10 Reasons Why APIs Are Pivotal to Modern Online Banking

10 Reasons Why APIs Are Pivotal to Modern Online Banking

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APIs and online banking go hand in hand. Online banking APIs prevent developers from having to recreate the wheel whenever they start a new financial application. Not only is having to write authorization code and abstraction layers from scratch every time unproductive, but it’s also bad for morale.

In fact, APIs and modern online banking are only becoming more intertwined. According to data from Open Banking Limited, online banking portals completed 795 million API calls in 2021. That number increased to 1.13 billion by 2023. That’s a 42.14% increase in two years. Clearly, people working with modern banking products must come to grips with APIs.

Productivity is just one of the many potential reasons financial products need APIs in their toolkits. Below, we’ll look at many other reasons APIs are essential for modern online banking.

1. APIs Have Gotten More Mature

According to a recent report from McKinsey, financial institutions have placed a lot of trust in APIs for online banking in just the last five years alone. The proliferation of mature API developer portals alone has made it faster and easier to publish, use, and consume APIs, for example.

The spread of APIs also means that more people are increasingly familiar with their existence. This means those responsible for controlling the budget are more likely to think of an API as a solution when needed.

2. APIs Are A Revenue Stream

That same McKinsey report notes that many organizations have switched focus from saving money with APIs to using APIs as a revenue source. Previous studies showed that 18% of respondents hoped to save money using APIs by reducing IT complexity. The focus had shifted to driving innovation in just two years. Further analysis reveals that a third of respondents expected to increase their revenue by more than 10% using APIs.

“Modernization of the financial system has been driven by digitizing manual processes via APIs,” says Shayanth Sinnarajah, a Founding Engineer at Highnote. “Whether there is a need for analytics, automation, and, more recently, AI, APIs are the basis of interaction.”

3. APIs Help Avoid Reinventing The Wheel

When creating or working with a banking tool, writing every single line of code from scratch is counterproductive. Instead, common capabilities like authorization workflows or messaging features are available as APIs, saving you the time and trouble of creating new tools for each project.

As financial API provider Plaid puts it, “This enables safe and secure consumer-permissioned third-party access to account information such as account and routing numbers, balances, and transaction history.”

APIs also enable uniform transitions. All requests and returned data should follow a consistent pattern for each tool. However, each tool might have data coming from many different sources. Banking APIs help create data consistency across all interactions, regardless of the platform or device calling them.

4. APIs Enable Trustworthy Transactions

Trustworthiness, dependability, and security are more critical to FinTech than almost any other industry. When dealing with money, you must ensure your transactions are airtight — especially when that money is not yours.

APIs for online banking help ensure all your transactions are safe and secure, assuming they follow the latest security protocols. As that same article from McKinsey linked above notes, “APIs are easy, fast, and secure ways for customers to access banking products and services. They are also versatile. Banks and financial institutions are increasingly looking to deploy APIs for all areas, from traditional business to the emerging playing fields of banking as a service, platform as a service, and embedded finance.”

Many financial API providers offer resources to make sure your modern banking tools are secure. For example, Wells Fargo has a complete suite of account validation tools.

5. APIs Empower Integration and Connectivity

Modern banking APIs allow easy integration with third-party applications and analytics tools. This is necessary because financial decisions and transactions rarely exist in a vacuum. To make the most of online finance, you need seamless access to financial data, often in real time.

As the former head of Schwab’s Bank Engineering Team writes in a recent LinkedIn post, “Bank data integration offers several benefits that can enhance operational efficiency, decision-making, and customer satisfaction. In my experience, integrating data from various systems allows banks to create 360 degree view of customer, advanced and real-time risk management, cross-selling opportunities, smart insights, customer stickiness, retention are some of the additional benefits.”

APIs are the nervous system that makes sharing financial data in real time possible. Banking APIs allow you to share financial data with legacy systems and cutting-edge technology. This includes tools like enterprise resource planning (ERPs) and customer relations management (CRM). Even better, APIs let you customize the data you’re working with to adhere to the format of legacy systems. This prevents the need to replace your existing financial systems while still letting you make the most of the latest tools and innovations.

6. APIs Empower Innovation

Modern banking systems aren’t cheap. Not only is replacing legacy systems prohibitively expensive, but you must also take the time to teach your team how to use the new tools. You might even need to update any tools that interact with that system, potentially even having to go through extensive line-by-line code rewrites. As the website SafeSystems.com notes, updating a legacy bank system can require new physical hardware, additional software, increased operating costs, and additional efforts related to education and support.

Unsurprisingly, this makes many banking institutions reluctant to try new tools and products. Modern banking APIs allow easy integration between legacy systems and the endless array of new and powerful tools constantly emerging in the financial sector. “By providing a system that can scale infinitely and operate 24/7, we can provide our workforce with far more efficient tools,” says Sinnarajah.

7. APIs Add an Essential Abstraction Layer

When working on financial tools, you want to avoid disruption as much as possible. With banking APIs, you can make changes to your backend without disrupting service to your clients. This helps keep downtime to a minimum, which is essential for delivering a dependable product and user experience.

Financial APIs also help ensure the security of user secrets and data, making it a far more secure option than screen scraping. APIs often include an API authentication and authorization scheme, which helps ensure that only authorized users can access your network.

Most financial APIs utilize encryption, too, further providing additional security. APIs encrypted with SSL/TLs encryption can’t be read even if they are intercepted. It also makes your tools more modular and reusable. Once you’ve got the design pattern in place, modern banking APIs let you re-use each tool for multiple projects. This saves you even more time and money.

8. APIs Are (Typically) Stateless

When you’re working with APIs, it’s important that every transaction should be as self-contained as possible as recommended by Roy Fielding. Banking APIs help make financial transactions stateless by ensuring that each interaction contains as much information as possible. Stateless transactions significantly reduce the amount of server resources required by every transaction.

9. APIs Grant Increased Error Transparency

Every API interaction includes an accompanying status code, such as a 2xx code for a successful interaction or a 4xx code when there’s an error on the client side. These HTTP status codes can provide essential insights for your development team, offering many different opportunities for optimization. Transparency into error information is helpful for diagnosing issues and informing observability practices for modern engineering teams.

10. APIs Aid Cacheability

Banking APIs allow select information to be stored on a client’s device. This allows much faster load times and a much faster user experience. Studies show that delayed response times are almost as stressful as watching a horror movie. This is not the impression you want to make on your users.

Final Thoughts on Banking APIs

The world grows increasingly interconnected with each passing year. No one exists in a vacuum — modern banking institutions, least of all. Banking is a business of people at the end of the day. Modern banking APIs deal with people at their most intimate and vulnerable. Handling other people’s money is a position of great trust and responsibility. Modern banking APIs let you fulfill that role with more confidence so you can focus on delivering exceptional service to your customers and clients.

“In the end, APIs are what enable our ability to securely and openly share information, creating a highly effective ecosystem for commerce and connections,” adds Sinnarajah.