Banking’s API Evolution: Shifting from Cost Savings to Strategic Monetisation

APIs have firmly established themselves as a fundamental aspect of banking and various other sectors. Companies, especially in finance, once viewed APIs cautiously. However, a remarkable transformation has occurred in recent years. Now, financial executives are more sure about the benefits of banking APIs. They have started to embrace banking APIs for operational automation, scalability, and acceleration.

A recent survey on API in banking revealed that 88% of financial leaders say APIs are now an essential part of their operations. This transformation goes beyond cost savings. It fosters innovation, enhances customer experiences, and drives strategic partnerships.

Major financial institutions are dedicating approximately 14% of their IT budget to banking API development, reflecting a growing investment trend. This allocation allows banks to offer their customers access to many banking products and services easily, quickly, and safely. They also help banks explore new areas, such as banking as a service, platform as a service, and embedded finance. Additionally, APIs are key for future technology.

But what exactly is an API, and how does it operate within the banking system? For what specific purposes are APIs employed in the banking sector? Are there distinct categories of APIs that serve unique functions? How are APIs evolving to become increasingly relevant for revenue generation, extending beyond their cost-saving roles? And what challenges do banks face when implementing APIs in their systems? In this article, we’ll address all these questions.

What is an API, and How Does It Work in the Banking System?

API stands for Application Programming Interface. It is a set of rules and specifications that define how software can communicate with each other. APIs are like messengers that allow different software applications to communicate with each other and exchange data.

In simpler terms, a front-end application requests data or functionality from another system through the API. The API processes the request, ensures permissions, and interacts with the backend to perform the required tasks. Once backend processing is complete, the API returns results to the front end, enabling seamless communication. This entire process takes place in a matter of milliseconds.

For instance, imagine you initiate a payment through your payment application. Although initiating a payment is a front-end action, APIs work behind the application to complete the payment process. The API serves as the intermediary between your payment app and your bank’s backend. It takes your request to the bank’s backend, processes it, and obtains the required permissions. Within seconds, it relays the outcome of the payment processing. It then presents the results, indicating whether the transaction was successful or declined, on the front end.

An API efficiently processes your front-end action and transfers it to the backend of the application for execution. It then swiftly returns the outcome to your front end. This ensures a seamless and rapid flow of information. However, many types of APIs cater to the range of use cases, making all the processes smoother.

Use Cases: APIs Cater To a Wide Range of Use Cases in Banking

APIs have entirely transformed the Fintech world, simplifying countless banking tasks and processes.

APIs empower banks to offer a wide range of services. They optimise operations and enhance ease and efficiency. Additionally, they also provide various functionalities to customers. Here are a few key use cases of APIs in banking:

• Account Aggregation: Financial app developers can utilise this API for creating an aggregator solution. It aggregates account information from multiple banks into a single view.
• Payment Services: APIs enable the initiation of payments, including fund transfers, bill payments, and more.
• Identity Verification: Fintech institutions can use this API to verify the identity of customers and meet regulatory requirements.
• Credit Scoring: APIs can be used to access credit information and provide services that depend on credit scoring.
• Risk Assessment: APIs help fintech companies to assess the risk associated with lending or other financial activities.
• Internal APIs: These APIs play a crucial role in facilitating the smooth and efficient movement of funds. They handle tasks such as data integration and support various financial systems.

Types of APIs in Banking

Banking APIs are classified into three main categories, catering to diverse use cases. Each category houses a suite of APIs tailored for various banking operations.

Deployment of APIs in Banking

API deployment in banking has evolved significantly. Initially, banks adopted APIs for cost savings and streamlined operations. Today, APIs serve broader goals. It empowers banks to offer improved customer services and collaborate with third-party partners.  APIs go beyond cost-saving. They are now strategic assets that create value, nurture partnerships, and accelerate growth.

In the dynamic API landscape, banks position themselves to thrive, adapt to change and explore new possibilities. This journey from cost-saving to monetisation reflects APIs’ evolving role. It has successfully shaped the future of banking, fostering innovation, and generating revenue.

Here is how API deployment in banking is revolutionising the operations:

• Cost Reduction & Efficiency: APIs have reduced bank reliance on extensive IT infrastructure by automating manual processes and reducing the need for extensive IT infrastructure. This leads to more cost-effective operations, freeing up resources for strategic growth initiatives.
• Faster Development & New Services Offering: Third-party API integration allows banks to establish partnerships with third-party fintech companies, systems, and applications, resulting in accelerated development of new web and mobile app designs. This allows banks to swiftly introduce an array of fresh services and innovative solutions to the market. These services often come with monetisation models, such as subscription fees or transaction-based revenue.
• Data Insights for Targeted Marketing: APIs are crucial for obtaining valuable data insights by integrating and consolidating data across the banking system. These insights empower in-depth analytics, enhancing decision-making, risk assessment, and precise customer targeting. This personalisation drives customer engagement, cross-selling, and revenue growth.
• Enhanced Security Service: Empower banks to strengthen the security of their entire banking ecosystem. With a strong focus on safety, APIs ensure secure data transmission and provide robust protection against cyber threats, enhancing trust and customer confidence in the banking system. Thus, it is essential to learn how to secure customer data from cybersecurity threats in the right way.
• Global Expansion & Market Reach: Banks can offer APIs to third-party developers, fintech companies, and partners. This enables banks to tap into international markets and extend financial services to a global customer base. These expanded markets often come with new and diverse revenue opportunities.
• Scalable Infrastructure for Digital Banking: In a world of evolving digital banking, scalability is key. APIs facilitate banks to scale their services and infrastructure as customer demands grow seamlessly. APIs enable banks to scale services and infrastructure seamlessly as customer demands grow. Banks are now monetising this by offering white-label API solutions to help other financial institutions adapt to changing market dynamics and meet customer needs more effectively.
• Customisation and Tailored Services: APIs empower banks by extracting meaningful information from data. This includes customer behavior, income, spending habits, and more. This capability enables banks to deliver personalised services tailored to individual customer needs. This capability leads to tailored, customer-centric experiences and financial solutions that enhance the overall banking experience. In addition, by providing these personalised services, banks can charge premium fees, ultimately leading to significant revenue growth and nurturing increased customer loyalty.

Challenges of API Integration in Banking:

While APIs in banking provide numerous benefits, they also come with specific challenges, including –

• Data Privacy and Consent: Banks must navigate complex data privacy regulations, to secure customer consent to access their banking details. This process can vary based on specific legal requirements.
• Integration Complexity: Third-party API integration with legacy systems and ensuring they work seamlessly with existing infrastructure can be challenging.
• Security Concerns: For banks, ensuring transactions and data security when using APIs is a top priority. Banks must use reliable API or hire specialised API developers to safeguard against potential vulnerabilities and cyber threats.
• Regulatory Compliance: Adhering to a complex web of financial regulations is crucial for banks. Deployed APIs in banking systems must comply to ensure data privacy and meet legal requirements.
• Monitoring and Governance: Monitoring and managing API usage in a multi-partner ecosystem demands robust governance. This ensures data security and compliance are upheld.
• API Versioning and Maintenance: Managing multiple API versions within banking systems requires ensuring compatibility and smooth integration. Planning for seamless transitions during updates can be challenging and requires careful attention.
• Interoperability: Ensuring that APIs can communicate effectively and consistently with various systems within and outside the bank is a significant challenge.

Conclusion

APIs in banking evolved beyond cost-saving tools, driving business growth and innovation.  Initially, these versatile connectors enabled banks to reduce expenses and save costs. But, today they’re gateways, accelerating services, providing insights, enhancing security. APIs have unlocked new opportunities, enabling global expansion and personalised customer experiences.

However, the implementation of APIs in banking comes with its own set of challenges. The difficulties include concerns related to data privacy, integration complexities, and regulatory compliance. Successful navigation of these hurdles is essential for banks to fully harness the potential of APIs in the evolving financial world.

Ficode’s fintech development services offer assistance for those looking to integrate fintech applications. We specialise in third-party API integration, making it easier to create scalable finance apps.