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 us move on to discuss the next set of core banking APIs, i.e., the cross border APIs for international deposits.
Currency conversion APIs explained
Cross-border payments create so much pain due to challenges like delayed payments, unreasonable conversion charges, etc. As there exist such challenges to do international transactions, cross-border APIs can be a powerful tool in the international banking realm.
Cross-border payments are expected to grow at a rate of 5.6% every year, and these APIs will enable financial services providers to facilitate these transactions easily and efficiently.
These APIs can help your customers have greater flexibility with regards to payment methods. If you’re an Indian company or a freelancer with US clients, and your payment solution only allows you to receive in INR, then you’re placing the entire burden of foreign exchange conversion onto your end customers. This will add unnecessary friction to your relationship with clients.
Now there are solutions built using blockchain networks. They provide rapid and streamlined B2B payments for financial institutions for large value international transactions. One such solution is developed by VISA and Chain Inc., which allows banks and corporations to make payments to one another by using VISA as a central clearinghouse.
As business is increasingly crossing borders and currencies, all the existing financial companies are adjusting their strategies. They dream and work to stay flexible and meet new customer demands by turning to APIs which connects their customers around the world to give them a smoother & faster financial experience.
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 APIs.