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API in Banking: Definition, Types, Benefits

API in Banking: Definition, Types, Benefits
Alex Malyshev
API in Banking: Definition, Types, Benefits

While some hail API and all the trouble it entails, it is commonly agreed that its effectiveness is groundbreaking. To start with, let’s debunk the myths around the big bad wolf stealing users’ private data and spying on the innocent ones.

What is banking API?

In fintech and banking, API is used as a method of communication between third parties and online banking systems. For instance, an independent payment or financial service provider can access certain data about a certain user through his or her bank account by relying on the already undergone KYC process. However, unlike the critics argue, a banking API can be granted access to customers’ data only after full consent is given.

How does API in banking work?

Banking API is the process of exposing banking functions as a web service so that they can be accessed by third-party companies. This makes business processes more efficient, as it allows different parts of the organization to work together in a coordinated manner. Additionally, APIs can help third-party companies build products around banking services. This means that customers can use the APIs to get real-time updates on their accounts and perform transactions without having to go through a bank representative.

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What are bank API types and their benefits?

Different types of APIs come with different target solutions and usages, but as outlined by Fintech Ranking, these are divided in:

  • Core banking (for deposits, lending and SME cross-border);
  • Plug & Play (trading, accounting routine, oAuth)
  • Cards, wallets and transfers (SDK stock, MultiCurrency, fraud monitoring and others);
  • Acquiring (mobile and alternative phone payments, NFC solution, online card acquiring and others).

REST is an architectural style where messages are sent in a single direction while SOAP is a messaging language that allows for two-way communication. REST and SOAP provide different benefits to businesses, such as scalability, security, and data transmission efficiency. However, integrating a banking app or website with an API is easy and quick–making it simple for businesses to take advantage of all the benefits these platforms have to offer!

The APIs also have full support for international transactions, making them ideal for global businesses. Finally, scaling is easy because the platform supports unlimited payouts from one account number. This makes it possible for businesses to process payments in bulk quickly and easily-saving time and money.

The API challenge in banking

When it comes to the financial sector, there is no question that APIs are a driving force of innovation. In fact, we believe so strongly in the power of APIs that our company used API-first architecture to build our banking software. But as any developer knows, simply having an API is not enough-you also need people who will use it.

This is where fintechs come in. These startups are using APIs to create new products and services that challenge the status quo in banking. And while they may be nimble and creative, they often lack the resources to develop an API from scratch. This puts them at a disadvantage when competing against larger banks, which have had years-and in some cases, decades-to build out their API infrastructure.

Fortunately, there is help available for fintechs looking to compete in this space – best practices for developing and implementing an API strategy they can make use of, from authentication and authorization to data governance and security.

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What are the advantages of using APIs in banking?

The main benefit of API, in the age where time is money, is the elimination of redundant procedures, meaning that third parties don’t have to verify new customers but solely rely on the KYC procedure already completed by the bank.

In other words, it ensures speed and ease of use for third party financial service providers. The only element needed is a successful online banking login. An example is credit scoring, which can be submitted in seconds because of the data imported from a client’s bank account by the API.

Because of their benefits (and ensured security), APIs are being used in a number of solutions, and fintech is pioneering their implementation.

  • For starters, they allow for different ways of developing apps, which can be a key advantage in banking.
  • In addition, the four dimensions of a hybrid integration platform help banks modernize efficiently and streamline operations. Microservices are an effective way to develop apps because they’re flexible and adaptable to nearly any computing context, making them perfect for the fast-paced world of banking.
  • Additionally, businesses can manage their entire financial operations using our dashboard or API.

What are the disadvantages of using APIs in banking?

Nothing’s perfect, so along with numerous pros, banking APIs do have a few disadvantages:

  • they can be expensive
  • there is always the risk of fraud when dealing with sensitive information
  • APIs can be difficult to use and may require specialized knowledge.

Still, these disadvantages are outweighed by the many benefits that come with using APIs in banking.

The growth of bank APIs

Despite APIs having been around for a long time, their usage in the banking industry is now growing at an unprecedented rate. APIs are now being used by 70% of banks to support internal purposes, while 30% of banks use them externally. What’s more, one in five banking APIs is “public.” This means that they’re open to anyone who wants to use them-not just the bank’s customers.

Banks aren’t content with this level of success, though. They plan to double the number of public APIs by 2025. This growth is being driven by several factors: the need for agility, the desire to reduce IT complexity, and a focus on making life easier for customers.

APIs offer benefits for banks in many different areas. In addition to simplifying processes and making it easier for customers to get what they want, APIs can also help banks become more agile and efficient. By using APIs in creative ways, banks can improve their customer experience while also reducing costs and becoming more competitive in the market.

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How can APIs be used to drive innovation in banking?

  1. By using APIs, banks can offer new products and services without having to develop them themselves. This process is fast and easy, thanks to the power of APIs.
  2. In addition, APIs can be used by banks to integrate new products and services with the bank’s existing systems. This allows for a quick and seamless integration that can be done in a matter of minutes. If a bank wishes to create a new product or service, APIs make that process much easier than it would be otherwise.
  3. Seamless integration of new technology is not limited to vendors who are part of a third party provider marketplace. Banks can also use APIs internally to improve efficiencies across all areas of their business. For example, APIs might interface with automation tools to further reduce the risk of human error. Using APIs in this way can help banks innovate at a rapid pace and keep up with the competition.

How will APIs in banking impact the future of banking?

There is no doubt that APIs will play a major role in the future of banking. They help banks generate new customer insights and revenue streams, improve customer experience and make their systems & data available to third parties.

But what does this mean for consumers?

Early adopter banks are already asserting their role in open banking by proactively making their systems & data available to third parties. This means that we can expect greater innovation and experimentation when it comes to financial services, as opposed to relying solely on banks for our needs.

In addition, APIs allow for greater transparency within the industry, which is something that consumers have been asking for years.

Banks must use data to truly benefit their clients, and APIs are one way of doing just that. By making data available through an API, banks can create new experiences for consumers while also improving efficiency across the board. This increased agility will be essential in a rapidly changing world where technology is always evolving.

As such, it’s clear that APIs will play a major role in the future of banking-and we’re excited to see what comes next!

API in Banking: Definition, Types, Benefits

FAQ

What is banking API?

In fintech and banking, API is used as a method of communication between third parties and online banking systems.

For instance, an independent payment or financial service provider can access certain data about a certain user through his or her bank account by relying on the already undergone KYC process. However, contrary to the critics' arguments, a banking API can be granted access to customers’ data only after their full consent is received.

How does API in banking work?

Banking API is the process of exposing banking functions as a web service so that they can be accessed by third-party companies.

This makes business processes more efficient, as it allows different parts of the organization to work together in a coordinated manner. Additionally, APIs can help third-party companies build products around banking services. This means that customers can use the APIs to get real-time updates on their accounts and perform transactions without having to go through a bank representative.

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