The banking and finance industry has grown and changed in recent years. Two of the factors driving that growth and change have been the rise of financial technology (fintech) companies or programs and the use of application programming interfaces (APIs). Because of APIs and fintech, people can now do incredible things with their money from the comfort of their homes that once required them to visit a local bank or brokerage.
The use of APIs for fintech has been made possible in part by the rise of open banking. Banks now have customers’ permission to provide third-party providers with access to their financial information, allowing for the development of apps and programs that make everyone’s financial lives more manageable.
What is a Financial API?
Before we can understand what a financial API is, it’s helpful to look at APIs in general. An API is a code that enables the transmission of information between applications. One software may combine hundreds of applications to function. Each application fills a different role. The API allows these applications to communicate so the user can get the information they need to carry out a service.
In the financial sector, APIs facilitate communications between the apps involved in financial transactions. A financial API gathers information from banks, consumers, third-party retailers, and more to ensure the transaction goes through accurately and quickly. APIs also record transaction information so all parties involved can track purchases.
Financial APIs find the most use in e-commerce, investing, and online banking where third-party services need to access a user’s bank information.
How APIs Benefit Fintechs
Fintech is a term typically used when talking about companies or programs that use tech to provide financial services to customers. The fintech space is a big one. It includes everything from apps designed to help people create budgets to robo-advisors, and from payment processing programs to blockchain technology.
As discussed above, an API is what allows programs to talk to each other. In the case of fintech and banking, an API would be what allows a fintech program to communicate with a bank’s server. APIs streamline things. Some examples of fintech API include allowing a user to access their checking account information when they login to use a budgeting app or allowing a person to make an online purchase with PayPal or a similar payment processor.
In addition to having a variety of different uses, APIs provide numerous benefits to the fintech companies that use them. These benefits are why APIs are the future of fintech innovation.
1. APIs Increase Cost-Effectiveness
At one point in time, it was cost-prohibitive for banks to offer customers a wide range of services. Customers could use a bank for checking and savings, but few other options were available. Thanks to the use of APIs, banks can now offer customers more services, such as the ability to integrate their bank accounts with bookkeeping software or the option of getting one-stop access to their bank and investment account information.
APIs help to customize a client’s experience, which can also help to lower costs for the financial institutions that use them. Instead of having to rely on a “one-size-fits-all” model, banks can give their customers choices. Bank customers can choose to use the programs and apps that best meet their needs while leaving the others on the shelf.
2. APIs Have Opened up Fintech
Before the introduction of the Second Payment Services Directive (PSD2) in 2016, banks could keep their information under wraps. Keeping information and data secret might seem like a good thing when it comes to security and privacy, but it made it difficult for programs or users who could benefit from the data. PSD2 essentially compels banks in the European Union to make that data accessible to third parties.
The user or consumer still has control over their data. In fact, you could argue that PSD2 has given users even more control over their data, as they can now tell a bank what to do with it. If a person wants to share their checking account information with a budgeting app, a bank needs to allow it. The arrival of PSD2 has opened up fintech possibilities, meaning that more apps and programs can be made available to consumers.
3. APIs Have Future-Proofed Fintech
The number of fintech APIs out there has grown and continues to grow, especially as new fintech startups launch and as customer demand for easy access to financial data and details increases. The continued growth and development have helped to future-proof financial technology, meaning that it will continue to grow and develop.
How Fintechs Are Using APIs
APIs are popping up in fintech in many different areas. Just a few examples of APIs in fintech are:
1. Payment Processing
Payment processing APIs expand the payment options merchants can accept. As shopping goes global, it benefits merchants to be able to accept as many payment methods as possible. Payment processing APIs can also streamline the check-out and payment process when people shop online.
One example of the evolution of payment processing fintech can be seen in the difference between PayPal and Adyen. Both are payment processing fintech companies. EBay, which used to own PayPal, announced that it would be switching to Adyen. Adyen’s APIs create a seamless checkout experience. Instead of moving away from the checkout page to log into a separate account, which is the case when someone uses PayPal, companies using Adyen let users stay on the page as they move through the checkout process.
2. Peer-to-Peer Programs
Peer-to-peer programs (P2P) once referred to software that let users download files from other users. Newer uses for P2P include APIs that facilitate currency exchange, resulting in lower costs for all involved and lending programs that let investors loan money. Lending program APIs automate the process of issuing loans.
3. Investment Management
Other examples of fintech API platforms can be found in investment management. Investment management APIs provide access to portfolio information of individuals so financial advisors and brokers no longer have to guess or cobble together a picture of their client’s assets and net worth from a variety of sources.
4. White Labeling
Although many APIs are branded by the companies that created and own them, white-label APIs also exist for use by fintech companies and banks. White-label APIs can open the door to financial technology to banks and other financial institutions, without requiring them to develop their own platforms or programs.
Regulation technology, or regtech, is an increasingly important component of fintech. It’s vital that companies have a way to confirm that their customers are in fact who they claim to be. Regtech APIs range from programs that enable biometric identification, such as fingerprint or iris scanning, to Know Your Client verification programs.
Online banking makes financial services accessible to more people, and APIs work as catalysts for the process. By implementing an API, a bank can offer features that are easy and safe to use on mobile devices. An API can open doors for remote money transfers, loan requests, deposits, and much more. These API-based services make a bank more attractive to clients.
7. Cryptocurrency and Blockchain
Cryptocurrency is growing in popularity. Money is data. Cryptocurrency runs on blockchain technology which is a database that stores and shares transaction information.
An API can set parameters for blockchain communication in order to verify credentials, approve transactions, and ensure their security.
Which APIs Are Right for My Business?
APIs are great, especially because they are customizable. You can develop API platforms that adhere to your business’s needs. There are a few things businesses in the financial sector need to consider when choosing APIs:
- The ways end-users interact with your program
- Your customers’ needs
- Your business strategy
- Government regulations or compliance requirements
Representational state transfer (REST) APIs are one of the most recommendable types of APIs because they offer the best performance and are the easiest to use. A set of architectural criteria distinguish REST APIs from others.
A REST API features:
- A standardized interface for the resources that external API consumers can access.
- A client-server structure where each application runs separately.
- Stateless server storage parameters that treat every client request as a new one.
- A system that caches client resources for faster interactions.
- Compatibility with layered systems for server organization.
- Code on-demand capability for scalability.
Hydrogen Lets You Build Innovative Fintech Products
Hydrogen focuses on helping companies of all sizes across the financial industry to create innovative products. Our solutions have been used by retail and commercial banks, challenger banks, fintech startups, and insurance companies. The Hydrogen API platform uses REST APIs to help companies develop apps and programs that analyze the financial health of clients, authenticate and verify identity, manage accounts and portfolios, and provide customer support. With Hydrogen, your organization can build, power, and grow your fintech application. To learn more, start building fintech products today!