API -The Power that Drives New-Age Banking Ecosystems

Did you know the concept of API originated in the 1940s?

Yes, the idea of an API is much older than the word itself. Back in the day, organizations employed APIs for software libraries, computer operating systems, and computer hardware design. Today, APIs are a staple to our millennial lifestyle. From a simple search on google to tracking couriers to space programs, everything works on APIs.

That brings us to the question of what an API is.

What is API?

Application Programming Interface (API) is simply a code snippet that enables two entities to exchange data and functionality with ease. This interface empowers every transaction or communication between two applications, devices, and individuals, from behind the scenes.

Let us take an everyday instance to understand the concept better. When you touch a hot stove, the nerves in your skin transmit the message to the brain. The brain processes the information and signals the necessary action. In this case, the nervous system then triggers the muscles to pull your hand away from the flame.

APIs work like the nervous system in our body. Say, you are googling about your favorite destination. API sends your request in packets of data to the server. The server interprets the received data and sends it back to your phone through an API.

Transition to financial services

Earlier, the production and distribution of financial services were a part of a single value chain. They were operated and handled within the bank’s own channels contrived with tightly regulated infrastructure. In 2016, when API made its way into the banking industry, it remarkably transformed the traditional banking experience.

What is API Banking?

API Banking facilitated banks and other financial institutions to develop and offer superior customer-centric solutions and “doorstep banking” experiences. It led to critical advancements in the banking ecosystem and allowed financial institutions to seamlessly collaborate and integrate with third parties (both banking and non-banking entities). Leveraging API Banking, fintechs also offered targeted solutions to niche customer segments.

With the onset of the pandemic, the number of people relying on UPI payments snowballed, and so did the need for innovative and distinctive banking services and products. The emergence of UPI played a momentous role in the rise of banking APIs in India.

According to a survey by McKinsey in 2020 on APIs in banking, about three-quarters of banking APIs are used to support internal functions, and one in five banking APIs are considered “external.” Furthermore, banks intend to double up these numbers by 2025.

Why API Banking?

Steve Jobs once said, “You have got to start with customer experience and work back towards technology — not the other way around.” API aids banks and other financial institutions enhance customer experience by catering to their ever-changing needs.

Legacy bank practices generally involve a lot of time — This is where API Banking comes to the rescue.

API Banking primarily eliminates the arduous tasks of integrating directly with the banks as it enables digital onboarding, easy cash access, paperless cheque deposits, mass transactions, and automated cash flow reporting.

For instance, say a customer wants to open a savings account in a bank. Conventionally, one has to drive to the bank, join the queue, wait for the turn to fill out the account opening form, submit it with the necessary KYC documents, and further wait for one or two days for the new account activation. Whereas, with API Banking, you can open an account within minutes through internet banking or via the bank-specific app.

One other important feature of API Banking is that the interface allows the banks to get direct insights through surveys and customer feedback. Using behavior metrics, APIs help improve current services, offer customized products and shorten TAT. Banks and fintechs increasingly rely on APIs for speed and reach. As manual processes are simplified and automated, operations become more effective, reliable, cost-efficient, and secure, mutually benefitting all parties.

How Does API Banking work?

Imagine a customer-facing application generates an API call (also known as an API request) to send/retrieve information. The request is transmitted to the server via the API’s Uniform Resource Identifier (URI). The banking server sends a response to the API with the requested data. The API, then transfers the information to the customer application.

Types of API Banking Models

API Banking is constantly evolving. Currently, we have Open Banking, Banking as a Service (BaaS), and Banking as a Platform models in use.

Open Banking

Open Banking is one of the most adopted API Banking models. However, Open Banking is a European concept as it first came into existence when the European Union established the Payment Services Directive Two (PSD2) guidelines. The PSD2 gives customers ownership of their data across various banks. Likewise, Open Banking gives consumers control over the information shared with the banks and other financial institutions. Based on the data collected, they render tailored services and products.

This model uses Open APIs to share the customers’ financial data with authorized third-party developers to build applications and services that make financial transactions more flexible and viable. The data shared is obtained with the customer’s consent. An Open API is nothing but a Public API available for everyone’s use without almost no restrictions. However, it is responsible for information security. In most cases, Open/Public API is free; however, others require membership or payment.

Revolut, a UK-based financial services company, is a leading open banking platform. This global payment app offers a gamut of services, including mobile banking, money remittance and exchange, investment and trading, and card payments. It uses a worldwide network and local expertise to help customers improve their financial health, make payments, and connect people seamlessly. According to reports, Revolut is expanding beyond the United Kingdom and the United States markets. The company is all set to enter the Indian financial space with its products in the second half of 2022.

In a nutshell, the model empowers non-banking entities to obtain customer data from the banks to develop pioneering products for the customers.

Open Banking benefits both banks and non-bank entities. Here are some of the advantages of the Open Banking System:

Digital revenue

Most Banking apps have a pre-defined set of options and services. As more and more 3rd party service providers enter the financial market, each one comes up with a new customization and personalization element to improve the customer experience. As a result, every new service broadens the scope of revenue for banks.

Customer-centricity

Open Banking encourages a customer-centric business model.

How? Because it gives real-time access to customers’ financial data. Financial organizations and TPAs leverage it to offer tailor-made services to the customers.

Operational efficiency

Open Banking helps banks perform a range of services under a single administration. This centralization of services fosters the bank’s operational efficiency.

Interoperability

Mobile applications leverage the Open Banking Model to access customer data across banks. This empowers customers to manage multiple accounts with a single log-in. As the application is integrated with other services, it also facilities the users to make quick, easy, and direct payments on various platforms.

Banking as a Service (BaaS)

Banking as a Service (BaaS) is a model that enables businesses to embed core financial services into their products through partnerships with licensed banks or financial institutions.

Although the description of this model might appear to be akin to the Open Banking model, let us take a minute here to understand that BaaS serves a different objective altogether. In the Open Banking system, businesses have access to and directly use the customer data for their products. However, the BaaS model allows enterprises only to integrate financial services into their products. The BaaS acts as an intermediary between a bank and a brand.

Google Pay is a classic example of Banking as a Service. The application offers users a digital wallet for online, in-store, and peer-to-peer payments with integrated rewards. It also equips users to manage and handle various bank accounts from a single app. In addition, they can check account balance and transaction history within the app and engage directly in online banking to pay bills.

Acquiring a banking license is a strenuous task as it involves capital requirements and adhering to strict regulations and whatnot. It is much easier for non-bank entities to associate with licensed and regulated banks to gain access to the APIs for each banking activity. Using the BaaS model, banks and other financial institutions unbundle their technology infrastructure and banking system to productize a specific banking service.

The three main components of the BaaS models are Licensed Banks, BaaS providers, and Businesses (fintech/non-fintech). As shown in the below chart, banks grants access to their services by lending their license to BaaS providers. The providers correspond with the core banking system via APIs and send financial assistance to businesses. The businesses, in turn, give their customers access to banking functionalities.

BaaS creates a new revenue stream for the banks as they let 3rd party providers access their services for a fee. The revenue growth is directly proportional to the number of providers that sign-up with the banks. Enterprises that integrate banking and payments services into their platforms go to market faster and tend to be cost-efficient by accessing banks’ functionalities and mitigating regulatory complexities. This leads to customer acquisition and retention due to a better customer experience. As for the customers, BaaS radically improves the end-to-end banking experience. It makes it easier for the customers to make payments promptly and securely.

To outline, Banking as a Service is a win-win-win situation for the end customers, businesses, and the banks themselves.

Platform Banking

Platform Banking is a model where banks integrate their products & services and offer them on a single digital platform to provide a convenient and unified banking experience to their customers. This model paves the way for innovations that can help the banks significantly improve the consumer experience and banking operations and eventually become tech-savvy like customers.

One of the best examples of Platform Banking is DBS Bank. Development Bank of Singapore is headquartered in Singapore and has branches worldwide. Its banking platform uses over 150 different APIs to enhance its service, reduce customer acquisition costs, and improve customer experience. They have also partnered with other enterprises for APIs to improve the cashless experience.

Globally, traditional banks are adopting Platform Banking primarily to help them cater to the ever-changing needs of their diverse customer base. Unlike the other API Banking models — here, neither the customer data nor the banks’ services are accessed by third parties; the banks own the customer data and take the help of fintech and non-financial companies to develop a superior customer-centric service. In some cases, the platforms address several customer pain points as it combines benefits across banking, fintech, and non-banking partners.

By switching to Platform Banking, licensed banks leverage the software service providers’ expertise, infrastructure, platform, functionality, and scale to focus on their core capabilities. In addition, as Platform Banking simplifies and unifies the processes, banks and other financial service providers can be more receptive to change without trivializing their abilities.

How to choose the right API provider?

Choosing a right API provider is as crucial as picking a right API gateway. This decision may entail limitations in the future for your business or can give it great pliability. A right API provider would seamlessly cater to your interface needs, allowing you to focus on the other business functionalities.

Before we jump into the checklist, we have a pointer for you here: It is imperative to determine the goal of integration before choosing an API provider. It can be anything from improving customer service to cross-selling products. Once you establish the plan, you must then examine whether the APIs you are considering cater to all your needs or at least fulfill most of the functionality required by your product or service.

With that being said, now, let’s look at the parameters that you should consider while selecting the right API provider.

Documentation

Good documentation must elaborately describe how to use and integrate an API and provide information on working with the API functions. A right API provider’s document ought to include FAQs and clear and useful examples or tutorials.

Data format

Data format plays a key role in determining the right API provider. The most common formats used in modern APIs are JSON (JavaScript Object Notation) and XML (Extensible Markup Language). A right API provider must use either one of the formats as it is easier to implement.

Fraud monitoring features

The scope for financial fraud has significantly increased in recent years, and it is fundamental to have a proper crime and fraud detection system in place. Therefore, check if the API provider has a robust fraud monitoring system embedded with the APIs.

Sandbox sign-off phase

The sandbox sign-off phase is the time required to move APIs from sandbox to live. Each API provider has a different time frame. Ideally, you should choose the one that enables a smooth transition from the sandbox to a live environment.

Error management

Check if the API provider has a proper error management system. Ideally, the error management system should consist of specific error scenarios and respective error codes and error description strings that are user-friendly and easy to comprehend.

Apart from the above parameters, look-see if the provider has a dedicated developer community. A developer community gathers and discusses the solutions to common problems. Being a part of it would help you obtain the correct information to accomplish your goals.

Want to know more about APIs? Write to us at business@m2pfintech.com.

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