Over the last decade, financial APIs have helped businesses connect third-party services with financial institutions and greatly revolutionized the financial services market.

APIs have catalyzed new fintech innovations, given financial institutions opportunities to create new products and boost their revenue, and changed how today’s tech-savvy consumers interact with their finances. API economy statistics show that by 2028, the API management market will be worth $13.5 billion.

But what exactly are financial APIs? In this article, we’ll explain what financial APIs are, how they work, and how they can benefit customers financially.

What Are Financial APIs?

An application programming interface (API) is a set of computer protocols that allow two or more disparate software systems to connect and share information. For instance, if you have software for inventory management, another for keeping track of profit and loss, and an ERP system, you can use an API to connect the three. This way, you can see what products you’ve sold and your profits and losses within the ERP system instead of opening each software to view its specific information.

In the case of financial APIs, the protocols allow a financial institution’s core banking platform to securely communicate and share data with third-party applications. For example, if you have an expense tracking app, it uses an API to communicate with your bank and see details of your transactions.

There are three kinds of financial APIs: open, partner, and private. Open APIs, also known as public APIs, allow communication between a financial institution’s core banking platform and a third-party developer. Open APIs are the most commonly used to enable collaboration between financial institutions and vetted fintech companies.

Partner APIs are only open to authorized business partners preselected by the financial institution. On the other hand, private APIs are only available to developers within the financial institution. They are not available to third parties and typically power internal applications.

Benefits of Financial APIs for Consumers

1. Fast and Convenient Financial Access

Under the traditional finance model, accessing financial services is a long and tedious process. For instance, to secure a personal loan, a customer would need to provide bank statements, which sometimes involve trips to the brick-and-mortar bank branch to get the statements. This quickly becomes tedious if the customer has multiple accounts with different banks.

With financial APIs, this long and challenging process becomes smoother. The lender can instantly access a customer’s financial history through the different banks’ APIs and determine their creditworthiness. Securing a personal loan becomes much easier since all the required information is readily available, making loan approvals much faster.

Additionally, some fintech companies are combining financial APIs with technologies like the internet of things (IoT) to provide consumers with more seamless ways of interacting with their finances. For example, some banks are leveraging Amazon’s Smart Assistant Alexa to enable customers to access their accounts and initiate actions through voice commands. Such innovations will make financial services more intuitive and convenient for customers.

2. Tailored Product Offerings

In the past, third-party financial services had minimal customer data to work with. As a result, they only created broad financial products that catered to everyone but were not particularly suited to specific users.

With financial APIs, such third-party financial services can easily access a customer’s financial data from multiple data sources on a case-by-case basis. They can then use this data to understand their customers’ needs and create tailor-made product offerings that address every user’s specific situation.

For example, Aplazo, a “Buy Now, Pay Later” fintech company, uses financial APIs to access customer financial information and gain insights into the customer’s financial habits, payment ability, and risk profile. Using this approach, Aplazo has increased financial inclusion for customers with no credit history and improved credit approval rates. Considering that 22% of Americans don’t have a FICO score, such tailored products can significantly improve financial inclusion.

3. Better Control Over Personal Finances

Most people are not very good at tracking and managing their finances. A study by Intuit found that 65% of Americans don’t know how much money they spent last month, while one in three Americans regret their spending habits. In such an environment, financial APIs create an opportunity for fintech companies to develop products that give consumers better visibility and control over their finances.

For example, some expense-tracking apps use APIs to access details about customers’ transactions and use this information to create reports about their spending habits. This makes it easier for users to track where their money is going and make better financial decisions. Some apps even use this information to give advice and tips on how users can optimize their spending and adopt better financial practices like increasing their savings.

Financial APIs also create opportunities for financial aggregation apps that pull a customer’s data from multiple bank accounts and present it under a single dashboard. With such apps, consumers can easily monitor their financial habits. Some apps even go a step further and use the customer’s financial data to recommend financial products like loans, credit cards, and overdrafts based on the customer’s financial health.

Some personal finance apps also rely on financial APIs to provide users with information that can help them make important financial decisions. For instance, by analyzing multiple users’ financial information, such an app could discover that in Canada, the average person pays slightly over $1,000 for car insurance per year, while in the United States, the average is $1,630. If you’re choosing between living in the US and Canada, such information could help you make the right decision.

4. Better Control Over Personal Data

Before the rise of financial APIs, banks and financial institutions had total control over their customers’ financial data. Banks decided who they wanted to share this data with and what data to share. With financial APIs, this control has been transferred to consumers. Under open banking powered by financial APIs, consumers can now decide who has access to their data and how it is used.

5. Automated Personal Finance

Keeping track of financial tasks like paying bills is challenging for many people. In fact, one study found that 45% of Americans missed a credit card payment simply because they forgot to make the payment. Missed payments can sometimes lead to costly fines. Financial APIs provide a convenient solution to this problem.

Services built on financial APIs allow customers to set and maintain connections to their financial institutions and automate their payments. This not only works for bill payments but can also be used to automate savings and investments. Such a set-it-and-forget-it approach allows consumers to save time and avoid the penalties that come with missed payments.

6. Streamlined, Faster Payments

Today’s digital world is highly dependent on digital payments. While credit cards remain the payment method of choice for most people, consumers are looking for more flexible ways to make payments online. Many digital payment methods like Apple Pay and Google Pay rely on payment APIs to simplify transactions. Such payment methods allow consumers to pay for goods and services from their digital wallets using their smartphones, which is more convenient than other options like credit cards or cash.

Wrapping Up

Financial APIs have opened doors for banks and financial institutions to revolutionize their services and create better customer experiences. They have also created opportunities for fintech companies to develop new, innovative services that would have otherwise been impossible.

Implementing an API-based economy helps future-proof financial services businesses and provides numerous customer benefits. These include fast and convenient access to financial services, customized financial products, better control over a person’s finances, better control over financial data, and the ability to automate personal finances.

Ultimately, financial APIs present an exciting opportunity for financial services providers. Those who can leverage these APIs to meet the changing needs of today’s tech-savvy consumers will definitely be the clear winners.