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 innocent ones.
In fintech and banking, API (application programming interfaces) 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.
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.
The global API banking market size was estimated at USD 3.5 billion in 2023 and is expected to reach around USD 17.5 billion by 2032.
Source: Custom market insights
In 2021, there were 795 million successful API calls performed utilizing banking APIs, which increased to more than 1,13 billion in 2023. Statistics indicate a positive tendency toward integrating and utilizing banking APIs.
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.
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.
Source: Dzone
Different types of APIs come with different target solutions and usages, but as outlined by Fintech Ranking, these are divided in:
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!
According to another banking API classification, below is a list of different types of banking APIs that are used to facilitate communication between software components:
Open APIs are widely used to integrate third-party services and allow applications to interact with each other.
These APIs are focused on internal functionality, security, and the optimization of organizational processes. They play a vital role in streamlining workflows, automating internal procedures, and improving communication between various departments within an organization.
These APIs are optimized for performance and speed, minimizing the number of calls and reducing server load, which is crucial in complex financial infrastructure.
These APIs enable collaboration between financial services companies and third party developers, and are frequently used in B2B models for complex financial services such as payment processing, data sharing, identity verification, and supply chain management.
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.
API banking provides a flexible and scalable approach to financial services. Here’s how it makes maintenance easier:
API banking leverages modular architectures, enabling developers to update or replace individual components of the system. This means that improvements or fixes can be implemented without touching the entire platform, minimizing disruption.
By isolating changes to specific modules, API banking reduces the risk of widespread issues. If a problem occurs, it’s confined to a single component, making it easier to diagnose and resolve quickly.
Third-party services, such as Plaid and Yodlee, can be integrated with ease. Developers can incorporate new functionalities or data sources without overhauling existing systems, ensuring that services remain up-to-date without extensive downtime.
Updates can be rolled out in small, manageable stages. This incremental approach allows for continuous enhancement of services, with significantly reduced risk of errors or service interruptions.
API banking facilitates more robust testing by isolating individual components. This modularity allows for thorough testing of each piece before it goes live, ensuring a smoother overall user experience.
In summary, API banking provides a structured yet flexible framework that allows for quicker, safer, and more efficient maintenance of financial services.
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 finance.
Because of their benefits (and ensured security), APIs are being used in a number of solutions, and fintech is pioneering their implementation.
Nothing’s perfect, so along with numerous pros, banking APIs do have a few disadvantages:
Still, these disadvantages are outweighed by the many benefits that come with using APIs in banking.
Banks employ a layered architecture in API banking to streamline operations and enhance functionalities via structured interactions.
Each core banking function—such as account management, payments, and data analytics—is abstracted into distinct modules. These modules each have their own APIs, adhering to standard protocols and data formats like JSON or XML. This abstraction simplifies third-party interactions with the bank’s services. For instance, fintech startups can integrate specific banking functions, like payment processing, without delving into other modules.
The modular design permits faster innovation and targeted enhancements within financial services. Developers can focus on specific APIs for different functionalities, facilitating quicker integration and updates. This means a business can update one part of the system independently, reducing maintenance burdens and increasing flexibility.
A crucial component is the API gateway, which acts as a secure entry point for all incoming API requests. It authenticates these requests, performs necessary security checks like token validation or OAuth authentication, and then routes them to the appropriate service module. This protective layer ensures that only authorized requests can access core banking systems, safeguarding sensitive financial data.
On top of these APIs, banks often implement monitoring and analytics layers. These layers track API usage, measure performance metrics like latency, and identify potential bottlenecks. This data allows banks to maintain optimal performance, anticipate issues, and improve their services continually.
In summary, banks leverage a layered architecture in API banking to promote modularity, security, and innovation, making it easier for third-party developers to integrate and build upon their services.
Real-time analytics and monitoring provide substantial advantages for businesses utilizing API banking.
Firstly, these features enable companies to keep a close eye on their transaction activities. By tracking transactions as they happen, businesses can promptly identify any discrepancies or unusual patterns. This immediate visibility helps in quickly addressing potential issues, ensuring smoother financial operations.
Additionally, monitoring usage patterns offers valuable insights into customer behavior. For instance, businesses can observe peak usage times and adjust their operations accordingly to ensure optimal performance and customer satisfaction. They can also detect emerging trends, allowing them to adapt their services to better meet market demand.
Analyzing system performance is another crucial benefit. Real-time monitoring helps in identifying bottlenecks or inefficiencies within the system. By pinpointing areas that require improvement, businesses can take proactive steps to enhance overall system performance, thus reducing downtime and preventing potential revenue losses.
Furthermore, the actionable insights derived from these analytics can significantly inform business strategy. Understanding detailed metrics enables companies to make data-driven decisions that improve their competitive edge. For instance, they could refine their product offerings, develop targeted marketing strategies, or streamline operational processes based on the insights gained.
In conclusion, real-time analytics and monitoring are vital for businesses using API banking. These tools not only help in maintaining robust operational oversight but also drive strategic improvements, ensuring long-term growth and customer satisfaction.
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.
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.
Moreover, API banking facilitates smoother and more convenient interactions for the customer. Whether it’s faster payment processing or more intuitive financial management tools, these benefits elevate the overall customer experience. By enabling third-party companies to integrate advanced features, customers enjoy a more seamless and efficient banking experience.
In essence, API banking not only empowers third-party developers but also significantly enhances the overall banking experience for customers.
By leveraging APIs for both operational efficiency and revenue generation, financial institutions can stay competitive and meet the evolving needs of their customers.
The SDK.finance PayTech Platform is a scalable solution that serves as a foundation for building different payment products like e-wallets, neobanks, payment acceptance platforms, money transfer systems, and currency exchange services. With APIs as the building blocks, the platform seamlessly connects complex financial services.
The software provides 400+ API endpoints to let you connect your payment solution to a broad set of customer services fast and cost-effectively. This API-first structure allows you to accelerate time-to-launch and conquer new markets with SDK.finance Platform in a short time.
The payment software provides the following features:
Thanks to its adaptability and flexibility, our Fintech Platform caters to different industries and business types like e-commerce, telecoms, loyalty programs, or banks. Explore SDK.finance PayTech Platform to build and scale any payment product faster.
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