Building innovative apps and services that enable consumers to get a better handle on their money or perform specific financial tasks requires access to rich financial data. A banking Application Program Interface (API) is the software intermediary that allows a third-party app to connect with financial institutions to obtain the financial data needed to meet today’s growing digital banking demands.
APIs have existed almost as long as computers have, and they’re used in all industries. Banking APIs work like regular APIs, only they’re specifically used for leveraging banking data. By using a banking API, technology providers and banks can get quick access to up-to-date financial and account information to securely connect and quickly verify financial accounts, confirm balances, generate a holistic view of finances, enable critical insights, launch embedded financial services and Banking as a Service offerings, and more. According to a 2020 McKinsey survey on APIs in banking, banks plan to double the number of internal APIs by 2025.1
3 Types of APIs Used for Banking
APIs aren’t new to banking. In fact, they’ve been around for decades. But thanks to the ever-growing number of financial services, web APIs have become the standard. After all, a secure API is essential to protecting sensitive data; any bank that cares about its clients’ privacy (as well as its own reputation) will naturally take steps to secure that information, both internally and externally.
Some of the most common types of APIs used in the banking industry include private, partner, and open APIs. A partner API is a type of private API, but for this article’s purpose (exploring the most significant APIs for banks and FIs) we’ll explore it in greater depth.
Private APIs (also known as internal APIs) are just as the name suggests: APIs developed and used internally. In general, private APIs are easy to develop and help mitigate problems caused by data silos, streamlining communication and collaboration between employees, teams, and departments. The resulting efficiencies create better experiences for customers.
Partner APIs are a type of private API that facilitate secure connections between banks and financial tech providers (FinTechs). The benefits are mutual: lower/shared costs (though some partner APIs are free), better security, faster services, and of course, happier customers. In essence, partner APIs let banks and FinTechs team up to improve the experience for everyone involved.
Open banking APIs (also called public APIs) are APIs intended for public use and facilitate sharing of consumer-permissioned financial data. Though open APIs offer many benefits for organizations–namely, the ability to affordably share information with developers–they can also present a variety of security and quality challenges. 5% of banking APIs are “public,” used by external developers for open banking purposes, including revenue generation and participation in ecosystems. Banks expect to triple the number of public APIs they have in use by 2025. (McKinsey Study)
Examples of APIs in Banking
Banking as a Service (BaaS)
Innovative banking business models often include Banking-as-a-Service (BaaS), or white-label banking, which allows non-bank businesses and FinTechs to offer customers digital and mobile banking services by leveraging an established financial institution’s capabilities and banking license. With BaaS, third party providers and FinTechs connect to a bank’s infrastructure with interface APIs to add banking and finance functionality into their mobile phone apps, websites, and more.
While the third party pays a fee to access the BaaS platform and leverage the financial institution’s banking license and infrastructure, the benefits are well worth it, as banking licenses can be time consuming to acquire, expensive, and impossible for many businesses to obtain on their own. BaaS enables third parties to quickly utilize a financial institution’s existing capabilities such as lending and payment services, bank accounts, debit cards, fraud management, and regulatory expertise to provide the full-featured apps and experiences under their own brand that today’s digital savvy consumers expect.
Embedded finance describes financial services that are offered through consumer apps and websites of non-banks. It’s the front-end access to financial services, while BaaS is the back-end functionality that makes embedded finance possible. Banking APIs are necessary for embedded finance, since they connect financial accounts to the apps and websites offered by FinTechs and non-banks. Embedded finance can include embedded payments and embedded lending – two popular capabilities integrated into FinTech and non-bank apps and experiences to attract and retain consumers for the long term.
As an essential digital banking service, embedded lending occurs when lending services are offered through non-financial apps, services, or products. The simplest example of it is the popular “Buy Now Pay Later” (BNPL) digitally deferred payments used by department stores and big box retailers. Originally associated with big-ticket items such as cars and furniture, BNPL is now regularly used for other smaller ticket purchases such as apparel.
Klarna, Affirm, Uplift, and Splitit are some of the BNPL companies that experienced significant growth during the pandemic as banks closed branches and consumers shifted to digital. Today, there are more opportunities than ever to grow profits and drive down processing costs with embedded lending, while making it easier and quicker for consumers to obtain loans.
Embedded payments occur when a third party like a retailer adds payment functionality to a non-financial app or website so consumers can purchase goods and services digitally within the app or service. One example of a company successfully using embedded payments is Starbucks, which offers embedded payment functionality in their app so customers can skip the line and quickly order and pay for coffee on their phones.2 Other examples include Uber and Lyft, whose apps make it easy for customers to order and pay for rides with just a few clicks.3
Advantages of APIs for Banking
The best application programming interface APIs enable banks and FinTechs to power frictionless customer experiences and streamline tedious onboarding tasks. They also utilize data feeds for account verification, data aggregation, data enrichment, payment services, open banking, and more. Banking APIs can assist with everything from obtaining a holistic picture of a client’s financial situation, to verifying users’ account info to prevent fraud, to uncovering financial insights for more strategic financial advice.
As a global leader in financial data aggregation, Envestnet | Yodlee is the ideal partner for building embedded finance capabilities into non-financial apps and capitalizing on Banking as a Service and other opportunities. With industry-leading APIs providing access to current data from multiple financial institutions, intelligent insights, and open banking expertise, Envestnet | Yodlee can take the complexity out of building and delivering personalized FinTech experiences that consumers can act on.
How APIs Are Transforming Traditional Banking
Mobile banking trends and the widespread availability of financial data through banking APIs are resulting in the development of innovative new products and services. The banking industry and FinTechs are using open APIs to optimize digital banking experiences and grow customer experiences, expand revenue streams, solutions, and market influence.
Continued Rise of Mobile Banking
Digital banking services like payment tools available through mobile devices over the past decade bolstered the digitization of banking services, and created the concept of mobile banking that’s become essential to the industry. While many consumers currently use their mobile devices to manage everyday transactions, it won’t be long before they’re using their devices for more elaborate processes like applying for a mortgage. APIs are at the heart of epic mobile banking apps and solutions, as they enable secure, authorized access to the data needed to streamline banking tasks and generate personalized financial insights.
Improving Experiences Through Open Banking
As the “better way to connect,” open banking enables faster, safer, more reliable and more consistent data to power your consumer experiences. Regions such as the U.K. and Australia already mandate open banking, and signs indicate that the U.S. may regulate open banking APIs as well for the sharing of financial data electronically, securely, and exclusively under conditions approved by customers. Growing partnerships between banks and FinTechs, as well as the amount of data shared between financial service providers and third party developers through open banking APIs, are encouraging and accelerating the development and delivery of exciting FinTech apps and solutions in the U.S. and around the world.
Changing Consumer Preferences
In an increasing personalized and digital world, more consumers expect custom banking solutions. APIs enable banks and FinTechs to provide those experiences in a secure and streamlined manner.
While less than 10% of consumers use FinTechs for primary banking services, 67% of them used FinTech banking services last year, according to a PYMNTS.com survey.4 Despite the hesitance to switch to fully digital primary banks, consumers are interested in the features APIs make possible: quick access to financial information, easy transfers, and most importantly, fewer costs.
Staying Competitive in the Market
Retaining current customers (and attracting new ones) means offering more satisfying and digitally cohesive bank offerings. APIs play an important role in achieving this goal, especially as partnerships between banks and FinTechs become increasingly commonplace. The potential benefits are mutual for all parties involved: banks can lower their costs and offer more value to their customers, and customers can enjoy increased security, a greater variety of essential services, and more personalized financial experiences.
How Are Banks Using APIs?
Many banks use APIs to increase or bolster their range of services while keeping down costs. Strategic partnerships with FinTechs allow banks to offer features and integrations they may not be able to offer alone, or would otherwise be too costly or too ambitious to develop alone.
When thinking about your API strategy, it’s important to understand what your customers want. Look closely at your audience, identify relevant segments, and consider current trends in banking and financial technology. What features are your customers missing from your current experience? How can you add them in a safe, streamlined, and cost-efficient way? Are there internal processes that could be improved and passed on to customers?
As the saying goes, a rising tide lifts all boats. The bottom line: a strong API strategy should benefit you, your partners, and your customers.
Let’s Get Started
Built for speed to market and innovation, Envestnet | Yodlee’s banking APIs enable financial institutions, FinTechs, and non-banking innovators to access anonymized financial data in real-time for next-gen banking experiences and initiatives. We are open banking ready and offer industry leading practices in accessing and handling personal consumer credentials and financial data.
Contact us to start experiencing the future of banking today.