June 24, 2022
Application Programming Interfaces, or APIs, provide a common language for sharing data between two applications. By doing that, they also enable open banking, in which banks open up their APIs for third parties, such as fintechs, to create related apps and services. Learn more about how banking APIs work and how they are fueling fintech innovation.
APIs provide a common language for sharing data between two applications. For example, banking APIs allow consumers to securely connect their bank accounts to other apps and services. A consumer can download a financial app to their phone and create an account on that app. Next, the application sends an API request to the consumer's bank to verify the account's existence. On the other side, the bank then uses the app's API to authenticate the consumer's account to authorize the requested transfer of funds.
Given the ability to connect with consumer bank accounts, fintechs then provide innovative products and services to consumers. Some examples of new products and services available because of banking APIs are P2P payment services such as Venmo® and Zelle®, online investment portals, and robo advisors like Robinhood® and Betterment®.1
Thanks to banking APIs, fintechs have developed innovative products for consumers that increase access to credit, financial advice and provide faster ways to accept and make payments to businesses and other consumers. Banking APIs provide a critical ability for financial companies or other providers to connect with a consumer's account without directly integrating with complicated banking legacy systems. In addition, the ease of accessing bank account information allows consumers to open accounts and move their money more efficiently.
The pandemic created a consumer need and expectation for immediate online access to information and transactions through their bank accounts. Banking APIs help banks provide that by ensuring consumers receive the latest news on their accounts, whether interacting directly with their bank or through a third party. The APIs can also help banks offer more functionalities tailored to customers' needs.
So-called financial aggregators, such as the budget tracker Mint®2, also use APIs to gather consumer data. Previously these companies would have needed the consumer's username and password, which the aggregator would then use to repeatedly log into the consumer's bank account to access their banking data.
APIs can allow businesses to seamlessly connect their banking accounts with other financial providers, including accounting and billing software.
So-called online-only neobanks attract customers by offering new products alongside deposit accounts. In addition, their low-cost structure means they can waive the account minimums and fees levied by many of the larger banks while also offering a better online experience than larger banks.
Many neobanks are not technically banks, but technology companies integrated with traditional banks to offer typical bank services like checking and savings accounts. Banking APIs allow these neobanks to connect their apps to the traditional bank, creating a seamless consumer experience.
With the growth of digital banking and financial services, more financial firms are developing APIs to stay competitive. The percentage of banks and credit unions that have either invested in or developed APIs jumped to 47% in 2021 from 35% in 2019, Pymnts.com reported (APIs to Drive Banking-as-a-Service Growth in 2022 | PYMNTS.com). An additional 25% say they plan to invest in developing APIs in 2022.
Given the growth of banking APIs, related apps are gaining in consumer popularity. More than 80% of consumers used a form of digital payment in 2021, according to McKinsey’s 2021 Digital Payments Consumer Survey. (Source: New trends in US consumer digital payments | McKinsey & Company)
Generally, banks and financial services are hesitant to provide access to their consumer data because of privacy and security concerns. However, through APIs, open banking follows uniform security standards for both data access and user-based permission and control. Open banking then allows consumers to share their financial information with third-party service providers like fintechs and payment apps.
Deposit Hub from Synapse3 is a platform that enables fintech firms to open deposit accounts for individuals or businesses via an API call. Build experiences including: Cash Deposits, For-Benefit-Of Sub-Accounts, Custody Accounts, and Clearing Accounts. Interested? Learn more here.
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