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Drivers of the Growing Adoption of APIs in Banking

May 2, 2024

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API in Banking

The multiple benefits offered by APIs for banks and other financial institutions are driving the adoption of APIs in the finance sector. Read on.

Application Programming Interface (API) in banking allows financial institutions to allow access to their systems and services to third-party developers, applications, and businesses. APIs enable seamless, standardized, and secure communications and integration between disparate software systems, allowing friction-free functionality integration and data exchange. In fact, APIs have revolutionized the finance sector by powering quicker innovation, enhanced customer experiences, and easy collaboration between banks and FinTechs. They have also opened up a plethora of revenue opportunities for banks and other FIs.

Little wonder then that the global API banking market, which stood at $24.7 billion in 2022, is expected to reach a value of $217.3 billion by 2032.

The global API banking market is projected to expand at a CAGR of 24.7% during 2023-2032.

Here’s a look at specific reasons for the growing adoption of APIS in banking.

Rising Digital Services

Banks are actively investing in digital transformation to remain competitive in the rapidly evolving financial landscape. Today’s customers prefer to conduct financial activities via digital means while expecting seamless experiences across digital channels.

Global spending on digital transformation is projected to be worth $3.4 trillion by 2026.

 

How APIs Help

APIs facilitate smooth interactions between multiple systems, making it easier for banks to offer consistent experiences across different digital channels. Here’s how:

Services Integration

APIs enable banks to integrate services such as balance inquiries, transaction history, and fund transfers into a single app while providing customers a comprehensive set of tools to make banking hassle-free.

Real-time Updates

APIs facilitate instant balance updates and transaction notifications, giving customers access to the latest information and greater control over their finances.

Third-party Integrations

APIs enable banks to collaborate with third-party developers and integrate external tools and services into their own platforms. These integrations enhance the value proposition of the bank’s digital offerings and cater to diverse customer needs and preferences.

Wells Fargo incorporated third-party financial management tools in its online platforms to give customers access to budgeting tools. This was made possible by APIs.

Open Banking

Traditionally, users had no control over how and with whom their financial data was shared. Now, open banking promotes collaboration between service providers through the secure and consensual sharing of customer data to create seamless user experiences and drive better products and services.

How APIs Help

APIs enable banks and other financial institutions to connect with third-party software, such as financial advisors or budgeting apps. There are three types of APIs used in open banking:

  1. Data APIs, through which companies gain access to customers’ financial data.
  2. Transaction APIs enable payments between accounts held in different banks.
  3. Product APIs, which allow banks to offer unified financial products.

 APIs enable banks to extend their reach to new markets and customer segments, unlocking growth opportunities and revenue streams.

Data Aggregation

Simply put, data aggregators in banking are organizations that consolidate financial information from diverse sources, such as banks, credit unions, payment enablers, etc., and put it into a usable form for business decision-making.

How APIs Help

Aggregators gather data from multiple sources via APIs. Banks and other FIs leverage the collated and analyzed to enhance their products and services to fulfill the ever-changing customer needs.

For example, loan approvals are accelerated with access to the customer’s financial history, directly from the aggregator. This data is used for creditworthiness checks and risk assessment by financial institutions before lending.

Personalization 

Personalized banking experiences are becoming increasingly important for customer satisfaction and engagement. For example, a bank can offer a credit card that offers customers discounts on flights, based on data that the individual is a frequent flier.

How APIs Help

By leveraging APIs for personalization, banks can leverage the power of analytics to offer customers tailored products and enhance the banking experience. By offering tailored solutions and support, banks foster stronger relationships and strengthen customer satisfaction and engagement.

A JD Power survey revealed that 78% of customers will stay with their current banks as long they receive personalized support.

Expansion of Financial Services

The expansion of financial services to investment platforms, insurance aggregation, open banking, cross-border payments, and more necessitates robust API infrastructure for smooth integration and frictionless customer experiences.

How APIs Help

APIs facilitate the integration of multiple financial services onto a single platform, ensuring easy accessibility for customers, which tends to drive adoption. By enabling secure data sharing and transaction processing, APIs drive innovation and collaboration across different sectors, contributing to the growth and competitiveness of the banking industry.

Emergence of Embedded Finance

Embedded Finance or embedded banking is turning traditionally non-financial platforms into financial ones. For example, a cab-hailing app allows users to pay for the service directly from the app. Other examples include e-wallets or e-commerce apps. The surge in the use of such apps has resulted in the demand for APIs that can embed financial capabilities into myriad digital ecosystems.

How APIs Help

APIs offered by payment service providers enable e-commerce websites and mobile apps to accept payments directly. This makes the checkout process seamless for the user. In fact, shoppers can apply for BNPL right at checkout, minimizing cart abandonment and increasing revenues for both the merchant and the financial services provider.

Plus, APIs allow developers to build apps for personal finance management, enabling users to aggregate their financial data, and track their spending, set budgets, and analyze their financial health. This gives greater control over one’s financial freedom.

Such data can also be analyzed by banks to innovate better financial products to address customer pain points. 

The adoption of APIs in banking is improving the overall efficiency of players in the sector while offering a plethora of other advantages. Opus Technologies is a leading technology provider, facilitating swift digital transformation for its partner banks. Given our 26+ years of experience, we are best positioned to help future-proof your business with the best-suited digital transformation. Contact us now to learn how to harness the power of APIs.

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