How are APIs Changing the Banking Industry?

Companies in all economic sectors are using APIs more and more, but how are financial APIs changing the financial services industry?

Application programming interfaces (APIs) are a set of functions and procedures (building blocks) that when used by developers can create and connect applications to each other, successfully pulling select features or data from one application to another.  APIs are commonplace and work quietly behind the scenes to offer you a seamless experience. Every time you send an instant message, check the weather app on your phone, or use a web mapping platform to help you with directions - you’re engaging with APIs.  

APIs have become more refined and sophisticated in the last decade and are a vital part of the Internet of Things (IoT) wherein developers use APIs to deliver solutions to customers. For example, you can use a digital credit card in your mobile wallet to pay for lunch. Behind the scenes, your device is sending the data from that transaction to your bank account through APIs, updating your account balances to accurately reflect that lunch purchase you just made. 

How are APIs used in the financial industry?

APIs can be viewed as the bridge between financial institutions holding data and FinTech services - they are also the key to improved customer experiences. In the banking industry, they are commonly referred to as
Financial APIs. Through financial APIs, consumers can elect to share their financial data with third parties, such as FinTechs. In turn, financial APIs improve the user’s banking experience through increased visibility and control.

APIs aren’t just used to send information from a bank app to your bank account, but also to enable third-parties (not your bank) to securely access this financial data, tools and valuable assets. This allows a user to customize their banking experience by using third party apps such as Paypal, Venmo or Quickbooks to manage their financials. APIs help facilitate real-time payments (RTP), same-day ACH payments, reconciliation and the overall payments process. 

Matt Naish, FISPAN’s Head of Product Strategy believes that application programming interfaces (APIs) are essential for financial institutions (FIs) to create the digital products that are required to reach customers' accelerated expectations. “Digitizing is not really just making a standard paper form available online — it’s actually a reworking of the customer journey.” - Matt Naish, Head of Product Strategy at FISPAN told PYMNTS.

FISPAN is one of those third-parties. FISPAN partners with banks to remove friction and provide the banking experience of the future to commercial clients through secure API connections, enabling embedded banking. Embedded banking refers to integrating financial services into accounting products — such as ERPs.  FISPAN turns banking services into branded embedded banking experiences embedded within the ERP and accounting software clients rely on to run their business.

Another prime example of how APIs are used in the banking industry is through Open Banking APIs. Open banking is a banking practice that provides third-party financial service providers open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions. Across the globe, open banking is pushing to the forefront of financial services and is having transformative results:

  • In Europe, PSD2 mandates access of consumer-authorized data to third parties. In providing a regulatory framework, the directive ultimately accelerated conversations surrounding open banking in Europe. This legislation, adopted in 2018 has had a profound effect on both consumer and commercial banking experiences across the EU since its launch.

  • Germany, a country known for traditional banking, views open banking as an important tool to support its digitization strategy goals and is poised for accelerated open banking use-cases in the next year, specifically due to improved APIs.  

  • In Singapore, the Monetary Authority of Singapore (MAS) has provided guidelines and a framework for APIs and open banking. Singapore has seen significant innovations and developments in open banking over the past years, driven by socio-economic developments and rapid uptake of new consumer technologies. 

  • Australia’s largest banks must release APIs per the Consumer Data Right (CDR). This allows consumers greater access and control of their financial data and provides the opportunity for banks and lenders to add value to new & existing customers. For example by giving personalized offers for their customers based on their financial history, credit score and risk profile.

  • Hong Kong launched its Open API Framework in 2018 with the expectation that through the framework, open banking would support developing innovative and integrated banking services that can improve the customer experience, thereby maintaining the competitiveness and relevance of the Hong Kong banking sector.

Many other countries across the world, like India, New Zealand, Japan, Turkey, Canada, Pakistan and more are in support of increasing the use of financial APIs through open banking to fuel innovation and growth within the industry.

How Banks are Using APIs

Did you know:

  • 65% of banks said that open APIs are central to their plans for payment modernization.
  • Currently, about 40% of banks don’t have an API strategy (with half of that group in the process of evaluating API solutions
  • 48% of banks said that their legacy systems are not up to the challenges of the rapidly changing payments landscape for either commercial or non-commercial customers. 

Banks are already creating, developing, and even implementing their API strategies, especially banks in countries that are regulating sharing financial APIs through open banking. 

Developing an API strategy requires banks to have: 

1) A business strategy that clearly defines the differentiated experiences and products the firm offers.

2) An ongoing focus on the APIs that enable them to connect to their ecosystems to deliver on their differentiated experiences and products.

Formulating an API strategy is key to a successful digitization transformation. It will support your growing digital ecosystem and provide your business with increased opportunities to create new revenue streams, react more quickly to market changes, as well as be primed to adapt and innovate as needed.     

How can banks create and implement a successful API strategy?

First, they must identify their goals what do they want to achieve using APIs? Some goals could include; improving customer experience for both personal and business banking, increasing client retention, offering new and innovative digital solutions, updating legacy systems, streamlining the payment process, and more.

Once you have identified your goals, the big question is how to attain those goals: In House, Acquisition or Partnership

  1. Will you create all your APIs in-house and manage the project from start to finish? This is a massive undertaking for your teams and requires a large investment of time, money, and prior knowledge on the subject.

  2. Another option is acquisition; perhaps there is an organization already doing what you’re looking for that you can acquire.

  3. The third, and (FISPAN's favourite option) is partnership. Partnering with an organization that will take control of infrastructure and back-end of developing and implementing your API strategy ensures a faster time to market, quality assurance, maintenance, and upkeep of the software. 

57% of legacy FIs expect to reap cost savings from FinTech partnerships, and 48% see collaboration as essential for innovation. 25% expect to be able to make their service offerings more attractive to potential customers by harnessing such technologies.

If you’re considering your options, check out our blog post written by FISPAN CEO, Clayton Weir titled, “Build versus buy: Platform Development & The Future of ERP Banking.”

The Growing Need for API Standardization

The need for API standardization grows alongside the increased use of APIs in the financial services industry. As mentioned earlier, some countries have set out guidelines, frameworks, or regulations specific to open banking, and thus open APIs. We need more guidance and regulatory frameworks both nationally and globally to better address standardization issues. Standards will help streamline and simplify implementation for banks and businesses, creating more efficiency and ease of innovation within the sector.

In the United States, banks already use APIs to offer new products, enhance their customer experience, strengthen security, and increase automation. While we are seeing great progress, it is still being held back by a lack of standardization. For example, financial institutions all use different formats to share information, using different names for the same processes. A Nacha report on API standardization said, “Without standardization, every time a developer tries to create or update an app, changes to that app will be required to interact with each bank. With standardization, a developer could design and implement one app that would interact with countless banks without needing modifications.” 

Nacha, the governing group behind the ACH Network payment system, formed the API Standardization Industry Group (ASIG) to drive the development of standardized APIs. Part of that process includes identifying API use cases for security (account validation, tokenization, account closure notifications, and fraud), data sharing (single sign-on, access to account balances, and transaction status and history) and payment access (transaction status, payment initiation and routing, ACH origination). These are all areas where leveraging APIs can improve process, experience, and deliverability. 

Future of APIs 

As we see more financial institutions adopt API strategies, accept Open Banking, and pivot towards digitization, there will be some banks that fall behind. Everything moves quickly in our digital age, which makes it difficult to keep up, especially with tech-savvy competitors. If you’re interested in how FISPAN can support you to leverage APIs and embedded banking sooner rather than later, contact us today to learn more. 


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