Technology today has such deep reaching impacts, that the way we work, and function has changed drastically over the last decade. The traditional ways of working are giving way to innovative and advanced ways of working. From the luxury of our homes, we can book flight tickets, get medicines delivered, or consult with doctors to name a few.
Technology has had such far-reaching impacts that financial and banking activities can also be done from our phones. The technology innovation that has changed the banking and financial activities is the API banking system.
The use of APIs in banking has caused substantial changes to the way financial operations are carried out. Recently, we have seen the advent of many fintech inventions that have simplified money movement, enabled faster transactions and simplified finance and banking.
What is API and how does it work
An API is an application programming interface, a type of interface that allows two computer systems to share information with each other.
API banking is a set of procedures, practices, or tools that allows accessibility to a bank’s services and information to other financial structures or third-party institutions.
APIs help to systematize functions that a business would normally perform on a banking gateway. These include transfer of funds via mobile applications or any other banking related activities.
Banks will usually give limited and protected access to their core banking functions to other third-party institutions. This is done to give them access to banking related activities such as checking balance accounts, queries and transaction related information can be obtained.
How API banking works:
If you have used GPay, PayTM or any online financial application, this has been made possible by an API. APIs, or application program interfaces, are used as a protected way of communication between third-parties and online banking systems. This communication comes from FinTechs (that build or create the API) and banks that make use of that API. API link both customers and banks with each other to enable customers to do banking services through applications.
They create a secure way of giving access to a user’s financial information such as balances, account information, cash flow, and transactions. How this takes place:
- Banks open their central banking system for the third-party applications and platforms.
- A link is established, and integration is set up between the bank’s API and the third party requesting application
- The third-party platform will then send out a request to obtain the vital data from the bank servers. These are called API calls.
- By doing this, business organizations and other financial service providers can successfully combine single third-party APIs to gain access to numerous banking APIs.
The purpose of the third-party platforms is to deliver an easy to use interface. This should be user friendly so that business and banking transactions can be easily carried out. The key examples of banking APIs include analytics, account authentication, account information, payment processing, and loyalty programs.
Types of APIs
There are different kinds of API’s that are targeted to different audiences and users. Below are the different categories of APIs:
Private APIs are targeted towards improving the operational efficiency of the banks and the banking industry considers this a very important aspect of their routine work. It is used internally within the organization and offers the following advantages:
- Automation of services
- Economical and cost saving
- Improved integration and collaborations
- Higher safety in data exchange
Partner APIs are used to engage in activities between third parties and banks, they usually support expansion and development activities. This model is used when new services and products need to be introduced.
Take for example, with the operation of a partner API, a bank can engage with a third-party organization. They can work together to develop loan documents with respect to loan applications. This would subsequently enable the bank to maximize efficiency rates and automate loans. Hence this is one of the reasons banks are going the API route.
One of the rarely and often less used models of API. The aim of public or open APIs is to make business data available to third parties. Here, the banks are usually concerned about data security and other vital customer information. It allows for innovation and building a developer community, allowing access to new markets.
Advantages of API banking
With API banking, innovations have more elasticity to offer the best features and services to modernize financial services, thereby building a healthy atmosphere of competition and innovation in the fintech products industry. This has led to a revolution of banking methods.
Real-time competences, get greater visibility of cash flow, cash position, and more, across currencies. It led to reduction in administrative challenges with respect to handling finances like applying for a business loan, checking your creditworthiness, and more.
- Varied services
API banking platforms offer more than banking services, you can use them to carry out payments to any other bank account and online services. Funds can be received and transferred from different banks. Money can also be transferred to any UPI-BHIM ID, PayTM wallet, or debit card.
- Instant Verification
API platforms offer Bank Account Verification as one of its core and essential services. This feature enables you to validate the bank account number, name and details before carrying out the transfer in real time.
- Availability and Scalability
The features and services are bigger and better on these fintech platforms; you can transfer money from any place at any time. They are built to function 24/7. The ease with which transactions can be carried out make it a popular choice.
- Easy Interface and Integration
The third party applications are built and developed to provide efficiency and ease of use. It also helps for easy integration and at the same time protection of data. It ensures that you can easily integrate with your application or website, or ERP and transfer money easily. It would take only a few hours to set up your initial details after which payouts will be carried easily.
Bank servers can be unreliable and there can be latency along with them being unresponsive, when you need them to. As API banking platforms are integrated with several banks, these issues and problems have been addressed. This allows them to redirect the transactions through different banks.
Challenges around API banking
In order to have a more efficient, reliable and secure open banking system, the following challenges need to be overcome. With digitalization being accepted as the way forward, it needs to be ensured that we have a strong and robust financial ecosystem that can not only support the functionalities it allows, but enhances the services and ease for consumers.
Hence the following challenges are the focus and need to be overcome:
- Indifferent Customers
The prerequisite for API banking is that customers must agree to give authorization to access their data. This is an essential requirement for the API bank to function. However, this is an ongoing battle, as only a small percentage of the population accept the open banking system.
Two factors play into this problem. The first is the matter of security and privacy of data. API banking is still facing challenges with regards to security of data. Fear of fraudulent activities and data security is a major hindrance in adopting the new way of banking. The second reason is the customer is looking for value. Besides the ease of transactions, they are yet to find significant value in the return for the trust placed in API banking systems.
- Insufficient awareness among customers
A major issue standing in the way of the comprehensive acceptance of API banking is inadequate customer awareness. Customers are not completely sold on the idea of API banking as they do not have enough information. The need to educate customers is a necessity in order to promote the acceptance of API banking and its benefits. The indifference of customers can, in fact, rise from the failure of the banks to effectively communicate and inform their customers about the changes to banking terms and conditions that precede API banking.
- Data sharing apprehensions
The functions around API banking are based on the fact that data sharing is a requirement. This has led to a paradigm shift for banks in terms of how they function and operate. Traditional ways are giving way to new and innovative ways of working. This has called for widespread sharing of data across the board, causing apprehensions in adoption of an open banking system. The quandary for banks, therefore, is how much customer data can they risk to reveal so as to participate meaningfully in the API banking world?
- Legacy restrictions
As new age innovations have become combined with the fast pace of technological changes, legacy devices and systems are no longer able to support the new features that API banking can offer. The rollout of central banking systems has been determined by product-centricity, departmental structures, and compliance goals. This has led to the detriment in interoperability with API banking platforms. This needs to change for API and open banking systems to be successfully adopted.
API banking becomes significant when customers accept and participate willingly and cooperate with banks. Therefore, it becomes important for banking institutions to familiarize and educate their customers on the potential advantages that API banking offers.
Along with these, finding resolutions to the legacy system issue will allow financial institutions to better support themselves to enter and contribute in the field of API banking.
While banking institutions are focusing on modernization of their core banking, there is definitely a potential future for API banking in the financial ecosystem.
In the future API led innovation in banking and fintech will only gain more momentum and speed. The recent pandemic will attest to this – banks were forced to provide functions online that were only ever executed in person previously. The future for API banking is going to re-shape the way that consumers transact, create new business models and redefine banking.