A banking API is software that facilitates a digital connection between a company and a bank. Using a banking API, companies can embed financial services into their products, without having to deal with the complexities of becoming a bank themselves (obtaining a federal charter from the Office of the Comptroller of the Currency (OCC) or getting FDIC-insured, for example).
From investment apps like Robinhood to buy-now-pay-later (BNPL) services like Klarna, the last decade has seen a proliferation of tech-first businesses that want to offer financial services to their customers. Historically, only banks have been able to offer financial services like those powering investments in the stock market, payroll services, and the like. However, recent advances in technology have made it possible for banks to easily provide access to their financial infrastructure. One of the key ways they do so is through a banking API, which is a type of API.
What is an API?
An API, or “application programming interface”, is a piece of code that allows two or more software programs to connect. Similar to a bridge between two islands, APIs enable otherwise disconnected entities to communicate and exchange information with one another.
Here’s an example. Let’s say there’s a new stock trading app called Vest. Vest requires users to connect their bank account to the app in order to add funds for investment. Chances are, Vest uses a service like Plaid, which includes an API that allows the user’s bank to securely exchange information with the investment app. This enables users to transfer funds as needed.
How is a banking API used?
Here are a few of the most common examples of a banking API in action.
- Payments. When a customer pays for goods and services within an app, they’re likely using some type of banking API. Examples of the payments use case for banking APIs include anything from rideshare servicesto grocery delivery services. Without banking APIs, these companies would have to build all the necessary infrastructure required to facilitate secure transfers to and from their users’ bank accounts.
- Lending. Banking APIs allow companies like Klarna to offer small loans to their customers. As one example, without banking APIs, Klarna would have to create a system to collect and authenticate sensitive information about a user’s bank account.
- Neobanks. A neobank is a digital-only institution that provides a range of financial services. Rather than obtaining a bank charter, neobanks partner with traditional banks and use their financial infrastructure to power differentiated products and services for their customers. The primary way that neobanks leverage their bank partner’s infrastructure is through banking APIs.
What are the benefits of using a banking API?
There are numerous benefits to leveraging banking APIs for fintechs and any company that wants to offer financial services to its customers. Here are a few examples:
- Faster time-to-market. Because they abstract away complex processes and eliminate the need for a bank charter, banking APIs allow fintechs to ship financial products faster.
- Lower costs. Similarly, by providing the critical infrastructure up front, banking APIs can dramatically reduce the amount of resources required to build any financial product.
- Allows fintechs to insure their deposits. By partnering with a traditional bank, fintechs can provide insurance on their customers’ deposits, without needing a federal bank charter.
What are the benefits of offering banking API?
For banks, there are ample benefits to offering a dedicated API. The primary benefit is that it helps them win more business from the next generation of fintech companies.
The number of investment apps, online banks, p2p payment apps, and similar consumer technologies has increased exponentially in recent years. SVB estimates that European and American fintech companies raised a combined total of $70b in 2021, up from $29.3b in 2020. 5 of the 10 largest US VC-backed tech IPOs in 2021 were fintechs.
By offering an API into their services, banks make themselves a more attractive partner for high-growth fintech companies that value speed and a developer-friendly focus. Fintech companies depend on one another to provide complementary services, so one effective partnership can easily lead to a healthy stream of referrals.
Payment operations is an umbrella term that refers to the entire lifecycle of money movement for a company.
- 1Bank Reconciliation
- 2Banking API
- 3Cash Position
- 4Continuous Accounting
- 5Fiat Money
- 6Flow of Funds
- 7Gross Merchandise Volume
- 8Invoicing API
- 9Know Your Business (KYB)
- 10Payment Operations
- 11Payment Processor vs. Payments Gateway
- 12Settlement (Net vs. Gross)
- 13What are Incoming Payment Details?
- 14What are Payment Controls?
- 15What is A2A Banking?
- 16What is Bank Redundancy?
- 17What is Batch Processing?
- 18What is Cash Float?
- 19What is Know Your Customer (KYC)?
- 20What is Money Transmission?
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