Finance has been radically changed by the smartphone. And as companies undergo digital transformation to meet these changes in behavior, it’s the financial API that underpins it all.
What are financial APIs?
An API stands for Application Programming Interface. Quite simply, it’s a secure communication bridge between different software systems. Rather than requiring separate manual connections to each bank or financial institution, financial APIs are a great way to standardize protocols that allow applications to request and receive financial data. Or, even to initiate transactions.
Think of an API as a translator. When you open a budgeting app and connect your bank account, it’s the API that is being used to authenticate your credentials and pull data. Without it, there is no Open Banking.
The role of banking interoperability
Banking interoperability is how well financial systems and applications can exchange information. It’s a fancy way of saying “standardize”. Before the mass adoption of financial APIs, the banking world existed mostly in silos. Each institution had its own proprietary systems. It’s expensive, but worse than that, it led to a worse customer experience as the industry wasn’t communicating.
Financial APIs broke down these barriers and established common standards. What began as a way to enable simple data retrieval has now blossomed into real-time payment processing and multi-bank account aggregation. This can deliver more bespoke financial services to individuals.
How financial APIs enable open banking
Open banking is the regulatory and technological framework for this interoperability. The goal was to promote consumer data ownership and financial transparency. So, it became a way to mandate financial institutions to provide this secure access. Again, through APIs.
It was a total paradigm shift because financial data, we used to think, must be kept insular in order to be protected. But actually, giving consumers the power to share their financial information third parties in a secure way only improved security. Just as importantly, it caused a surge in innovation – how will this newfound access to data be used? Suddenly, budgeting and bookkeeping apps were being created left, right and center.
Consumers can now (if they want to) use one app to aggregate all their bank accounts (it also means our current banks can offer this feature too), but it could be to get better loan rates based on their actual spending patterns.
Rising players in the financial API landscape
This shift really caused a gold rush, and the market has been better for it. The financial API ecosystem now has many established platforms that have built extensive networks connecting banks with fintech applications. Plaid was a dominant force in North America, connecting thousands of financial institutions with applications (e.g., Venmo and Robinhood). It does well in account verification and transaction categorization.
In Europe, Tink (which was acquired by Visa in 2022) has a comprehensive open banking solution across more than 3,400 banks. It’s totally cornered the entire European market. For Latin American markets, Belvo and Prometeo API have become known as the regional leaders. Belvo focuses on financial inclusion by connecting alternative financial data sources like gig economy platforms. Prometeo operates as a cross-border banking API platform, so it gives users access to financial institutions across 11 countries in Latin America and the United States – it also has an emphasis on payment infrastructure and account validation services in underbanked regions.
The business impact of financial API adoption
Organizations adopting financial APIs often tend to share similar experiences. The most immediate impact tends to be on the operational efficiency, as processes that once required days of manual verification can now happen right away. It’s not even about the time in and of itself, but what it means for the customer and their service delivery.
For businesses wanting financial data for their underwriting decisions, APIs are a great way to be more accurate about risk. Instead of relying on credit scores (which are considered outdated and, in many cases, unfair), lenders can now use actual cash flow patterns. Again, it’s only there if the customer wants – it’s not a loss of data sovereignty. It’s just a way of customers now being able to plug in their current account bank into a loan application and let them see the real picture of what’s going on. This can lead to lower interest rates and more favorable terms.
The future of financial APIs
Financial APIs are not yet the finished product – they’re still changing to new technology. Artificial intelligence is of course going to be a key driver, and we’re yet to see what will come of it. So far, we’re seeing more powerful pattern recognition and fraud detection, which lowers costs for all parties.
We’re also seeing more embedded finance, which is where financial services are integrated into non-financial applications. This might be point-of-sale financing and instant payouts for sellers.
Open Banking is only just getting started. With it now becoming the norm in Europe and the US, we’re seeing more innovations and use cases for this newfound standardized flow of information. The result, in the end, is bringing the delivery of products and services closer to customers.
