What You Need to Know About API Banking

API banking enables fintechs and banks to work together
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April 6, 2021
Illustration of a mobile application with embedded banking capabilities.

API banking technology makes it possible for banks to digitize their services, and enables fintechs and banks to work together. For banks, these benefits make it easier to provide a higher quality digital experience to a larger spectrum of customers. Meanwhile, fintechs that connect with banks are able to back their services with FDIC-insured banking infrastructure. Banking APIs also allow banks and fintechs alike to embed their services in non-financial apps. 

This post will explain API banking in detail. 

What is API banking?

To understand what is an API in banking, one must first understand what an API is, in general. An API, or application programming interface, is basically software that acts as an intermediary between other pieces of software. As the acronym implies, an API is a program that acts as the interface between applications. 

APIs play a crucial role in the Banking as a Service (BaaS) industry. BaaS — sometimes called Banking as a Platform (BaaP) or banking Software as a Service (banking SaaS) — refers to services that enable banks to provide digital services to customers or integrate with other digital services. BaaS providers like Treasury Prime offer API banking. Treasury Prime also connects fintechs and banks directly with each other so they can build relationships. 

A BaaS company is a type of fintech company, and is sometimes referred to as “Fintech Banking as a Service”. Fintech is short for financial technology, and refers broadly to technology for financial operations. BaaS companies provide services to other types of fintechs that need to embed banking services into their applications. In addition to BaaS, fintech refers to payments apps, apps for day trading, neobanks or online-only banks, and other financial technology tools. Examples of top fintech companies include PayPal, Stripe, Square, Gravity Payments, and Affirm. 

Examples of API banking

API banking use cases included Banking as a Service (BaaS) and embedded finance

BaaS: Banks can use API banking to build digital banking experiences for customers, including online banking and mobile banking. When banks use an API from a trusted provider, they can offer customers a premium digital experience that would otherwise require greater overall investment to build in-house. Banks can also use APIs to link their services to fintech apps, enabling new customers to open debit, credit, or savings accounts from within those apps. BaaS providers that offer API banking can help banks build lasting relationships with top trusted fintech companies. 

Embedded finance: Embedded finance refers to embedding banking or financial tools in non-financial apps. Examples include:

  • Embedded payments — Customers can pay in-app for services. Examples include rideshare apps such as Uber and Lyft, and retail apps like the Target app.
  • Embedded lending — Services like Klarna and Afterpay, which are embedded in retail sites to extend small loans so consumers can pay for purchases in installments.
  • Other types of embedding — Banks can embed their services in other fintech apps where users would regularly use money, such as robo advisors for investing.

The benefits of API banking for banks

API banking allows banks to digitize their services and better serve customers who don’t live near physical branches or who prefer internet banking. Digital banking enabled by internet banking APIs is becoming a lot more popular, and still has room for growth. 

Roughly one in five banked households primarily accessed their bank accounts by bank teller as recently as 2019, according to the FDIC. But that number has been in decline as more people have adopted online or mobile banking as their primary mode of interacting with their accounts.

The COVID-19 pandemic put pressure on banks to accelerate their digital transformations. U.S. Bank, for example, closed hundreds of branches in 2020 as more customers opted for digital banking. 

As digital banking grows in popularity, so do fintech apps. Digital-online banks or neobanks, like Chime, gained users in 2020, when consumers facing financial uncertainty wanted options to receive their stimulus checks faster. Robo advisors are now trusted alternatives to their pricier human counterparts. Apps like Venmo and CashApp have replaced traditional money transfers for a lot of people. Fintechs may also target specific types of users, like Zeta which caters to couples. 

As a bank, you want to be connected to these newer companies. Top API banking providers can not only give you the technical tools you need to connect with fintechs, they can introduce you to trusted companies that will offer you real value. For example, fintech partners can give you access to different customers, essentially serving as nodes in areas where you may not be building or marketing. Your partner’s growth is your growth. Fintechs can help you capture deposit market share and increase your transaction fee revenue. 

Bank API integration with fintechs is something only a small number of banks are thinking about at this point. That number is growing, however, as major deals get announced and financial institutions (as well as investors) realize they need to jump on this opportunity. 

The benefits of API banking for fintechs

Fintechs can’t operate as islands. If you offer a highly specific service, you’ll be going after customers who need other tools to complement yours. You want to have access to a network of potential partner companies. If you’re a full neobank, you are probably not chartered, which means you can’t insure your deposits. But you can partner with a larger established bank, which can hold deposits and provide FDIC insurance.

None of these beneficial partnerships are possible without API banking. Fintechs need an intermediary with banks, and with each other. Building out that intermediary system on your own would be a huge burden. A strong BaaS provider that offers bank API programming can do it for you, meaning less work for your developers, and overall higher quality of experience for your users. 

You want to find a BaaS provider that has relationships across the board, with both banks and a wide spectrum of fintechs. BaaS services that only have relationships with banks, or only with fintechs, may not be able to meet all your needs — especially as you grow. 

The future of API banking

There’s huge pressure on banks to adopt API banking because of consumer preferences, market pressure, and the growing prevalence of open banking. 

Consumer preferences

Branch and ATM banking have been in steady decline among consumers for years, while mobile banking has skyrocketed. Mobile banking was the primary banking channel for 34 percent middle to high income people under age 54 in 2019, compared to about 6 percent in 2013, according to FDIC data cited by ABA Banking Journal. 

Consumers are also rapidly adopting fintech. Global fintech adoption almost doubled among digitally active consumers from 2017 to 2019:

“Adoption of fintech services has moved steadily upward, from 16 percent in 2015, the year our first FinTech Adoption Index was published, to 33 percent in 2017, to 64 percent in 2019,” states a report from consulting firm EY, that was cited by eMarketer

Market pressure

Actions by competitors are also putting pressure on banks. For example, fintech Stripe’s launch of Stripe Treasury, a new service that advances payments and makes small loans to merchants through pairing with Stripe Capital, contained an additional announcement that Goldman Sachs, Citibank, and Barclays were getting into API banking:

“Stripe is enabling standardized access via APIs to the global banking capabilities of its bank partner network, which now includes Goldman Sachs Bank USA and Evolve Bank & Trust as US partners, and Citibank N.A. and Barclays as global expansion partners.”

Now peers of these banks and smaller financial institutions are feeling the heat to get involved in API banking themselves in order to keep up. 

Open banking

Then there’s open banking, which is already popular in the United Kingdom and is gaining traction in the United States. Open banking refers to using open APIs to give third parties, such as fintechs, access to consumers’ banking and other financial data. 

How is open banking different from just engaging in API banking? At the level of individual banks and fintechs, it is basically the same thing — partnering organizations use an API to share data and offer each other’s services to customers. At a higher level, though, the open banking framework is different because it makes these partnerships universally available. It requires all banks to make their services available via API. 

“Nearly three years after the introduction of the second Payment Services Directive (PSD2) in the U.K.” — PSD2 is the law that regulates open banking — “there are indications that the opening of data flows between financial services companies has led to strong innovation (and demand for that innovation), and more regulation may loom,” writes PYMTS.

The U.S. is also moving in the direction of open banking, but in a different way compared to Europe. Rather than government regulation causing banks to become more open, these innovations are driven by enterprising businesses. That means U.S. banks and fintechs can pursue partnerships on their own terms.

That’s a lot of freedom, but not a lot of structure or guidance. That’s where BaaS providers come in. These are companies that have expertise in API banking, and can help banks and fintechs overcome challenges they would otherwise encounter if they tried to engage in API banking on their own. 

Not all BaaS providers are the same, however. Some providers have more limited capabilities, or they only work with either fintechs or banks — not both. You want to make sure your provider will meet your changing needs as you grow, before you decide to work with them.  
Treasury Prime has expertise and relationships in both fintech and banking. Developers interested in using Treasury Prime’s tools can familiarize themselves with our offerings by visiting our Sandbox. To learn more about how Treasury Prime can help your bank or fintech grow through collaboration, get in touch with our sales team.

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