An application programming interface, more commonly known as an API, is a software intermediary that lets two applications communicate and interact with each other. In other words, an API conveys a set structure for requests and responses so data can transfer between one application and another to carry out a designed function built around sharing information and executing pre-set processes. An API carries requests from the consumer to the provider of services and then delivers the response back to the user. Applications of APIs expand within a vast range of businesses and industries, including banking. APIs have become especially important for banks when the Revised Payment Service Directive, so-called PSD2, came into play to regulate electronic payment services and payment service providers. PSD2 has accelerated the utilization of APIs by demanding banks to open up their data channels to third parties and share consumer data with them when requested by users.
What exactly is a bank API?
In banking, APIs provide a convenient, time-efficient, and cost-effective method for the bank and the third party to connect and alleviate many operational processes. Financial institutions with the utilization of APIs enable third-party providers, usually fintech companies, to build apps and services that most advantage from the data they pertain from financial institutions. Third-party applications through bank APIs can easily access the bank’s tools, services, and valuable assets, including financial information or customer accounts, and use this information to provide financial services. In addition, third parties deliver banks with many features that can broaden the scope of services for customers. By enabling the interchange of information across financial institutions and third-party service providers, APIs also allow them to transparently and securely deliver data to their consumers. To put it simpler, banks can offer third-party providers access to their customer services through dedicated APIs. These third parties then can use banking services or can also provide the same to their customers.
How do bank APIs work?
Generally, the process of sharing data via APIs relies on the procedure of request and response. To put it simpler, APIs enable the first application to make a request for a second application and give a response back to the first application. This definition may sound abstract, so let us turn to an example. Suppose that bank wants to develop an app that allows its consumers to access their account data and get information about ATM locations. To optimize this app, the bank uses APIs to connect with third parties which provide map services and offer account information services. Also, by using APIs, third-party providers access consumers’ account data, such as account balance, spending, and personal information, such as location, and pass it along to customers with their explicit consent. To sum up, the exchange of information between all parties works due to APIs, which allows the API provider, in this case, the bank, to deliver data to the API consumer, or, in this respect, a third-party provider, which sends it to customers with their request.
Types of APIs
Many banks deploy various types of APIs, including internal APIs, partner APIs, and open APIs, that are utilized for different purposes and have distinct requirements for accessibility. Firstly, internal APIs, also known as private APIs, are accessible and used only within financial institutions to connect systems and data within the business. These APIs help banks to enhance their internal processes, such as improving operational efficiency. Secondly, partner APIs are more open than already mentioned ones. These partner APIs can be accessed and utilized by the selected and authorized third-party partners of the bank. By collaborating via a partner API, both banks and their third-party partners, usually other banks or fintech companies, can improve security, reduce cost, and increase the speed of their financial services and therefore provide a better experience for consumers. Also, partner APIs permit expansion of financial institutions, especially concerning new channels, products, services, etc. Finally, open APIs, also known as public APIs, are partner APIs that are freely available to developers inside the bank and any developers and businesses outside of a bank who desire to use them. By enabling business data sharing with various third parties freely, open APIs allow banks to generate additional business, grow their customer bases, and create opportunities for innovations.
What are the benefits of APIs?
Due to the utilization of APIs, banking has become more efficient and easier for all parties: consumers, banks, and third-party providers. First of all, by allowing and facilitating the collaboration between third-party providers and banks, APIs help to modernize payment services and encourage innovative solutions to financial problems. In other words, with the usage of APIs, fintech companies get to build new tools and applications while using the underlying banking features, and banks can offer broader services to their customers through their API partners. In addition, banks collect data concerning customer behavior, which allows them to identify marketing opportunities and offer services that suit consumers’ needs the best. Most importantly, the deployment of APIs in banking benefits consumers in many ways. By facilitating access to customer data, APIs provide a convenient, rapid, and easily accessible way for customers to get an overall view of their financial situation, including transactions, balances, and direct debits. Also, with the help of APIs, customers can check their credit scores, speed up their transactions, application processes for loans or other financial services, etc. Due to APIs, customers can interact with various service providers and quickly and conveniently get the financial services and products they need. In addition, banks with the usage of APIs can allow customers‘ account data access for services beyond the banking industry, including retail shops, hotels, car apps, etc. Overall, by deploying APIs, financial institutions can provide customers with an experience based on flexibility, greater freedom, and customization.
The use and development of APIs have a profound impact on global banking. By enabling financial institutions to connect with third parties and consumers, AIPs allows the secure and convenient transfer of information, boost the scope of services, and make financial procedures much more transparent. All in all, applications of AIPs allow consumers and financial institutions to reach more intelligent financial decisions and create more innovations.