API Baking: Types and How it Works?

Application Programming Interface (API) Banking: API Banking uses XML/JSON codes (APIs) to communicate between the bank and client servers, facilitating data transfer between these two systems and guaranteeing a secure and smooth integration between the bank and the customer's systems.

This feature enables the customer to conduct banking transactions easily without switching between the bank and the Enterprise Resource Planning (ERP) platform.

Table of Contents

Types of API Banking

How does API Banking work?

The Benefits of API Banking

How maintaining financial services is made easier with API banking

The impact of API banking in the future of banking

In what ways may API banking help financial institutions make money?

Types of API Banking 

There are several types of banking APIs; below is the list of types that are used to communicate between banks and financial institutions.

Open-Banking APIs: Open banking involves exchanging client data with third-party financial service providers through APIs. This allows users to access a larger choice of services from diverse providers while keeping security and control over their data.

Example: SprintOPN, Paysprint.

Payment APIs: APIs for payments: These are made to start and run transactions. Customers can pay bills, transfer money, and make purchases directly within the bank's ecosystem thanks to payment APIs.

Examples: Google Pay and Amazon Pay. 

Data APIs: Data APIs make financial information, such as account balances, transaction histories, and statements, accessible. These APIs are frequently used to give organizations and consumers financial data and analytics.

Example: Google Map API. 

Authentication APIs: These APIs are used to verify identity and make sure that people using banking services are who they say they are. Biometric authentication and two-factor authentication (2FA) are popular techniques.

Example: Google or Facebook

Lending APIs: These APIs allow third-party platforms to provide services related to loan applications, approval, and disbursement. They make it possible for financial organizations to lend money outside of their infrastructure.

Example: Google Maps API landing page.

Core Banking APIs: The purpose of core banking APIs is to integrate with a bank's core systems so that third-party developers can access a variety of banking functions like account management, transaction processing, and customer services.

Example: Plaid.

Investment APIs: These APIs give' access to services related to investments, like stock market data, trading platforms, or tools for managing a portfolio.

Example: Alpha Vantage, Yahoo Finance API

Forex & Currency Exchange APIs: These APIs give access to currency conversion, foreign exchange rates, and cross-border payment services.

Example: Fixer API.

Banking-as-a-Service (BaaS) APIs: By integrating with a bank's infrastructure via APIs, BaaS enables third-party providers to create banking products such as digital wallets, accounts, or payment solutions.

Example: Mobile Banking, Virtual Cards. 

Fraud detection APIs: These APIs identify and stop fraudulent activity in banking transactions by using data analytics and machine learning.

Example: Datavisor.

Blockchain & Cryptocurrency APIs: These APIs incorporate blockchain technology or provide access to services connected to cryptocurrencies, including blockchain data, transaction tracking, and wallet management.

Example: Coinbase and Bitpay API.

Regulatory and Compliance APIs: These APIs automate processes such as reporting, Know Your Customer (KYC), and Anti-Money Laundering (AML) to assist financial organizations in adhering to rules.

Example: ComplyAdvantage. Trulio. 

How does API Banking work? 

Step-by-step working of API Banking API 

Step 1: The customer makes a request

• A third-party app (such as a payment gateway, e-commerce website, or fintech app) is used by a user (consumer).

• Example: A consumer wishes to use an e-commerce app to make a UPI payment.

Step 2: Third-Party App Submits Request for API

• A public API is called by a third-party application (such as a fintech platform or payment gateway) to establish a connection with the banking system.

• For instance, to handle payments, the application submits a request to SprintOPN's API.

Step 3: The request is routed to the bank's core system via a public API.

• The app and the bank are connected by the API.

• It safely forwards the request for processing to the bank's main banking system.

• Customer authentication (e.g., UPI PIN, OTP, or biometrics) is part of the request.

• Details of the transaction (money, recipient, account information, etc.)

Step 4: Verification and Processing of Bank Data

• Customer identity (KYC, account balance) 

•  Fraud detection & security checks 

• Adherence to banking regulations is all confirmed by the bank's backend system.

Step 5: The Banking App Completes the Purchase

• The transaction is processed by the bank, which also updates its records.

• Through the API, the banking app provides a confirmation answer.

Step 6: The customer gets a confirmation.

• The response from the API is sent to the third-party app.

• The successful (or unsuccessful) transaction is communicated to the consumer.

The Benefits of API Banking 

Improve Customer Experience: You are relied upon by your clients for wealth management, banking, insurance, and the like. The foundation of a solid customer connection is quick, easy access to timely, accurate account data around the clock. 

When clients have a simple way to obtain safe, reliable information, they may finish their financial responsibilities fast and go on.

Customers can feel secure knowing that their bank is looking out for their best interests when it provides the answers they need.

Provide Data Accessibility: Your applications must be able to connect because banks employ a wide range of core systems (such as FIS Horizon, Fiserv, and Jack Henry) and third-party apps. 

With the use of an API, data silos can be extracted and presented in a usable manner.

Better data access using an API generates valuable business intelligence, which boosts productivity and profits.

Integrate legacy systems and third-party apps: It may be difficult to obtain access to all resident data if your bank uses unrelated systems and third-party apps. 

You cannot access the abundance of data you have gathered if your systems are not able to connect.

By resolving the data-communication issue, APIs can increase the overall value of your main system and third-party apps as well as your investment.

Possibilities for Product Development: Banks and credit unions frequently create their products and market them using exclusive sales channels. 

With the emergence of third-party products and APIs, you can use those products to market them to a larger audience through the ecosystem of financial marketplaces, if you so choose.

Functional Portability: When you require an API, it's there. As new business prospects emerge, your applications can cooperate if they are built with standards like REST and Open API. 

The development and purpose of interfaces are made more functional by this accessibility and modularity.

Save Time with Automation: All banks place a high premium on getting rid of manual labor. Inaccurate data, misunderstandings, and missed opportunities can result from time-consuming, hands-on activities. 

APIs improve control over data input and output while automating manual processes like spreadsheets and human analysis.

Boost Employee Efficiency: The sheer number of projects, client demands, new rules, and constantly shifting compliance standards put more strain on all employees. 

IT and operational personnel may operate more efficiently and effectively with the use of APIs, freeing up more time for other tasks.

The effort of managing and integrating data is reduced via APIs, which are frequently linked to laborious data integration projects.

Tighten Security: Developing APIs by recognized programming standards (such as REST and Open API) helps to prioritize security. 

Their open architecture makes better security, monitoring, and performance possible by their open architecture, which also makes it possible to manage them as needed.

How maintaining financial services is made easier with API banking

API banking offers a scalable and adaptable method of delivering financial services. Here's how it simplifies maintenance:

Component-Based Updates: API banking makes use of modular designs, which let programmers change or swap out specific system parts. As a result, there will be less disturbance when updates or patches are applied without affecting the entire platform.

Enhanced Stability: API banking lowers the possibility of broad problems by limiting changes to particular modules. If an issue arises, it is limited to a single part, which facilitates prompt diagnosis and resolution.

Smooth Integration: It is simple to integrate third-party services like Plaid and Yodlee. Without completely redesigning current systems, developers can add new features or data sources, guaranteeing that services stay current without experiencing prolonged outages.

Incremental Improvements: It is possible to introduce updates in modest, doable steps. With a much lower chance of mistakes or service outages, this gradual method enables ongoing service improvement.

Improved Testing Procedures: By separating different components, API banking enables more thorough testing. Because of its modularity, each component can be thoroughly tested before going live, guaranteeing a more seamless user experience overall.

The impact of API banking in the future of banking

APIs will undoubtedly have a significant impact on banking in the future. They assist banks in creating new revenue streams and customer insights, enhancing the customer experience, and opening up their systems and data to outside parties.

Principal Advantages:

Real-Time Updates: Clients can view account changes instantaneously, improving their capacity for proactive money management.

Direct Transactions: Save time and effort by completing transactions quickly and without the need for middlemen.

Faster Payment Processing: Transactions are completed more quickly, cutting down on wait times and raising customer satisfaction.

Intuitive Tools: Get easy-to-use financial management tools that make difficult jobs simpler.

In what ways may API banking help financial institutions make money?

Banks can provide new services and products without creating them themselves by utilizing APIs. Because of the power of APIs, this process is quick and simple.

Additionally, banks can leverage APIs to incorporate new services and products into their current systems. In only a few minutes, this enables a smooth and rapid integration. APIs greatly simplify the process of developing a new product or service for banks.

Third-party provider marketplace sellers are not the only ones who can seamlessly integrate new technology. Internally, banks can use APIs to increase productivity in every aspect of their operations. For instance, APIs may interface with automation technologies to lower the possibility of human error. Banks can stay competitive and develop quickly by utilizing APIs in this way.

Conclusion: API Banking 

API Banking, By facilitating smooth integration between banks and companies, API banking has completely transformed the financial industry. By enabling safe and instantaneous data interchange, it promotes innovation, improves client experiences, and simplifies financial processes. As Open Banking gains traction, APIs are becoming increasingly important in propelling digital change and opening up new financial services and products.

Companies that use API Banking can get better financial control, quicker payments, and automated transactions. To guarantee safe and effective operations, security and compliance are still crucial factors.

The future of finance will be further shaped by API Banking as technology advances, encouraging a banking ecosystem that is more integrated, effective, and focused on the needs of its customers.