With the introduction of the Application Programming Interface (API) economy in the last ten years, we’ve witnessed ordinary banking radically shift. It’s a novel approach to sharing software and data that involves merging the functionality of one application with that of another through API Banking.
Have you ever wondered how your smartphone assists you in making payments while placing online orders? Your banking information is not stored on the device, and neither is it stored on the app you use. So, where did all of this data originate from? All of the necessary information is handed on to us via bank APIs.
Let’s take a closer look at what bank APIs are and how they benefit us all, one industry at a time.
1. API Banking is on the rise
In the same year, the Reserve Bank of India (RBI) released the Unified Payments Interface (UPI), which was significant in the growth of banking APIs in India. API banking was coined to describe the process of sharing client data using bank APIs.
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Forbes declared 2017 to be “The Year of the API Economy” a year later. New opportunities arose as a result of the new ecosystem. Since then, the number of API providers has increased. API banking has also aided the rise of new entrants such as neobanks and challenger banks. They are slowly carving out a position in India, with market size of $15,000 million estimated by FY27.
The way banks and fintech companies work has also changed as a result of API banking. The major shift that occurred following the open banking movement, namely, allowing API access to bank data.
2. Moving away from vertical integration as we know it
Until recently, almost all incumbents were vertically integrated, meaning they held two or more stages of financial service production and distribution on their own. Their products and distribution were all part of a single value chain, and they had their distribution networks and infrastructure.
However, following the open banking movement, platform business models emerged, which shifted away from the old vertical strategy and toward a more inclusive and innovation-focused approach.
A banking platform is at the heart of this platform business model, which employs technology to connect people, companies, and resources in an interactive environment where incredible quantities of value may be created and traded. But how can a platform affect such significant changes in a company or perhaps an entire industry?
This occurred when companies began establishing core goods, services, or technology on which a large number of companies might build supplemental products using financial APIs, resulting in a loosely built ecosystem for innovation.
3. What is API Banking and how does it work?
API Banking is a three-step procedure that may be stated merely. An API provider can assist any fintech (neobanks, lending firms, etc.) or service aggregator company (Uber, Zomato, etc.) in opening bank accounts for their employees.
The advantages of API banking:
According to Capgemini’s 2019 World Fintech Report, nearly 89% of banks use APIs to interact with fintech as part of their business strategy.
- The key advantage of API is that it eliminates needless steps in the banking process. In other words, it ensures financial service providers’ speed and convenience.
- APIs are a bank’s digital transformation entry point. They may quickly obtain customer insights and offer a wide range of services to create a more comprehensive value chain for their clients.
- Customers can use API banking to gain access to and profit from a variety of product offerings. Customers in the B2B sector, such as SMEs and startups, benefit from services such as virtual cards, expense management, accounting bulk payouts, and so on.
Looking at current API banking trends, one can be assured that it will continue to evolve and grow to give clients more advanced services.
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4. Models of API Banking are being
Three types of API banking models can be roughly classified. They are as follows:
i. Open Banking: The usage of open APIs, which allow third-party developers to create apps and services based on the financial institution. Account-holders have more financial transparency options, ranging from open data to private data. To achieve the aforesaid, open-source technology was used.
ii. Banking as a Service: With Banking as a Service, third parties can directly interact with banks’ systems via APIs, allowing them to construct banking offerings atop the providers’ regulated infrastructure and changing the financial services industry worldwide.
iii. Banking as a Platform: Banking as a Platform, or BaaP, refers to the ability of a fintech or other software/technology firm to create a service and “rent” it to a bank. Banking as a Platform, in other words, refers to banking as “a platform for fintech and internet enterprises.”
In order for banks to improve their customers’ experiences, APIs make it possible for them to cooperate with major credit card companies, brokerage firms, and other large corporate clients. The ultimate goal is to increase sales and get new consumers while keeping current customers happy.
APIs are a need for banks to use and develop. Their software is the best solution to assure any company’s success while also making consumers’ lives easier. APIs for online banking offer a wide range of benefits, which is why many financial institutions have chosen to use them.