A definitive guide to understanding API banking

As we discussed in Chapter 1 & Chapter 2, Open banking APIs have disrupted the entire banking & financial industry. Out of all the banking APIs available in the marketplace, core banking APIs are the most widely used ones.

Core banking includes APIs that provide primary banking services like opening bank accounts and making domestic or international deposits. These APIs are used by consumers and businesses to create their own digital banking products or services.

In this chapter, we are going to look at the APIs used to open bank accounts and the ones used for making deposits

Opening bank accounts with the help of core banking APIs

There are quite a large number of businesses that create savings accounts for their employees. An example of this sort would be Uber creating salary accounts for their drivers. Now Uber can either approach a bank or an API provider to get this done quickly and seamlessly.

The account opening process gets completed in just three-steps. Let us look at the detailed run-through of what happens if Uber approaches an API provider to create bank accounts.

As a first step, Uber would request any of the API providers like Open to create salary accounts for their employees. Since 3rd-party providers have already integrated with the bank via APIs, they can directly initiate a request to create salary accounts for Uber employees. Now, banks create those accounts and send the information back to the API provider. As a final step, the API provider forwards this information back to Uber.

How is this process with a 3rd-party API provider faster & more efficient than Uber going to the bank directly? Primarily because it will be quite difficult for Uber to connect directly with the bank due to -

  • Complexity of integration
  • Strenuous error management
  • Lack of standard API documentation, and
  • Difficulty to integrate multiple bank accounts in a similar way

We have already explained this in detail in our previous chapter on API banking.

Well, this need not be the case with companies offering financial services. For example, let us look at the app called Tomorrow, which offers smartphone banking services. Although users have the impression that they have opted for the Tomorrow account, in reality, the underlying banking activities happen through Solaris bank, a prominent neobank from Germany.

In short, only banks can provide accounts that people use to perform financial activities. But, we use these accounts via different mobile & web applications because of the core banking APIs provided either by the bank directly or through different API providers.

Now, let’s move on to the next set of core banking APIs, i.e., the APIs for making deposits and domestic payments.

Real-time domestic payments

The core framework to make real-time domestic payments is fast changing and is catching up in India. Domestic payments have seen a 106% growth, over the past 9 months. This has been possible because of the efficient use of APIs for domestic payments.

Real-time payments can benefit financial institutions, merchants, and customers by offering them enhanced visibility to payments. They’ve helped businesses to manage their cash & day-to-day operations by improving liquidity. The liquidity improvement can be especially impactful to small merchants who are used to waiting for several days for their settlements. This will possibly be creating a positive impact on their cash flow and daily sales outstanding.

Currently, there are four categories of payments happening in India with the use of domestic payments APIs. They are:

  • Business to Business (B2B) - B2B payments consists of payments that go out from businesses to their suppliers or vendors. They are usually in crores, making them typically large-value payments.
  • Business to Consumer (B2C) - B2C payments are payments that go from businesses to consumers. These payments include refunds, legal settlements, insurance claims, and contingent employee wages. These are medium to large-value payments.
  • Consumer to Business (C2B) - C2B payments are payments from consumers to businesses. Bill payments, Hospital co-payments, and Point-of-sale (POS) payments are examples of C2B payments. These payments are typically considered to be of medium to low in value.
  • Domestic Peer to Peer (P2P) - Domestic P2P are payments that happens between two individuals. Payments that happen between friends and family are examples of domestic P2P payments. These are medium to low-value payments.

As per the Indian Payments Handbook by PwC, the Indian payment landscape has seen extraordinary growth in the volume of transactions at an average CAGR of 23%. This is due to the innovation that happened in technology, change in regulations, changing customer and merchant expectations and the emergence of new players with new business models.

Real-time payments will affect the way we transact and conduct business. Consumers will enjoy the convenience of paying their bills at the last minute without penalties. Businesses on the other hand will benefit from the increased availability of funds.

That is it about the two widely used core banking APIs. Up next, we have one API which is gaining a lot of attention these days - Lending API's