The impact of APIs on the banking industry: Convenience, innovation and security

Application Programming Interfaces (APIs)

The banking industry has undergone significant changes in recent years, with advancements in technology playing a major role in driving these changes. One of the most significant technological advancements in the banking industry has been the rise of Application Programming Interfaces (APIs).

The use of APIs in the banking industry has led to the development of new business models and revenue streams for banks. For example, banks can now offer their APIs to third-party developers, who can use them to build new applications and services. This has led to the emergence of a whole new ecosystem of fintech companies that are using APIs to build innovative new banking services and products.

However, with the rise of APIs in the banking industry also comes the risk of security breaches. As APIs allow different systems and platforms to communicate and share data with each other, they can also provide a potential point of entry for cybercriminals to access sensitive information. To mitigate this risk, banks are implementing strict security protocols and utilizing advanced technologies such as encryption to protect their customers’ data.

According to McKinsey research, 75 per cent of the top 100 banks in the world will have public APIs available by 2022. However, when all banks are considered, this figure is correspondingly lower.

How can fintech companies use banking APIs?

The method for Fintech is the same as it is for third-party firm and bank relationships. Through an API, banks and Fintech companies communicate or share data and services.

Let’s break it down into three simple steps to better comprehend it:

  • Fintech firms contact a financial institution or bank for the user data they require and pay a charge for it.
  • The financial institution or bank creates an API to allow them access to their user data (sensitive or non-sensitive)
  • These data are used by fintech organisations to improve their application processes, develop their customer base, and introduce new innovative services to users.

API advantages in the fintech and banking sector:

APIs have created a positive atmosphere for both banks and fintech startups. The advantages of APIs in fintech are as follows:

Lowers overall costs: A single API can assist in the development of many products and services. It means that the costs of developing new features and functionalities from scratch will be greatly reduced.

Enhances the customer experience: Sharing user information is always a touchy subject, and in the past, banks were hesitant to share client data. However, with fintech API and its more secure frameworks, banks feel more comfortable sharing information. As a result, clients can request data for any third-party fintech apps they like to employ.

Process of continuous operation: Mobile banking, online banking, wallet services, and much more are available through fintech apps. APIs enable fintech and banks to provide banking services in a timely and effective manner. It provides clients with a smooth operation process.

A larger customer base: As previously said, the web service API connects banks and fintech to transmit data about client onboarding in banks and associated services via APIs. It occurs as a result of the modern digital scenario’s increased demand for third-party applications.

APIs act as a driver of new revenue:

From 2019 to 2021, the percentage of financial institutions that invested in or developed APIs increased from 35 per cent to 47 per cent, with another 25 per cent planning to do so in 2022. APIs give an opportunity for banks to utilise transparent data access that will enable their firms to expand key capabilities, co-innovate with partners, and fuel development that opens new revenue streams as they continue to explore creative ways to service their clients.

The value that APIs have provided to early adopters cannot be overstated. APIs have evolved from a one-time development barrier for technology-first enterprises to a sustainable competitive advantage that drives income for organisations across multiple industries. According to research, companies who invested in APIs had 12.7 per cent more growth in market capitalization over a four-year period than those that did not. According to McKinsey, more than 90 per cent of financial institutions use or intend to utilise APIs to earn more revenue from existing customers, while three-quarters seek revenue streams from new client categories.

Convenience, innovation and security

APIs (Application Programming Interfaces) have had a significant impact on the banking industry by providing convenience, innovation, and security. Convenience is provided through APIs as they allow customers to access banking services through mobile apps and websites, making it easy for them to manage their accounts and perform transactions anytime and anywhere.

Innovation is facilitated by APIs as they enable third-party developers to create new financial products and services using the data and functionality provided by banks. This allows for a wide range of new services to be created and offered to customers, such as budgeting apps, financial advice and other Fintech products.

According to Deloitte, by 2021, just about 22 per cent of banks would have created their API platforms. And roughly 39 per cent were attempting to establish them. It implies that while the use of APIs for data and service sharing is still in its early stages, it has grown tremendously.

API usage also helps to improve security for banking transactions by providing a secure way for different systems and applications to communicate with each other and share data. This makes it much harder for hackers to gain access to sensitive financial information.

Overall, APIs have brought a lot of positive changes to the banking industry, and they will continue to be important in shaping the future of banking and financial services.

APIs have also led to increased innovation in the banking industry, as they enable third-party developers to create new financial products and services using the data and functionality provided by banks. This has led to the rise of fintech companies, which have developed a wide range of new services such as budgeting apps, financial advice, and other products that help customers manage their finances more effectively.

Also Read | How Cloud Analytics is Gaining Momentum in the Banking Industry

In addition to convenience and innovation, APIs have also played a key role in improving security for banking transactions. By providing a secure way for different systems and applications to communicate with each other, APIs make it much harder for hackers to gain access to sensitive financial information. This is particularly important in the digital age, where cyber threats are on the rise, and financial institutions need to ensure the security of their customers’ data.

In conclusion, APIs have brought a lot of positive changes to the banking industry. They have made banking services more convenient and accessible to customers, and have enabled innovation in the form of new financial products and services. Additionally, APIs have also played a vital role in improving security for banking transactions. As technology continues to evolve, APIs will continue to be important in shaping the future of banking and financial services.

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