APIs Still Fueling Financial Services
The first time we discussed APIs (aka application programming interfaces) was back in March 2019 — about a year before COVID locked down the global economy. The brief discussion hovered on what is an API, and what are the top industry use cases. Linking external bank accounts, sending payments, and facilitating banking transactions was still somewhat new and innovative — fast forward to today and the true power of APIs is spreading across financial services globally.
The core value of APIs is the ability to provide new services to clients via banking access and data. There’s a real-time connection between internal and external systems, and even internal to internal systems (i.e. data sets within the same company). At its simplest level, an API provides a way to interact with something (like an app or website) without needing to build what’s under the hood — no need to know the code behind it, only how to use the interface.
For traditional institutions with legacy IT infrastructure, APIs are a true game changer in modernizing their tech stack. Regional and community banks are prime examples of firms that have quickly benefited.
The majority of innovation within the FinTech sector is API-driven — as such, both banks and credit unions (of all sizes) are clearly moving from planning to execution. Enabling access through platforms that are data providers or aggregators is now tablestakes in the industry. The investment sector (at the retail and institutional level) and open banking ecosystem are rapidly taking advantage.
INVESTMENT
Investment management firms rely heavily on data and research — access, analysis, and action are all time-sensitive. In the early 2000s, fund managers waited for data files to reach analysts who would then build reporting and dig for insights. Through APIs, there’s less downtime and less dependency on others for charts and tables. Day-to-day operations are more streamlined and customized, even with an increased volume of information.
How are investment offices responding? Many are now viewing tech development through a lens of API integration instead of building new software stacks. Key advantages include cost (its less expensive to work with an API provider) and agility when it comes to change (as new needs emerge, APIs can be updated & uploaded quickly). The ability to deliver interactive analytics in real-time (without rerunning reports) is also a game changer. For companies still stuck on legacy processes and systems (running on Excel, etc.), delaying a transition can set them back years from competitors.
For companies focused on retail clients, investment APIs are also making waves through fintech startups. Atomic is a US platform that offers an API for integrating investment programs into banks and other fintech apps. The integration only takes a few weeks and bypasses the cost of managing brokerage operations and legal/compliance staff. Atomic’s offering also includes direct indexing, ESG investing, and multi-currency trading across 60 global markets.
OPEN BANKING
The impact of today’s modern APIs also stretches into everyday banking. Top US financial institutions are doing their best to keep up with industry developments that meet client demands in managing budget and finances. Open banking is one of the biggest buzzwords in FinTech based on allowing open access to customer banking data across banks and 3rd party financial applications. Legacy financial institutions don’t leverage data on their clients to help them build credit, manage debt, or increase long-term savings — fintech startups are pushing for access to turn this around.
Open banking is changing this dynamic. The impact is being felt throughout Europe and the UK, as local government agencies provided a framework to support this movement years ago. For the US, 2022 is expected to be the breakthrough year for open banking & finance. Many consumers and businesses have already embraced at least one neobank or challenger bank in the last year. Chime (the largest neobank in the US) saw a wave of new users during 2020 due to the pandemic and increased demand for branchless banking. As confidence rises in fintech companies, so will the demand for open banking.
A shift in mindset is also expected to come internally for institutions as product roadmaps are being influenced by open banking. ‘How will new initiatives play out in an open finance landscape?’ is a key question. Banks are increasingly exploring embedding financial services as an innovative, low-cost option — typically through Banking-as-a-Service platforms (who provide core infrastructure, processors, APIs, and reporting). For emerging products (such as credit builder programs and crypto investing), BaaS partners deliver speed to market at a lower total cost of ownership.
Payment solutions via API are also boosting programs for banks (such as Deutshce Bank, who expanded instant payouts in Asia-Pacific) and institutions (Mastercard, acquiring Aiia for peer payments). Local payments and FX platforms are making it easier for consumers and businesses to transact instantly through multi-currency wallets over the next year.
WHAT’s NEXT for API?
APIs are here to stay, especially when it comes to financial services. Your smartphone and its apps are running APIs back and forth to provide information in real time. For companies serving users around the world, adoption of payment and banking APIs allows for money movement, holding deposits, and making purchases — no need for building infrastructure or software from scratch.
How far will these firms go to unleash the power of APIs? Ultimately, its based on a best fit with business and user priorities. Companies need to be prepared internally to switch internal systems, processes, and operating mindset towards effective solutions that exceed customer expectations.
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