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The Power of API in Banking

May 13, 2024

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APIs Revolutionizing the Banking Industry

Banking APIs offers more than just enabling instant payments or embedded loans. Discover how you can extract maximum value from APIs.

Banking APIs are digital adapters that enable communication and secure data exchange. They allow third parties to access the functionalities of the bank and extract value from customers’ financial data. APIs are key for banks to foster a supported and reliable financial ecosystem. From real-time payments to micro-lending, cross-border transactions to neo banks, APIs underpin every leap banking takes in the age of globalization.

Types of Banking APIs

Three common types of banking APIs are:

 

APIs Drive Banking Innovation

APIs have ushered the banking industry into an era of introducing revolutionary products and services, designed with data-powered insights. Additionally, banks can monetize the data by sharing it with third parties. APIs are the cornerstone of all the emerging and trending banking transformations

With banks prioritizing APIs, their integration maturity level has grown 23.3% within 2 years across the strategic, operational, and technological dimensions.

Process Enhancement

Connecting banks’ core systems with software applications and data lakes through APIs has enabled banks to measure and enhance operational efficiencies by uncovering existing bottlenecks. Banks also leverage APIs to validate compliance adherence. Automation has further reduced exposure to manual error, improving operational accuracy.

Personalization

By categorizing spending, enabling budgeting, and assessing customers’ financial goals, APIs empower banks to offer tailored products and services. APIs have allowed banks to ride on the hyper-personalization movement, at par with other industries.

Digitalization

The extensive digitization of payments is an outcome of the effective use of APIs that enable automated bill payments, one-click fund transfers, simplify cross-border transactions, and promise a frictionless future for money movement.

Open Banking

APIs have fostered the idea of decentralized financial management and allowed users greater control over their data. Further, the latest banking paradigm has enabled non-financial organizations to leverage financial data.

Converging Finances

APIs have facilitated the convergence of financial management for users by enabling instant payments through a mobile app, after verifying the balance. Integrated microfinancing and credit facilities, along with budgeting and financial management tools, to give users a comprehensive view of their financial health and tailored advisory to maintain or improve the same.

Fostering Inclusion

APIs enable collaboration across the traditional regulated and unregulated financial structures. This has enhanced oversight and financial inclusion by breaking down the barriers that hindered banks from making their services available to the underserved.

Top Challenges Banks Face in Leveraging APIs

Skill Gaps 

Banking API implementation requires developers to be adept at banking, technology, third-party collaboration technologies, and regulatory guidelines. Banks often lack the technical expertise and workforce that can be trained to harness the power of APIs.

Compliance Concerns

With data sharing becoming ubiquitous, compliance with privacy, security, consent, and anonymization guidelines is paramount to ensure increased collaboration opportunities. Additionally, identifying and ensuring that third parties also comply with regulations adds to the complexity of the integration process.

Technical Inadequacies

Legacy technologies and deficient data infrastructures create hindrances to orchestrating API integration at scale.

Vulnerability Management

Effective use of APIs entails sharing sensitive information with diverse market participants, exposing banking systems to a wide range of potential threats. 

How to Get API Monetization Right

Adequate API monetization enables the smart design of technological infrastructure to control exposure and enable faster development while reducing time to market. 

APIs are no longer mere connectors. Banks must adopt an API-first approach to optimize their value. Considering them as discrete, well-defined, and managed products, rather than just integration elements, can position banks as facilitators of interoperable, efficient, reusable, and customizable financial technology products. The plug-and-play feature allows banks to offer and monetize exactly the kind of APIs their partners need, adding flexibility to integration models. 

Bank as a Platform

Platforming is a fresh perspective on banking, with a promise to disrupt the sector. It allows banks to build an ecosystem connecting customers to providers from a variety of industries through digital devices. APIs are the foundation of platforming since they enable banks to securely and efficiently integrate internal systems with partners. Consider the following examples:

  • BNY Mellon’s integrated API-based platform connects not just TPPs (third-party providers) but also customers and FinTechs to offer apps, leveraging big-data solutions.
  • Barclays’ private digital platform serves as an innovation lab for FinTechs to create novel offerings.
  • DBS has expanded its revenue streams by launching a marketplace for cars by integrating automobile dealers. The platform allows the bank to offer embedded financing and insurance services, much like traditional eCommerce platforms.

The Future of Banking APIs

When prominent banks and FIs leverage the benefits of APIs, their usage is bound to grow. Smaller and medium-sized banks must also initiate API-fication to remain relevant and competitive in the long term. As the use of banking APIs becomes ubiquitous, here are a few things APIs will enable in the foreseeable future:

 

The global banking API market is forecasted to expand to $17.5 billion at a CAGR of 23% from 2023 to 2032.

The key to extracting greater value from APIs for small- and medium-sized banks is to partner with a trusted data migration and technology transformation services provider. With over 26 years of experience in the digital finance space, Opus Technologies drives innovative API integration initiatives to enable banks to optimize the value of their data. Learn more from our experts.

 

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