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APIs & Open Banking: The Future of Finance - BizTech Magazine

The pandemic underpinned a growing need for flexible financial services; customers want the ability to conduct transactions anywhere, anytime, and expect banking tools to seamlessly interact with third-party services. Recent survey data found that 43 percent of consumers say they’ve changed the way they bank.

Combining flexibility and security is now critical for banks to keep clients happy.

To bridge the gap between experience and expectations, banks and credit unions are turning to technology-driven approaches such as application programming interfaces and open banking. But what does this mean in practice? How do open banking and APIs work together, and how do they enhance the customer experience?

What Do APIs Provide for Banks?

APIs facilitate communication between two disparate pieces of software. For banks, APIs make it possible to expand service offerings without reinventing the digital wheel.

Tom Filep, Americas financial services industry lead at Cisco, puts it simply: “In a day and age where many of us use mobile banking applications or maybe pay a bill using an app, we are using APIs for our finances every day without necessarily realizing it. APIs give financial services institutions the ability to connect seamlessly to both customers and businesses.”

As noted by research firm McKinsey, APIs can also facilitate income growth across B2B and B2C segments. Over 90 percent of survey respondents said they planned to leverage APIs for revenue generation among existing customers, and 75 percent plan to use APIs to drive new customer connections.

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What Do APIs Provide for Customers?

For customers, APIs help streamline the banking process across digital services. By leveraging secure APIs, banks can connect internal transaction systems to online e-commerce payment portals or point-of-sale services.

“APIs mean customers can directly access their bank account when executing transactions online, allowing easy tracking of balances and outgoing payments,” says Filep. “They can also enable integrations between physical banks and merchants, which offer consumers financing and lending options at the point of sale.”

What Are the Different Types of APIs?

There are four basic types of APIs: public, partner, internal and composite.

Public APIs (also called Open APIs) have no restrictions on use or availability. Partner APIs are designed to facilitate specific business-to-business communication and often have increased security and authentication controls. Internal APIs are used to connect systems or services within corporate networks, such as payroll and HR. Composite APIs combine two or more APIs to create a sequence of operations that help streamline more complex functions.

What Is Open Banking?

“Open banking is a secure way for banks to share financial data and services with third-party providers such as mobile stock-trading applications or popular mobile payment service applications that use technologies like APIs,” says Filep. “It complements one of the core principles of banking — to protect customer information — by sharing the data in open and collaborative ecosystems, if customer consent is provided.”

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As noted by the Future of Privacy Forum, while challenges remain with interoperability and standardization for open banking, President Biden’s recent Executive Order on Promoting Competition in the American Economy suggests the creation of new rules under Section 1033 of the Dodd-Frank Act. These include better support for open banking initiatives that make it easier for consumers to switch banks or try innovative services by promoting data interoperability.

“For customers, open banking provides a better experience by building brand trust and security, improving payment experiences, and increasing transaction approval rates,” notes Filep. “For merchants, it reduces processing costs as there are typically no interchange fees. Chargebacks are also removed, which makes the process seamless and simple.”

How Are APIs Used in Open Banking?

APIs underpin the efficacy of open banking initiatives. In order to provide seamless data access, interoperability and security across multiple vendors and other financial institutions, multiple APIs are required, each with a specific purpose.

However, Filep says, “while open banking adoption numbers are growing, security, privacy and fraud remain legitimate concerns. A primary risk for consumers, banks and third-party providers is how to ensure data privacy and security beyond banking systems if fraudsters take advantage of APIs.”

To combat this, banks must be able to both identify and eliminate third-party API risks. Filep points to multifactor authentication tools, such as Cisco Duo, along with artificial intelligence and machine learning frameworks capable of analyzing data and payment histories to detect suspicious activities.

Underpinned by APIs and safeguarded by solutions such as MFA, AI and machine learning, open banking initiatives make it possible for banks to offer flexible finance options that meet consumer needs without compromising security.