API integration is and why is the way forward for financial

Integrating new applications into the existing IT infrastructures is a pain for banks. They use 1000 unique applications; however, only 29% of them communicate with each other, according to Connectivity Benchmark report. To solve that and enable point to point integration, they spend time and money.

The same report also suggests that 80% of the applications aren’t reused for developing new products and services.

This process not only slows down financial institutions in their development journey and hinders customer experience but also drains resources.

What is API integration?

API or Application Programming Interface is a set of protocols and codes that directs the communication between applications. They provide better means to share data between two or more applications. With the use of API’s developers need not manually code and facilitate communication between applications.

This is not only helpful for internal applications, but API integration also allows banks to integrate third-party services into their existing infrastructure. It helps them extend their offering and upgrade existing services without spending much time and resources.

How does it work?

• Banks will typically give restricted and secured access to their central banking system to other third-party institutions.

The third-party platform will then integrate the bank APIs. 

• After that, the third-party platform will request to fetch the required data from the bank servers to carry out functions such as balance queries, transactions etc. They are called API calls.

According to a Deloitte study, around 22% of banks have already deployed their own API platforms, while 39% are working on it. 

Types of API’s

Private/ Internal APIs

As the name suggests, this type of API is used by developers within the enterprise. 

Benefits of Private APIs

1. Cost savings through automation

2. It allows for improved collaboration with the team

3. It gives greater security in data exchange

Partner APIs

This model of API is operated between a third party and a bank to extend their services. It enables banks to utilise the new products and channels that enter the space instantaneously. Banks can also lend their APIs to third parties.

Since it allows for external collaboration, enabling advanced services, a large number eventually shift to partner APIs from private APIs.

 Benefits of Partner API

1. It gives more efficient collaborations

2. It enables the monetisation of the API

3. It also provides greater security in data exchange.

Public APIs

A public API can be used by any external party and developers to build products. This the most unpopular model of API as it makes entire business data available to third parties. Hence banks are usually bothered about data security and customer privacy.

Benefits of Public API

1. Innovation through external partners

2. The building of the developer community

3. It allows access to new markets

How to Choose the Right Financial API for Integration 

Below are some key points to keep in mind while looking for an API to integrate:

• Determine the Goal of Integration

There exist multiple service domains in the financial services sector, e.g. payments, finance tracking etc. Decide which service domain API you would like to integrate? Is it an existing service that you are upgrading or a new service?

• Make an Audit of Your CRM.

Identify which banks or services are popular among your target audience; it will help you shortlist vendors.

• Evaluate the Documentation of Multiple APIs and Shortlist

Some API providers have minimum documentation; look for providers with extensive documentation. They may be paid or have tech limitations like scaling constraints etc.Look for elaborative FAQ’s. 

• Comply Legally

Involve a legal member of your team to check whether the process of data sharing meets legislative requirements. You need to also ensure that all the developers from your team comply with the selected API’s security standards.

Real World API Integration Cases

Below are some of the most popular and successful API integrations that have happened so far:

Paypal and Siri Integration

IoS users can now use the voice command feature in Siri to transfer money through their PayPal account. In 2018, it reached $41Billion in transactions between its payments services PayPal, Xoom and Venmo.

Robinhood Connecting with User’s Bank Account

The investment bank uses plaid’s banking API to onboard users and link their bank accounts to the app. The API also helps connect various other applications such as TransferWise, Stripe etc.

It Opens Up Opportunities

Traditional banks may initially look at this as a threat. Since all the customer data they have been protecting so far will be made accessible to other players in the market too. However, as they realise the opportunities of collaboration that opens up with APIs they will eventually end up favouring it. 

API integrations will also benefit FinTech as they can channel their services to the masses through big names.