A definitive guide to understanding API banking

In the last 10 years, we have seen everyday banking fundamentally transform with the advent of the Application Programming Interface (API) economy. It refers to the new way of distributing software & data, by combining the functionality of one application to another via APIs.

Have you ever wondered how your smartphone helps you pay while you order things online? The device doesn’t keep your banking information and neither does the app that you use. So where does all this information come from?

Here in this case above, all such required information is passed on to us with the help of bank APIs. Let us dive deeper to understand what bank APIs are and how it is helping all of us, one sector at a time.

The rise of API banking

It all dates back to 2016 when the Competition and Markets Authority (CMA) in the UK asked several top banks to provide access to their data to third-party applications. This decision was however a result of many small steps taken on the road to Open banking. Later on, PSD2 came into the picture and made a significant contribution to the development of Open banking.

In the same year, RBI launched the Unified Payments Interface (UPI), which played a pivotal role in the rise of banking APIs in India. This process of sharing customer data via bank APIs was termed as ‘API banking’.

Based on the Services availed, and the plan selected, applicable fees shall be charged and any additional terms which specifically govern such Service shall become binding on such User.

A year later, Forbes announced 2017 as “The year of the API economy”. With this new ecosystem came new opportunities. Since then there has been an increase in API providers.

The adoption of API banking also fueled the growth of new entrants - neobanks and challenger banks. They are slowly developing a niche in India, and their market size is expected to reach $15,000 mn by FY27.

API banking also brought changes to the way banks and fintech organizations work. Let us look at the major shift that happened post the open banking movement i.e., allowing access to bank data via APIs.

Moving away from the tradtional vertical integration

A few years back, almost all the incumbents were vertically integrated, i.e., they single-handedly owned two or more stages of production & distribution of financial services. Their products & distribution were a part of a single value chain and operated within their own distribution channels with a tightly controlled infrastructure.

But post the open banking movement, we saw the emergence of platform business models that moved away from the traditional vertical model to a more inclusive and innovation-centric approach.

At the center of this platform business model is a banking platform that uses technology to connect people, organizations & resources in an interactive ecosystem in which amazing amounts of value can be created & exchanged. But how can a platform bring about such radical changes to an organization or even an entire industry?

This happened when companies started developing products, services, or technologies at the center, on which a large number of firms can build complementary products with banking APIs, creating a loosely assembled ecosystem for innovation.

How does API banking work?

API Banking is fairly simple and can be explained in a three-step process. The diagram below shows how an API provider helps any fintech (neobanks, lending firms, etc.) or service aggregator companies (Uber, Zomato etc.) open bank accounts for their employees.

Due to the complexity of direct integration with the banks and lack of proper documentation, API providers simplify the herculean task of integrating with banks.

Pros of API banking

Capgemini’s World Fintech report 2019 states that close to a whopping 89% of banks leverage APIs to collaborate with fintechs as part of their business strategy.

  • The main benefit of API is the elimination of unnecessary procedures from the banking process. In other words, it ensures speed and ease-of-use for financial service providers.
  • APIs are a bank’s gateway to digital transformation. They can easily gain customer insights and provide an abundance of services to provide a larger value chain to their customers.
  • As for customers, API banking provides them with access & benefit from different product offerings. When it comes to B2B customers like SMEs and Startups, they benefit from having access to services like virtual cards, expense management, accounting mass payouts, etc.

Looking at the recent API banking trends, one can say for certain that it will continue to evolve & grow to provide more evolved services to customers.

Deconstructing API banking models

API banking models are broadly classified into three categories. They are:

  1. Open banking
  2. Banking as a service, and
  3. Platform banking

Find out more in the next chapter on major API banking models.

Learn more about API Banking from our remaining chapters -