Fintech APIs: A Complete Guide to How APIs Help Fintech & Banking

The world of banking and finance is transforming right before our eyes, and this digital transformation is exciting to witness, to say the least. Millions of users around the world have not visited a physical bank branch in years. This is all possible thanks to the rapid growth and advancement of fintech technology, especially APIs. Today, we’ll look at the significance of APIs for the fintech industry, the types and peculiarities of APIs available today, and how to make this technology work in your favor.

What Are Fintech APIs?

Let’s start with the basics: what is a financial or banking API (Application Programming Interface)? An API in fintech is fundamentally similar to the APIs used by other types of products for other industries. It is a software application that serves as a bridge for transferring information between two or more other software products. Commonly, APIs connect the front-end part of the application with the server-side application. This is a technology that helps connect two platforms that would normally be incompatible with each other, thus increasing the accessibility and reach for fintech companies.

A significant reason why nearly every fintech or bank app now uses APIs in one way or another is that they allow for a secure data exchange between different financial institutions. As a result, all parties involved get only the requested information without getting any access to or even a full understanding of the application’s underlying logic.

If you are a regular user of at least one financial service or frequently shop online, you may have more experience with fintech APIs than you currently realize. Every time you complete a financial transaction on an eCommerce website or use a finance management solution that retrieves your personal finance information to then process it, you should know that the API technology is what made it possible in the first place.

How Do Fintech APIs Work?

While fintech software is famously complex and technologically advanced, the same can be said about an API for banking or financial use. The entire process of a fintech application working with an API can be broken down into several steps:

  1. Request and authentication. This is the stage where the user makes an initial request that triggers the use of an API. Since financial information demands extra security, authentication is usually required at this step.
  2. Data processing. The request is sent to the target source — for example, the user’s bank account — and the API accesses the required database or account to retrieve the necessary information.
  3. Data exchange. The information retrieved at the previous stage, which can range from financial data to transaction confirmation, is transferred to the client side through an API.
  4. Data presentation. Once the requested information reaches the user’s device, it is then displayed for the user to see. In some cases, when this data request is only one step in the sequence of steps needed to complete the desired action, the data is not displayed and is simply used to get to the next step.

In addition to the steps needed to make the connection between a financial app and an API work, the nature of a financial API calls for additional risk management and security measures. For instance, encryption is widely used to protect the sensitive data exchanged through financial APIs, and API providers are required to comply with certain industry regulations, put in place to keep financial institutions and fintech startups in check.

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Benefits of Using APIs in Fintech and Banking

Accessing financial services through API calls is nothing new: thousands of banking and fintech solutions successfully use an API or several of them in their day-to-day operations. But what exactly is in it for the world of fintech? Here are the biggest benefits of APIs for fintech and banking companies.

1. Enhanced functionality

The use of APIs allows organizations to make their fintech ecosystem richer and offer a more diverse product portfolio to their customers without making dramatic changes to the logic of their systems. For example, online fintech services can add an option to book a hotel or car rental when a user is booking a flight.

2. Improved user experience

New and engaging ways to use financial services or access financial data will always have a positive impact on user experience and customer satisfaction. Moreover, a typical modern fintech API offers a variety of personalization and customization opportunities, allowing businesses to reach out to customers in the most efficient ways.

3. Cost-effectiveness

The use of APIs in the banking industry means organizations can add the desired functionality to their products with a much shorter sequence of steps compared to traditional development. On top of that, APIs are relatively easy to integrate and maintain, meaning they don’t need as many developers to be used successfully. This makes APIs a very cost-effective alternative to building fintech apps and services from scratch, helping organizations avoid high development costs and delays in releases.

4. Future-proof and scalable solutions

Given its popularity these days, it’s safe to say that the API technology is not going anywhere. On the contrary — it’s going to become an even more significant part of fintech app development: as more companies will forgo traditional development in favor of using lightweight and easily accessible APIs, their quality, functionality, and diversity can only grow from here. Moreover, API development is highly suitable for projects that are expected to grow and expand over time.

5. Streamlined collaboration

The faster sharing and comprehensive analysis of data that APIs offer fosters closer communication and effective collaboration between all project stakeholders. By gaining instant access to information and reports, the stakeholders can get real-time updates on the state of the application, locate issues and weak points, and resolve problems quickly and more effectively, as each team can make a sizable contribution.

6. Better security

An API for fintech or banking use is designed with all the regulatory and compliance requirements relevant to its target market. This already adds an extra layer of security and data protection both for institutions and for their customers. Moreover, APIs can be continuously monitored and tracked for compliance and security problems, allowing organizations to instantly pinpoint various issues and take appropriate measures.

7. Multi-generational appeal

With all of their benefits, APIs also help the fintech industry create a stronger appeal for different generations of users — in particular, Gen Z. Gen Z currently makes up around 30% of the world’s population and they are becoming increasingly economically active. At the same time, Gen Z is famously reluctant to visit physical stores and banking branches, preferring to get their financial and banking services online. With the right choice of an API, banks and other fintech companies can appeal to all generations of users with different selling points.

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Types of APIs the Fintech and Banking Sectors Use

Having already looked at how financial and banking APIs work, and highlighted the reasons why hundreds of fintech startups invest time and effort into API integration, let’s look at the most popular fintech API examples. Here are the top fintech API categories available today.

1. Open Banking APIs

Any overview of fintech APIs would not be complete without the mention of Open Banking APIs. Organizations use the Open Banking API to connect to various financial institutions in a transparent and compliant way. Open Banking is heavily regulated by the financial industry, and although Open API development and integration can be challenging due to the regulatory requirements and variability in application logic and device configurations, this category of APIs helps significantly expand the financial services provided by an organization while keeping solutions well-suited for a highly regulated market.

2. ID verification and authentication APIs

User authentication is now used by thousands of services, but prevention of unauthorized access is especially critical for the financial industry since fintech companies handle lots of highly sensitive data. Therefore, APIs are often used for ID verification and authentication: for example, when a user wants to access an insurance portal, they will be prompted to enter their banking account credentials to gain access to the insurance information. This type of API usually uses the OAuth protocol and does not store the user’s credentials, instead creating an access token and improving the security of the entire process.

3. Payment APIs

This is one of the most popular types of API for fintech that gained recognition for the way it simplifies and streamlines exchanging payments all over the internet. Extra attention should be paid to the security of payment fintech API integration, as users share their most sensitive data with the application. Moreover, users are going to perform transactions on all kinds of devices and platforms, which is why all-around compatibility is a must.

4. AI-powered fintech APIs

The use of artificial intelligence is one of the newest trends in fintech API development that has already gained traction due to the incredible opportunities for refining financial services it creates. From engaging and informative chatbots to effective risk assessment and fraud prevention, AI-based APIs will undoubtedly have an impact on the fintech market of the 2020s and beyond. Of course, extensive training and careful integration are required for an API to fully live up to its potential.

5. RegTech APIs

We’ve already said a lot about the many regulation and compliance requirements surrounding the fintech and banking industry, and RegTech APIs were created with the sole purpose of helping companies comply with the regulations more efficiently. RegTech APIs can themselves be categorized into several different types, including monitoring, data warehousing, client identification, training, legal analysis, and reporting. 

Use Cases of APIs in Fintech

Clearly, thousands of companies belonging to the financial and banking sector use APIs for a variety of purposes. Still, any new fintech product owner or owner of an existing product with a desire to innovate should know exactly what the API can and cannot do. Let’s take a look at some of the most common use cases for APIs in fintech and banking:

  1. P2P transactions. Exchanging money between individuals via the API is a technology that millions of people in the world rely on for their daily operations. From lending money to someone to splitting the bill after a dinner with friends, P2P transactions are what pretty much every fintech app out there allows you to do.
  2. eCommerce payments. Another highly popular use case for accessing financial services through API calls is paying for goods and services online. Companies like PayPal and Stripe offer a variety of API-based solutions designed specifically for easy and secure payments in the eCommerce realm.
  3. Personal finance management. One of the perks of using fintech services is being able to monitor your financial situation in real time with detailed reports and analytics. Services like Mint use APIs to gather, analyze, and display personal financial information, helping the person adjust their financial habits.
  4. Investment management. Investment and wealth management has been getting more accessible and efficient thanks to the increased use of APIs. These services can be used both by individuals and their financial managers, who can quickly gather data from multiple sources to then effectively invest the assets.
  5. Insurance services. Similarly to investment management services, insurance portals are designed as self-serve websites where customers can review their current insurance status, adjust their coverage, opt for additional services, or request assistance, and this will all be typically done through an API.
  6. Smart contracts. Since their introduction, smart contracts have been gradually eliminating the need for paperwork or intervention from organizations, allowing individuals and businesses to exchange services, sign contracts, and reach agreements with nothing but a smartphone or another device on each side and a specially designed API that instantly processes and verifies the data.
  7. Credits and lending. A common way of leveraging fintech API technologies for banking and financial institutions is to use them for credit and lending management. An API can be used to verify the customer’s identity, credit score, and associated risks, and even calculate the appropriate loan size and additional terms.
  8. White label APIs. Most fintech APIs these days are developed and maintained by financial institutions. And although the majority of those institutions allow for third parties to use their APIs, white label APIs are here to make fintech software development easier while helping an organization build a strong brand identity in a highly competitive fintech market.
  9. Risk management. One of the most popular banking use cases for APIs is using them for accessing the risks and preventing fraud. An API will gain access to financial data from multiple sources to tell the institution whether the financial decision they intend to make is risky.
  10. Fintech API marketplace. Similarly to white label APIs, APIs that are then uploaded to a fintech software marketplace are typically designed and developed by a fintech software development company, not a financial institution. This offers equal opportunities for business use for all kinds of organizations and doesn’t impose any limitations on how the API is going to be implemented and used.

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When a Financial API Is Not the Best Idea

Using an API for banking and fintech seems to be able to solve a whole range of typical issues and pain points financial institutions frequently deal with. However, this technology should not be viewed as a silver bullet that can instantly start working in your favor. There are instances where fintech API integration is too difficult, overly expensive, or simply does not make a lot of business sense. Here is when you may decide against using an API in fintech:

  • Legacy systems. Many online banking services, especially ones that have been around for more than a decade, often rely on legacy systems. These systems may work fine and do what they are designed to do. However, an obsolete software solution can be downright impossible to integrate with a modern API.
  • Too much sensitive data. We’ve talked at length about the fact that financial APIs help maintain data integrity and regulatory compliance. Still, there are situations where keeping the data secure and meeting every single regulatory requirement while using a financial API becomes unattainable. For example, a financial institution dealing with trading may want to look into proprietary solutions, which makes it easier to control access points and implement security measures.
  • Complex and unique architecture. As much as fintech APIs come in all shapes and sizes, and can be successfully built into pretty much every system, there is a notable exception. We are talking about complex proprietary systems that are built on a one-of-a-kind architecture and need a team of developers just to maintain it in a working condition, making it not really feasible to pair it with an API.

Key Challenges of Implementing Fintech and Banking APIs

The choice, correct integration, and continuous maintenance of API products is a vital aspect of achieving the best and most desired outcomes. When implemented correctly, an API can take the functionality, user appeal, and security of a fintech solution to the next level. However, organizations should also be aware of potential challenges they can face on the way to a perfectly functioning API. Here are the most common challenges:

1. Technical and interoperability issues

When thinking about implementing a financial API, it’s important to remember that the variety of devices and platforms customers use grows by the minute. Failing to comply with interoperability requirements will result in the solution not performing in the anticipated way for a large percentage of customers who won’t think twice before abandoning the process and switching over to a competitor’s solution. This challenge requires APIs to be developed with a high level of standardization in all API service layers, down to the application logic and architecture.

2. Security and data integrity

One of the reasons why APIs have become so popular in the first place is that they ensure tight security of the sensitive financial data users share with their help. However, that is only possible when the team behind the development and integration of an API has taken appropriate measures to build a powerful security system. From stringent security protocols to using innovative, technically complex methods like two-factor authentication and data encryption, there is no way to go around the security challenge — you need to treat it with maximum attention.

3. Regulatory compliance

When developing an API or including one in your fintech solution, it’s not enough to just take care of the security measures. Being one of the most heavily regulated industries, along with healthcare and IoT, fintech software solutions have a whole range of regulatory requirements to comply with. Moreover, increasing your international presence without taking care of compliance issues first can result in legal trouble, financial losses, and irreparable damage to your business reputation. Establishing an independent compliance testing team is an effective way to overcome this challenge.

4. User adoption and trust

Unless you’re building or implementing a fintech API based on a completely unique idea, users hardly consider APIs to be a novelty. The convenience and security of APIs are what they expect from a modern and reputable fintech service. This is why it’s not enough to just release an API or API-based product. You also need to ensure swift and effective user adoption that grows into customer loyalty through strong security, flawless business reputation, and being able to hear your customers and give them exactly what they want with your software product.

5. Business and monetization concerns

The purpose of an API is to make money — whether directly through sales to other fintech companies or indirectly, through a growing audience of paying users who use the API for all kinds of transactions. This is why contemplating the appropriate business model and monetization techniques is as important as taking care of the technical side of things. After all, no one wants to invest all the time and effort into building an API that ends up losing the company money due to poor financial planning, marketing, and lack of strategic thinking.

Unlocking the Business Potential of Fintech API

The role of APIs in the fintech economy, especially nowadays when people are more conscious about their choices of banks and financial institutions, becomes more crucial than ever. A high-quality, well-integrated API can help an organization realize the full power of fintech technology, while the wrong choice of fintech API providers can result in popularity, reputation, and financial losses.

Moreover, a successful fintech API is always a blend of business and technology, and it’s important to treat both with the same amount of attention and care. When one becomes a priority and the other one gets shifted to the back burner, both possible outcomes are going to be equally negative. Either the solution is going to suffer from unsolved technical issues, becoming obsolete and brittle at an alarming rate, or the team is going to get too focused on the technical side without really having a vision of what to do with the product in terms of business.

One of the best ways to achieve a perfect synergy between the technical and business aspects of a fintech API without overwhelming the teams working on the solution is to rely on a reliable tech partner for the development and maintenance parts of the process. That way, your in-house team can focus on the core business processes while resting assured that the development team will do their part in creating precisely the solution you and your team envisioned.

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