SECTOR SPOTLIGHT is a series of in-depth articles on FinTechtris that explores a specific FinTech sector, discussing the industry challenges being addressed, top companies or products leading the trend for change, and future outlook.

The financial services industry has been revolutionized by the explosion of innovation from FinTech (financial technology) companies that are constantly improving on current products and services.  In the past, customers would journey to banks in-person to fulfill common financial needs such as making deposits and payments, transferring funds, obtaining loans, or opening a deposit account. 

Legacy institutions no longer have sole control over these activities due to the emergence of FinTechs who deliver similar offerings seamlessly through the power of APIs (application programming interfaces).  APIs are responsible for fueling the enormous value and cutting-edge changes in technology, most notably driving FinTech’s robust progress across multiple areas in financial services.

What is an API, and its Benefits

APIs are tools for building software, providing building blocks for developers to easily create certain capabilities (“expected behaviors”) in applications.  Acting as a software intermediary, an API is facilitating communication between two or more parties, most often a bank and an application, on behalf of a customer (as shown in the infographic above). 

An example is when a user signs up for a Robinhood account: they are prompted for their bank account details (i.e. account and routing number) — an API sends the account information for verification to the bank from the Robinhood app.  The app then waits for confirmation from the bank that all details are accurate from the API.  This process takes seconds, a tremendous improvement over the previous 2-3 business day verification model.  Plaid is one of the API leaders in FinTech known for executing this information transfer efficiently, and growing to 10K+ partnerships with financial institutions and credit unions. 

An additional benefit of API usage beyond seamless access is security.  Data travels in small packets, only transferring pertinent information needed to fulfill a transaction — avoiding complete exposure of private information from either party.

APIs have evolved beyond lines of code for connectivity to be treated as products within their own marketplace.  Modern APIs have been designed  for ease of use and open access in the developer community, with clear communication on maintenance and lifecycle. 

Within the FinTech industry, APIs have exploded in finance applications after 2017 because they helped design cost-effective models that integrate banking data and access, and opened new avenues for customer access to customized recommendations based on their data.

Industry Leading Uses of API

FinTech companies found early success in leveraging APIs with payments and transfers.  Stripe, the leader in the payments sector, provided early APIs for developers to integrate in websites and apps for payment processing, which included tools to deter fraud.

The volumes of data coming from global transactions offer opportunities for valuable customer insights.  FinTechs, such as Yodlee, have created APIs that not only aggregate data but provide financial management capabilities and analysis.

All financial institutions are required to meet regulatory guidelines, such as anti-money laundering (AML) and Know Your Customer (KYC) policies.  RegTech firms, FinTech companies providing services in meeting regulations and managing operating risk, use APIs that not only confirm proper government compliance but also prevent duplicate reporting requests, and support user authentication.

There are also companies that bring together multiple functions and activities with white label APIs and platforms for financial institutions.  SynapseFi is a leading provider in this category, offering a suite of APIs that simplify deposit account opening, card issuance and processing, ACH and wire transfers, up to creating cryptocurrency wallets. 

Future Outlook for the fintech API

As FinTech pushes boundaries in financial services, APIs will continue to evolve and fuel the next wave of innovation, focused on improving financial wellness.  Individuals on a global scale seek ways to improve their situation when it comes to managing credit, debt, and increasing savings for short and long-term goals.

APIs will help connect critical recurring activities that drive improvement in behaviors towards financial health, such as tools that automate savings deposit and debt payments based income and expenses.