What Are APIs In Banking And How Does It Affect The Banking Sector?

Margie D. Moore
Uses of API in the banking sector | BBVA

It is no secret that the last decade has been one of the most revolutionary periods for the global banking industry, at least from a regulatory standpoint. Financial institutions have been compelled to adjust in this new era of transparency, with authorities taking unprecedented steps to ensure that consumer safety is maintained in the face of all of the business activity being performed by banks. Open Banking is one of the most extensive transparency drives, requiring large banks to share consumer data with third parties. And at the core of Open Banking are application programming interfaces (APIs).

Open Banking API platforms provide a comprehensive set of offerings in regulatory compliance, data standards, governance, open ecosystems, and co-innovation to enable banks and financial institutions to embark on a seamless transformation journey.

What Are APIs?

APIs or Application Programming Interfaces, provide real-time communication across different software systems by allowing them to communicate directly. Simply put, it is a set of computer instructions that allows one software application to request that another form a task or a series of tasks. This is the foundation of many apps that we use daily, maybe without realizing the role APIs play in the process. 

Broadly classified into three categories as Open banking, banking as a service, and platform banking, Banking APIs are a bank’s gateway to digital transformation. APIs have evolved into increasingly sophisticated components of the Internet of Things (IoT), wherein smart gadgets use APIs to deliver solutions to clients, and they are now being utilized to transform the face of global banking.

APIs In Banking

In a banking context, APIs allow a third-party application to access a bank’s common tools, services, and valuable assets, such as financial information, customer accounts, and product catalogues. As a result, APIs make it easy for the bank and the third party to connect in a timely, convenient, and cost-effective manner. 

Customers are also more likely to have a better overall experience when conducting their financial affairs if access to shared consumer data is made easier. For example, an API could analyze customer-transaction data to determine which accessible financial options, such as a lower-interest credit card, a specific loan product, or a higher-interest savings account, are best suited to that unique consumer.

The Revised Payment Service Directive (PSD2) has accelerated the development of APIs, allowing third parties such as fintech (financial technology) firms and online financial-services vendors to create apps and services that will benefit from the data they can now obtain from financial institutions.

In Conclusion

Banking APIs, particularly open APIs, are currently playing an important role in assisting lenders in transitioning from traditional banking to open banking, allowing third parties to use banks’ services or even offer the same services to their consumers. They also allow businesses to engage with their customers more fluidly than was previously feasible, which should improve the customer experience.

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