The importance of APIs in digital banking

October 3rd, 2022

As the fintech sector grows and evolves, businesses need to connect and integrate with a wide range of services to innovate. Seamlessly and effortlessly linking with core systems will help organisations in the financial market to remain competitive and disruptive. How do these connections happen? That’s where a bank integration API comes into play.

This article covers what you need to know about application programming interfaces in the financial market so you don’t get left behind.

What is an API?

An Application Programming Interface, or API for short, is an intermediary software between two applications that allows them to talk to each other effortlessly. You can think of an API as a handshake between two people. The two interfaces are usually categorised as a client and a server, where the client requests information using an API and the server returns the desired response.

APIs can range from simply pulling information from a database to updating and posting new data, along with other more complicated tasks.

APIs are so versatile and pervasive throughout the modern world that you already use them without even knowing. When you check your weather app, financial stocks or order food online, you are using multiple API integrations to communicate with different servers, products, and organisations to fulfil a simple request.

For example, when you find a location in any online map program, an API is actioning the map’s server for information that relates to your search input. The server will then send a response back to you with the necessary details and display them clearly and concisely.

What is a banking API?

Banking API is the process of opening banking functions as a web service to allow communication between banks and other financial institutions, including fintechs, to help create a more seamless user experience for their customers.

Bank API integration leads to more innovative solutions to financial problems, such as failed payments and non-compliant international payments. With API integration, financial services can become highly specialised whilst remaining useful to a broad range of customers.

Client-Server Separation

This constrains the communication between a client device and server – requests can only be made by the client and responses by the server. The client and server are therefore distinct and separate, which allows changes to be made on either application without modifying the other.

Uniform Interface

All requests and responses must follow a common protocol for formatting their messages. This ensures that the client and server correctly understand each other. Otherwise, small discrepancies would result in lost or scrambled data.

The majority of RESTful APIs use HTTP or HTTPS (Hyper-Text Transfer Protocol Secure) as a common language.

Stateless

This means that every interaction between the client and server must be independent of each other and contain enough information to complete the intended action. Stateless transfers greatly reduce the number of server resources required, as well as the odds of a response failing because the server doesn’t need to retrieve old information to fulfil the interaction.

Layered System

Usually, servers have multiple layers for security, handling data and other important functions. This requires that requests and responses are processed the same way, regardless of the layers they pass through. This means that the server may be restructured easily without affecting data traffic.

Cacheable

This requires some data to be temporarily stored on the client’s device when received. Doing so leads to faster load times when returning data.

An API should send code to clients in its response so they can run it themselves. However, this is not technically part of the REST criteria.

API response and error codes

When an API response is received, status codes will be attached, allowing the client to understand more about the data received. These can indicate if the response succeeded (for example, a 2XX code), failed (a 4XX code), or required additional action from the client (a 3XX code), where the latter two digits specify the outcome further.

For more information on the IF API response codes, visit our API documentation.

How does API in banking work?

API integration enables third-party access to banking functions through web services, promoting efficiency and collaboration. They facilitate real-time updates and transactions, empowering customers with self-service capabilities.

API banking breaks down monolithic structures, enabling independent updates to specific features and enhancing the delivery of financial institutions' banking services.

In API banking, a layered architecture exposes distinct bank functions like account management and payments through well-defined APIs. These APIs, formatted in JSON or XML, ensure seamless compatibility and integration.

An API gateway authenticates and directs external API calls, providing security and enabling targeted innovation without full system knowledge. This modular API usage system allows independent updates and enhances security measures.

What are bank API types and their benefits?

Bank APIs are segmented into various types, each serving specific functions and purposes, as outlined by Fintech Ranking:

Core banking APIs handle transactions like deposits, lending, transaction history, and cross-border services for SMEs.
Plug & play banking APIs are tailored for tasks such as trading, accounting routines, and integrating OAuth.
Cards, wallets, and transfer APIs streamline processes like managing SDK stocks, conducting multi-currency transactions, and monitoring fraud.
Acquiring APIs facilitates mobile payments, NFC solutions, online banking and card acquiring, embedded finance, bank account management and more.

REST and SOAP stand out as prevalent architectural styles for APIs. REST emphasises one-way message delivery, while SOAP enables two-way communication. Each style offers distinct advantages, including scalability, security, and efficient financial data transmission, catering to diverse business requirements.

What is API integration in banking?

The integration of APIs in banking involves the use of a secure gateway, known as an API, to establish a connection between a financial institution's system and external applications. Through this connection, approved apps can retrieve data and features from the bank's system, encouraging creativity and advancement.

How to monetise APIs?

Across the digital world, more applications are becoming interlinked by APIs to give the user more functionality. However, not all APIs are created equally and some are more useful than others. This leads to the monetisation of APIs, including the banking APIs described above.

When it comes to monetizing banking APIs, there are several options to explore:

Subscription fees – Banks can charge a fixed monthly or annual fee to access their APIs. This option suits customers who plan to use the API frequently, such as fintech companies offering budgeting or money management tools.
Pay-per-use fees – Financial institutions can charge customers based on the number of API calls made. This option is suitable for customers who only need to use the API occasionally, such as accounting software providers needing access to transaction data for bank reconciliations.
Transaction fees – Charging fees for each transaction initiated through their API. This option is ideal for banks to offer financial services like real-time payments or cross-border transfers.
Revenue sharing – Banks can partner with third-party providers and share a percentage of the revenue generated from bank API integration and usage. This option is beneficial for financial institutions looking to encourage the development of new and innovative financial products and services.

What are the benefits of API banking for developers?

APIs help to improve the user experience and flexibility of fintech applications, allowing them to quickly access large amounts of data for the user. For example, they can help direct a user to the closest ATM or connect reward schemes. As a result, more users may utilise the application a developer has created.

For developers, APIs allow for creative and robust application development with expanded functionality. The server or client can be changed or updated in any shape or form and the APIs will still work to facilitate clear communication between them. They also allow developers to easily include features from a new application. In a time where a single app can quickly evolve the market, this is key for the developer’s work to remain relevant.

What are the benefits of using a banking API?

Whether a financial institution offers a niche service or a full neo-banking experience, partnerships are essential. Banking API integration bridges the gap between fintechs and traditional banks, enabling collaborations that wouldn't be possible otherwise.

Building an intermediary network is a massive undertaking. This is where Banking-as-a-Service (BaaS) providers come in, offering streamlined development and access to bank APIs. Look for a BaaS provider with extensive connections across both banks and fintechs – a limited network could restrict your growth.

Banking APIs offer a multitude of benefits:

Enhanced Functionality and Innovation: fintechs can leverage APIs to create bespoke financial products and services for specific customer segments. This flexibility fosters a richer financial landscape for consumers. Additionally, APIs enable user bank account aggregation across institutions within a single platform, allowing features like automated budgeting, bill payments, and personalised financial insights. Furthermore, pre-built functionalities for common banking tasks streamline development, allowing fintechs to focus on innovation and faster product launches.
Increased Efficiency and Reduced Costs: APIs eliminate the need for fintechs to build their core banking infrastructure, saving significant time and development resources. The inherent scalability of API-driven architectures allows fintech companies to easily adapt to market changes and user growth. Moreover, secure and automated data exchange between banks and fintechs eliminates manual data entry and errors, leading to overall cost savings.
Improved Security and Compliance: Standardised API protocols and access controls ensure compliance with Open Banking regulations (with the use of an Open Banking API), providing peace of mind for both fintechs and customers. Modern API gateways utilise robust authentication mechanisms to safeguard access to banking data, protecting sensitive customer data.

Digital banking APIs that you can bank on

If you are looking to launch your digital banking solution, incorporating existing technology and integrating solutions for complex processes using APIs is a valuable way to optimise development costs and reduce the amount of time it takes to get a product into the hands of customers.

Our Fintech infrastructure APIs help you build the solution that fits your exact customer needs, without huge upfront development.

You will quickly be able to:

Connect once and standardise your interaction across multiple banks
Make payments, issue bank accounts and perform FX using single workflows
Enhance your digital banking offering by adding more providers quickly and easily

You can build a fintech company in weeks, not months. Speak to one of our banking API experts today to request your sandbox environment.

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