A definitive guide to understanding API banking

In our last chapter, we went through the basics of API banking and the level of impact it has made on the banking industry.

With the fascinating but immense technological changes happening on a daily basis and the increasing number of new banking & fintech API models emerging, it is hard for us to keep them all apart. In this chapter, we’ll guide you through the jargon jungle of API banking models & understand what makes them set apart from each other.

Understanding the common API models

To date, there are three main API models that you would’ve heard of. We’re of course talking about -

1. Open banking
2. Banking As A Service (BAAS)
3. Platform banking

Open Banking

If you’re someone who follows the Indian fintech space at close heels, you must have noticed the buzz around ‘open banking’.

Open banking is a system where the banks share customer banking data (with their consent of course) in a secure manner with authorized 3rd-party developers via open bank APIs. This data enables them to build applications and services that make banking more fluid and accessible. Open banking is one of the most widely adopted API banking models.

Let’s look at an example. There are quite a few financial management applications that benefit from Open banking. They combine information from all your bank accounts into one application, thus enabling you to better monitor & track your finances. To combine all the information, the app has to draw all the transactional details from the bank, which can be done by integrating into the bank's systems via APIs.

More often than not, this API integration will be provided by another party (the 3rd party providers). They are generally categorized as API banking platforms and can be considered as the middlemen who connect banks with these financial management apps. You can read more about them in our previous chapter.

There are quite a few examples where open banking is put to use. But the important thing to remember is that everyone involved in the game stands to benefit from open banking. Some of the biggest benefits worth mentioning are -

1. There is more transparency in customer’s data which will help create a financial ecosystem that becomes a level playing field for all entities - banking & non-banking. Since it is constantly monitored by authorities, this will also put an end to fraudulent institutions & bad practices, thereby protecting customer’s data from fraud.
2. Banks can widen their scope of earning income, by sharing data with third-party providers

3. Fintech companies specialized in lending, can scrape into customer’s bank statements and come up with instant lending models
4. With open bank APIs, there are newer fintech players in the market
5. By opening up their APIs to FinTech companies, banks can now reach out to a whole new customer segment

This way, it widens access to in-depth customer banking data than what was previously possible by looking at the data from just one bank.

So, is BAAS the same as open banking?

No, they aren't the same. The two models often get confused with each other, since open banking also involves banks connecting to non-banking institutions via APIs. However, the models serve different purposes. Businesses simply use the bank’s data for their products in open banking models. BAAS models, on the other hand, describe a model in which licensed banks integrate their digital banking services directly into the products of other non-bank businesses.

Confused?

Okay, then let us explain with an example. Imagine that you own an eCommerce store. You’re facing heavy competition and you would like to strengthen your customer loyalty. If you could offer, let’s say a debit card, you could give away loyalty points whenever your customers buy from your site using the card. By analyzing your customers’ spending behaviour, you could understand them better and offer them more tailored services.

There are many ways in which you can improve your customer experience, by offering your banking services. However, to offer your own banking services, effectively every government would want you to get a banking license. Acquiring a banking license isn’t easy at all. There are capital requirements and strict regulations that you need to follow.

Here is where BAAS comes into the picture.

BAAS describes a model in which licensed banks integrate their digital banking services directly into the products of other non-bank businesses. This way, a non-bank business, such as your eCommerce store, can offer customers digital banking services such as debit cards without acquiring a banking license of their own.

To date, BAAS models are categorized into three broad categories. Let’s have a look at each of them -

API Stores:
Traditional or challenger banks that offer their APIs directly to consumers & fintechs to build better banking services.

White-labeled Platform:
Companies that provide APIs on a white-labelled platform to enable fintech players to offer specific banking services – such as issuing debit cards.

BAAS as Co-branding:
New age fintech players or neobanks who provide their cutting edge BAAS platform in a co-branded proposition to traditional banks.

Bonus read- Here’s a quick roundup of everything to get you on the speed with what’s happening in the world of BAAS.

Lastly but not in the very least, what is platform banking?

It is a different story altogether. It can, in a way, be described as the inverse of BAAS. In the platform banking model, the bank owns the customer and integrates services from a fintech service provider. In the BAAS model, the customer from a non-banking institution can integrate services from the bank.

Banks use platform banking as a strategy to prevent losing their customers to savvier fintech organizations, by changing the rules of the competition. The formation of such an ecosystem will increase the possibility of reducing transaction costs.

We hope we were able to shed some light on different API banking models. But what exactly are APIs? What are some important APIs in the financial services space?

There are, humbly speaking, thousands of APIs, but for our understanding let’s discuss five types of APIs that are currently popular in the fintech space.

Let’s jump to the next chapter to discuss the first one. See you there!