A definitive guide to understanding API banking
As discussed in the previous chapter, Core banking APIs have created a big disruption in the whole banking space. The introduction of Lending APIs to the market was an equally disruptive step. This has modified the lending chain from end to end.
Funding has always been important for the growth of businesses. But these businesses always lack access to formal credit as it is difficult for banks to do their credit risk assessment. It is due to the lack of financial information, historical cash flow data, etc.
A broker or lender does an identity verification before giving away credit. To give away mortgages, they need to ensure that the potential client had not been a part of any money laundering activities in the past. For this, they need to carry out. For this, they would verify the client's authenticity by manually going through documents like driving licenses, passports & utility bills and then approve or reject the loan request.
With the advent of Lending APIs, now all these verification processes can be done digitally. Now verifying all the client details, or running a check on their past financial activities is as easy as doing a Google search. The lender can just search for the data on any potential client and then save whatever information that pops up, to their system.
A lending cycle typically has four steps and starts when the borrower expresses his need for credit as a loan request. The lender will then verify the borrower’s credibility by looking at the data and then look for ideal loans. They then validate the data obtained from different sources. And finally they maintain the records for accounting purposes, after approval or rejection process.
Let us now look at how different types of Lending APIs are helping lenders at different stages of a lending process.
Lending API types explained
Based on the high-level flow of the lending process, the Lending APIs are divided into -
- Onboarding APIs
- Credit underwriting APIs
- Loan fulfilment APIs
- Loan collection APIs
Let’s have a more concentrated look at each one of them.
Onboarding APIs are used in lending to onboard the borrowers. The traditional onboarding practices require a lot of paperwork, it is tedious, time-consuming and is prone to errors. The unyielding nature of the traditional onboarding process has paved the way for the digital onboarding of borrowers. The digital onboarding gets completed in a few minutes when compared to the traditional onboarding process.
These APIs would include information about the amount of loan, expected duration range, and type of loan.
Credit underwriting APIs
Credit underwriting APIs supply the lender, relevant, and accurate information to set up ideal loans for the borrowers. They aggregate the customer credit data from CIBIL & other key alternate resources and share it with the lenders.
The data algorithms present in the API program gather data from different sources and send it across to the lender’s internal system. The quantity and quality of the data at a lender’s disposal indicate the competitiveness of the lending institution.
Loan Fulfillment APIs
Loan fulfilment APIs are used to disburse loans to the customer and to maintain loan account information in the platform for accounting and processing purposes.
After the loan confirmation, a loan agreement will be digitally generated, e-signed, and delivered to both the borrower and lender. The loan would be disbursed by debiting the lender’s account and crediting the borrower’s account.
Loan Collection APIs
Loan collection APIs are used to help debt collection agencies get current data on borrowers so that they can track and collect loan EMIs. These APIs significantly aid financial institutions as they can optimally utilize their resources, bringing about an upsurge in the overall debt recovery and bring complete transparency in the process. It also helps in integration with mobile & web platforms to deliver swift & paperless transaction processing with reduced risk.
Benefits of lending APIs
With the rise of lending APIs, the Lending As A Service (LAAS) model, a subcategory of Banking As A Service (BAAS), has become an emerging trend in the banking industry. LAAS provides the much needed technology to banks instead of lending directly to businesses & clients.
In a report published by Accenture, they call out five important things a company should provide customers with - all of which can be achieved by having a platform with Lending APIs:
Making it smooth & fast:
Lending APIs make it easy to create & deliver new loan products online that have Straight Through Processing (STP) capability.
Match them with the right loan:
With the APIs, lenders perform bespoke analysis using traditional and alternative resources. This helps them suggest ideal loan products for the customers.
Making credit available anywhere anytime:
These APIs can be integrated into accounting packages, online marketplaces, or even to your own website, thus making the credit available to customers wherever they are, anytime.
Making it appealing:
Lending APIs help lenders create unique products at different prices.
Increasing the retention rate:
These APIs also give the customer more than just the required credit. They can also give real-time alerts about their cash flow via digital channels which is why they come back to the platform for their future lending needs.
Customers have formed a new attitude towards lending which has driven the transformation in the way credit is delivered to the market. Now is a great time for you & your team to start brainstorming creative, customer-centric ways to integrate APIs into your lending operation.
We've pretty much-covered everything under the Lending API umbrella. Let us now discuss the APIs associated with payment gateway, physical & virtual cards, i.e., Card Issuance APIs in our next chapter.
See you all there!