies. As a result, APIs have the potential to bring many benefits and improve the FinTech industry. A wide range of banking tools, the ability to integrate bank accounts with multiple applications, customized client’s experience, easy access to financial data, and secure transactions are just some advantages of FinTech technology and APIs union.

Future of API in banking

Consumer preferences and market requirements head towards modern, tech-based, and secure solutions. Therefore, banks and other financial institutions are under pressure to implement APIs in banking. They tend to have a significant influence on business models as well as the positioning of financial companies. Also, we can observe that end-users got used to online and mobile banking. Thus, we can expect that more and more banks will continue to integrate APIs and tech-based banking solutions among their products and services in pursuit of a promising future

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