Primarily responsible for the democratization of modern applications, APIs are now essential to financial services and specifically to the banking sector, to a point where today their numerous advantages almost make them a communication standard.

What is an API?

An Application Programming Interface (API) is a set of rules that aim to enable communication between two information systems. APIs are everywhere – in Tesla cars, on a growing number of e-commerce sites, and evidently in the majority of new-generation financial services – and we use them almost unknowingly in our daily lives. 

For example, when you check the weather on your smartphone, the app gathers information using an API!

Indispensable in a financial world defined by Open Banking, these digital interfaces enable several applications (which may have been developed by different teams and for different purposes) to exchange and interact.This means one application can instantly use the resources and services of another without having to re-develop everything, a paradigm shift that lies behind a major reduction in resource access time. 

Most APIs use the HTTP protocol. Examples are those made via SOAP (Simple Object Access Protocol), which began in 2000 and was popularized by Salesforce and eBay in particular, via REST (Representational State Transfer), and via GraphQL (recently built by Facebook).

APIs – Business accelerators

By placing data at the heart of information systems, APIs facilitate interconnections and act as gateways to third-party information systems. In other words, they have become an essential tech foundation and – by extension – a source of innovation and unprecedented synergy between businesses.

According to a study conducted by Forrester for Axway published in March 2022, “APIs can be major revenue drivers for organizations. To seize opportunities and reach business goals, enterprises must pivot to API consumption.” The study highlighted that 72% of the ISDs (Information Systems Directors) and IT decision-makers surveyed said they expect an estimated 26.4% digital business growth on average if they could increase API adoption.

While they have been used for a long time, the adoption of the PSD2 European Directive in May 2021 has acted as a true catalyst, particularly for the banking sector. In a way, it has ushered in the Open Banking era – i.e. the opportunity for financial players (particularly fintechs) to access and exploit banking data.

5 key advantages of APIs for financial services

#1 Standardization of information exchanges

Data security is paramount in banking. Data is considered sensitive, and consequently, specific protocols have been put in place to secure Open Banking exchanges with: 

  • authentication certificates that are only available to regulated organizations,
  • the OAuth 2.0 standard that ensures user authorization and manages the rights they give to third parties to share their banking data.

The JSON format is widely used in web, mobile, and Internet of Things (IoT) applications. It defines a standard method of API consumption that is accessible in different programming languages like Java, Ruby, and Python, etc. It gives developers a major advantage as it facilitates the design and speeds up development time. 

#2 Immediacy

Using a REST API gives the freedom to choose from the resources in a third-party system. A functioning application can retrieve data in record time and even offer real-time services. This is particularly the case with professional applications (e.g. trading) but also in everyday life where it might involve booking a hotel room online and having instant confirmation of price and availability.

The adoption of PSD2, which looks to create a minimum standard based on known methods, indirectly sets up a desire for speed. In time the directive should create an appropriate and sustainable ecosystem for instantaneous payments, for example.

#3 Scalability

Not all APIs are designed for use by a third party. In fact, the first were created to meet internal needs. For example, Tesla uses a proprietary API for communication between its mobile application and the computers onboard its cars.

APIs can be divided into four groups:

  1. Private: for internal use;
  2. Partner: personalized APIs for a specific demand or service;
  3. Composite: to combine several data sources and API services;
  4. Open (public): accessible to all.

Yet API use is also a way of designing a more scalable infrastructure that can absorb demand better than a straightforward website!

Even if a banking application receives a higher number of requests from its users, the fact it is consuming APIs within the application allows it to benefit from several third-party services and for the application to continue to function even where one of the services is no longer available.

#4 Cost reductions

Access to APIs and the opportunity of arranging them like Legos can save a considerable amount of time. A reduction in development time is a resource saved in itself and represents a potentially significant financial gain. However, enterprises consuming one or several APIs do not mobilize internal resources for a product whose future success they do not control. Access to off-the-shelf APIs delivers operational efficiency and financial profitability!

Because with development partially outsourced, payment is mostly based on usage. The services used are only paid for when it is in use. A typical example is the KYC (Know Your Customer) process for an ad hoc need. Using the API of an external provider enables functionality to be implemented in record time without having to develop it in its entirety and to only pay for it on a per-user basis.

#5 New business models

For banks, recourse to APIs means not involving core banking (the historic application). A bank can easily enrich its offer using applications developed by other businesses, generally, fintechs, to better monetize its customers. In other cases, businesses can also aim to offer their own information system using one or more APIs and monetize the service. 

APIs offer a tech foundation that brings real opportunity for innovation in an Open Banking context. With solutions like Treezor lowering the barriers to entry into the sector and allowing organizations to launch new, more accomplished and faster solutions at a lower cost – today it is easier than ever to launch your own fintech!

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