What is API, how it is enabling banking, popular use-cases, and how to choose the right API. Read on to find out more.
Generally, API stands for the technology interface between two or more software stacks. In banking, Application Programming Interface or API pertains to the software stack that enables third-party services to implement bank services. The high demand for financial inclusion has resulted in increased adoption of banking technology. Fintech firms have been forced into evolution to handle the rapidly growing banking sector, which is currently being driven by emergent technologies such as the Internet of Things, decentralization, and AI.
The role of API in banking is to enable banks to provide third-party services with the right resources, permissions, protocols, and mechanisms to deploy products around the banking sector. Usually, the end products are usually focused on achieving a high user experience and making financial services available to all populations.
An example of an API use case in banking could be analyzing customer transactions data, mapping suitable offerings for customers, and identifying the pains of these customers whether they need lower interest credit cards, specialized financing products, savings accounts with high interest, or a given loan product.
Types of Application Programming Interfaces (API)
There are three primary types of APIs that businesses can deploy banking solutions:
This API is privately developed by financial institutions through their in-house team to improve internal processes and service efficiencies.
Partner APIs can be developed internally by a banking institution or a third-party service. However, the bank must approve these APIs when used to scale the institution’s financial services. Examples of partner APIs include brokerages, clearinghouses, custodial services, e.t.c.
Open Banking or Public APIs
This type of APIs is not commonly used but involves providing business information to third-party services. Public APIs are essential in generating and growing additional business for a bank and are usually focused on scaling the customer base. An example of a Public API is a lending interface for credit scoring, loan comparison app, loan application, credit history, and payment API.
The majority of the stakeholders believe financial adoption of common APIs in banking should follow a standard framework. This would align adoption and simplify partnerships between different global banks. As a result, the interest in open API banking has gained widespread attention, with an estimated 45 percent of respondents of an Asia-Pacific finding insisting on the importance of interoperability and open banking.
Benefits of Application Programming Interfaces in the banking sector
Real-time features - Data-driven insights lie is inherently a key metric for API banking. Through integrated software architecture, banking institutions can collect and act upon consumer data and tailor customized products for their intended market. In fact, the bank can gain a more realistic perspective of the market situation and the end consumer of its products before creating accurate financial products.
Reduce administrative tasks- API provides automatic contracts to applying for loans, managing finances, checking a customer’s creditworthiness, or tasks such as analyzing foreign exchange rates.
B2B partnerships - API in banking can integrate B2B services with banking services and increase the scope of products provided to financial consumers.
How to Choose the Right Banking API
What is the strategic goal of the partnership, and how does the financial institution intend to weave the API into its daily activities to improve customer experience, consumer acquisition, and market expansion.
What are the financial institutions’ security and data privacy protocols, and what are its existing capabilities in fraud detection, data mining, and theft prevention.
How does the financial institution audit its customer relations management, and what are its target consumers?
Finally, conduct an assessment of existing documentation and make a shortlist of all available APIs - highlighting how they will help the financial institution achieve its mission.
Conduct verification of compliance frameworks and compare this against the security standards of the shortlisted API. Ensure the data sharing process aligns with guidelines set out by data sharing legislation.
Draw alternative implementation case scenarios and explore further use cases.
Popular Use Cases of Banking APIs
E-commerce - internet consumers need a convenient shopping experience when buying from eCommerce sites. Each consumer requires a different shopping experience that suits their tastes and preferences. Application programming interfaces that link banking institutions and eCommerce sites are meant to provide payment alternatives that are suitable for each buyer. A good payment API for eCommerce sites provides a framework for deploying multiple payment options that can process chargebacks, refunds, and transactions at speed. An excellent example of an API in eCommerce would be Deutsche Bank’s recent API that integrates businesses in Sri Lanka with the bank’s foreign exchange offering to bolster direct online sales.
Gaming - Gaming companies such as Mobile Premier League, Pokersaints, and RummyCulture use banking API to automatically process gaming rewards and transfer the rewards to individual winners.
Lending - Instant loan approval and disbursement could be enabled through APIs in banking. An ideal API lending platform would automatically evaluate a consumer’s creditworthiness, approve their loans and instantly disburse them without the cumbersome process of manual approvals. Nonetheless, lending and wealth management APIs are not that popular in the banking-API sector for these reasons; banks have no obligation in lending and wealth management. Second, the processes behind lending and wealth management are sophisticated and less on-demand than payments.