By now, you’ve probably heard of APIs. Companies across a wide range of industries have either already adopted APIs, or plan on doing so soon – in fact, 58% of executives name participation in the API economy as a top priority for their business.
One of the most noticeable use of APIs, though, has been bank APIs in the financial sector.
Here, we’ve seen innovative, fresh-faced fintechs pair with 100-year-old banks to pioneer products that revolutionize the space. API banking is already changing the way business is done, and is slated to have a dramatic effect on our day-to-day lives.
But what is it?
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What is API Banking?
API banking – also known as open banking – puts account holders in control of their own data. If they so choose, they can then securely share this data with third-party apps that help refine the banking experience.
Think clear, real-time insight into cash position, personal budgeting plans refined by AI, or streamlined international payments. In effect, API banking allows users to customize their bank account(s) to fit their needs, whether personal or corporate.
API, by the way, stands for application programming interface. An API is simply a set of rules that facilitates communication between two applications.
In the example of Trovata, a banking application communicating with a third-party application.
The two most common web service APIs are REST and SOAP. These APIs leverage URLs on the world wide web in order to transmit information from one system to another.
However, APIs are also used for internal bank processes. Since they have a wide range of uses, there are multiple types of banking APIs. Let’s take a quick look at some of the most important.
Types of Bank APIs
Core Banking
Core banking APIs, offered by most major banks, are used for everyday bank functions-things like making deposits, wiring money internationally, and viewing transaction and balance details.
At Trovata, we have leveraged the core banking APIs from our various banking partners to allow our clients to view their transactions, balances, and submit payments in almost real-time.
Private APIs
Private APIs are developed “in-house.” They’re already part of the bank’s network and used to streamline operations. No communication with external parties is involved.
Plug & Play APIs
These APIs are meant to work immediately when placed into banking infrastructure without tweaking from the IT team. Examples include OAuth or an API plug-in directly integrated with Excel so you can view and manage your data directly in Excel or Google sheets.
Partner APIs
Partner APIs, AKA “open banking APIs,” are mostly what’s being discussed when people mention the “API economy.” Partner APIs are created by third parties and provide a wide range of services.
At Trovata, we have created our own proprietary APIs that consolidate treasury and accounting data from our multiple banking partners and streamlined it into one seamless API experience for our clients (via our web/mobile interface or directly through our developer portal).
KYC APIs
“Know Your Customer” or KYC APIs ensure a bank complies with KYC standards and help reduce onboarding time.
APIs Are Already Here
Have you ever used PayPal to buy something from an online store? If so, you’ve used APIs – your bank data is connected to PayPal, which then securely transmits this information to the vendor and completes the transaction.
Venmo also uses APIs, though indirectly through Plaid. While Venmo could connect directly to banks, it would have to create APIs for each individual financial institution.
That would take a long time. Plaid, on the other hand, is entirely dedicated to maintaining its own bank connections with APIs – over 12,000 of them around the world. So, by using Plaid, it’s much easier for Venmo to securely connect to a huge variety of financial institutions.
Actually, APIs are even more common than you might realize – any time you access your bank account from a mobile device, you’re using APIs.
So, API banking is inextricably connected with the digitization of banking. And, in a post-Covid world, where the vast majority of users prefer to bank or make payments from the comfort of home, this is critical.
Banks realize this.
According to McKinsey, 88% of IT executives at leading banks felt APIs had grown in importance from 2020-2022. As shown by data from PYMNTS, 35% of banks and credit unions invested in APIs in 2019. By 2022, the number had grown to 47%.
How Did We Get Here?
The Covid-19 pandemic sped up banks’ transition to digitization. However, it was really something completely unrelated—an EU law—that kicked off the first explosion in open banking technology. This was PSD2, the Revised Payment Services Directive.
The regulation, rolled out in 2018, had the aim of increasing competition in the financial services sector and stimulating development of new technologies to benefit consumers. It did this in two ways: first, by opening the field to bank challengers and, second, by requiring that banks permit customers to share their data with third parties.
At first, the landscape was competitive – challengers tried to do what banks do, but better. But these bank challengers still had to acquire licenses to offer services like personal loans or credit cards. While some companies did go on to acquire their licenses, for most, this was too much of a challenge.
APIs offered a compromise. By partnering with traditional banks, these challengers could offer banking services through their own platforms without having to earn their licenses.
API banking offers the best of both worlds. There’s no need to choose between a fintech provider and a bank. You get the flexibility and innovation of the first, paired with the reliability—not to mention financial insurance—of the latter.
Currently, open banking is a fact of life in the EU and UK. US-based fintech developers have been watching from across the pond and creating their own apps, some of which—like Robinhood or Chime—are already pretty popular.
Where Is API Banking Headed?
The age of API banking has just begun, especially in the US. However, if recent moves by the Consumer Financial Protection Bureau are anything to go by, it’s just about ready to become as common in the states as it is in Europe or the UK.
This is good news for American banks, as 56% of U.S. citizens now rate open banking as a must-have.
Predictions about API banking:
- According to Accenture, in September 2021, 76% of banks expected API use to increase by at least 50% over the following 3–5 years.
- Polaris Market Research projects the open banking market size will reach $128.12 billion by 2030.
- “Moving past legacy transaction banking systems that were designed long before APIs came to the fore begins to bring the promise of a new banking infrastructure within reach.” – Goldman Sachs
- “Open banking is a trend that is taking hold globally… the impact should be positive – both for consumers and for the financial services ecosystem thanks to a better consumer experience, keener competition, and increased innovation.” – Visa
Really, no matter who you ask – whether fintechs, major banks, or credit card companies, API banking represents the future of the space. And, when you consider the many benefits, it’s not hard to see why this is the case.
Benefits of API Banking
How Do Companies Benefit?
For businesses, one of the clearest benefits of API banking is visibility into cash flow and cash position. Where recording outflows and inflows the old-fashioned way – manually, in spreadsheets – is prone to error, bank APIs source data right from financial institutions. This provides a real-time view of all transactions.
When you have a clear view of cash position across all accounts, you can create more accurate cash flow forecasts that provide clear, actionable advice.
APIs also allow you to make payments from a central dashboard. For example, by leveraging bank payment APIs, Trovata consolidates and streamlines the experience for our clients to submit multiple payments and payment types to their respective banks without having to take on the hassle of processing the payments.
We also are able to offer payments without added fees.
When you have a clear view of all activity across accounts and departments, decisions are no longer made in isolation – you can see how each movement of money affects every other area of the company. You can also gain a clear line of sight over your financial runway and take steps to intelligently reduce cash burn.
With APIs, compliance is made simpler, too. For third-party financial service providers, KYC has already been done by the bank, so there’s no need to repeat it. For companies of any size, the ability to reduce fees through real-time payments and batch payments is a simple but effective way to increase cash flow.
Accepting API payments can also help reduce the cost of card processing fees and, in some cases, ensure business owners receive payment much faster.
How Do Consumers Benefit?
The perks of open banking are just as potent for consumers. For instance, some API-based apps offer budgeting advice based on a clear view of your income and expenses. Using these apps, you can create goals and get recommendations to help you achieve them.
Some APIs focus on helping you save money in other ways. For instance, an account holder may get customized loan offers, or find a credit card with rewards that fit their spending habits and/or have lower interest rates. Some keep track of subscriptions— something easy to forget about—and remind you to cancel them.
APIs are also an important part of safety, specifically two-factor authentication (where more than just a password is required to log in, a separate code may be sent to a phone app, for instance) and biometric authentication.
When you apply for a loan, there’s no need to manually collate all that information – APIs can show recent financial history to loan providers without any input from applicants. They can also provide additional opportunities to improve your credit score. Experian Boost, for instance, looks at factors like utility payments and phone bills.
How Do Banks Benefit?
APIs offer banks a simple way to modernize. That’s because, through APIs, they can offer customers these new innovations without actually developing them themselves. Fintechs are often highly targeted, creating ad hoc solutions to problems – this means banks can address the needs of specific clientele.
Using APIs, banks can also greatly increase the quality of life for their customers. They might develop an app that shows ATM locations or have a much easier time partnering with certain credit card providers. With APIs, they’re also much easier to integrate into the bank’s existing infrastructure.
APIs are a surefire way for banks to increase their revenue. One study from Accenture linked the adoption of open-banking APIs to a 20 % increase in revenue.
Banks should not think of the evolving, digital finance landscape as a threat—rather, they should think of it as the opportunity that banking APIs permit it to be.
How APIs Are Transforming Payments
Digital payments are growing rapidly. Millennials and Gen Z, who already control around $350 billion of spending power in the US, overwhelmingly prefer to make payments from their devices.
By allowing banks to connect with apps, APIs are a primary driver in the transformation to a digital payments-based economy.
The most obvious example of API-enabled payments are real-time payments (RTP). As the first new US payment rail in 40 years, real-time payments are similar to wire transfers, but much improved.
For one, they cost significantly less: where wire transfers cost $25 – $50 per payment, RTP cost just $0.25 to $1. They also settle instantly, as opposed to wire transfers, which can take 2–3 days.
For some banks that offer this service, like J.P. Morgan, the only way to currently access this technology is through APIs.
Buy now, pay later is another prominent global trend. This API-based payment method allows consumers to finance items they might not normally be able to buy, without drowning in debt. According to C+R research, 60% of consumers have tried buy now, pay later, and, according to Fortune Business Insights, the CAGR is expected to grow by 21.7% until 2029.
Embedded payments are also enabled by APIs. This is where you can buy something within an app, without first logging into your bank account. Think Lyft or Uber.
Listen to the Fintech Corner episode, “Dear Third-Party Payment Vendors, It’s Not You, It’s Open Banking APIs” where Trovata’s CPO, Joseph Drambarean, and CEO, Brett Turner, discuss how APIs are disrupting the corporate payments experience (and why Trovata is able to offer payments for free to all of its customers):
Now’s The Time to Get On Board with API Banking
Many banks have taken note of the API revolution. Trusted financial institutions like Bank of America, JP Morgan, and Wells Fargo have begun to integrate these technologies, working with third-party fintechs like Trovata.
Trovata is proud to be part of the move to API (open) banking. We truly believe that by working with banks, rather than trying to compete with them, everyone benefits.
See how API banking can transform your business. With automated aggregation, cash flow forecasting, and access to a variety of payment types, Trovata helps you manage liquidity and grow sustainably by putting each dollar to use, efficiently.
Want to see it in action? Book a Trovata demo today!
