Application programming interfaces (APIs) are increasingly critical to the worldwide digital economy. New estimates place the total number of public and private APIs in use at close to 200 million. For fintechs, APIs are now the pillar of many digital transformation and platforms.
No change is painless however, and new digital essentials involving fintechs and banking require legacy renovation; and the option to either integrate data, processes, and functionality or build newer systems.
The banking and financial services environment has markedly shifted. Fintechs and startups created innovations like online-only banks, completely automated financial advisory and investment sites, and peer-to-peer lending services – driving traditional financial institutions to dive into the digital transformation.
APIs allows financial service organizations to open up their applications’ data and functionality to external third-party developers, business partners, and internal departments. This lets dissimilar tech services and products to communicate and leverage each other’s data and functionality through the user interface to communicate.
Why Banking Needs APIs
Traditional banks are increasingly relying on APIs to power new apps and services; and many are partnering with API-based fintechs to do so. Plaid determined over 91% of banks expect to partner with fintech companies to increase their speed-to-market and ability to serve their customers; and that financial APIs have unlocked the door for thousands of new financial apps and services that have changed the way millions of people interact with their finances.
Whether financial institutions are dealing with existing tools or developing new ones, APIs simplify the process. According to IBM Some of the main benefits of APIs include:
- Improved collaboration: The average enterprise uses almost 1,200 cloud applications (link resides outside of IBM), many of which are disconnected. APIs enable integration so that these platforms and apps can seamlessly communicate with one another.
- Easier innovation: APIs offer flexibility, allowing companies to make connections with new business partners, offer new services to their existing market, and, ultimately, access new markets that can generate massive returns and drive digital transformation.
- Data monetization: Many companies choose to offer APIs for free, at least initially, so that they can build an audience of developers around their brand and forge relationships with potential business partners.
- Added security: APIs create an added layer of protection between data and a server. Developers can further strengthen API security by using tokens, signatures, and transport layer security (TLS) encryption; by implementing API gateways to manage and authenticate traffic; and by practicing effective API management.
The Complexity of Getting Connected
The paybacks of APIs in software development are diverse. Many financial institutions and fintechs find they help control the swing from rigid on-premises software to the cloud and a collection of applications. Using APIs, financial institutions can retrieve and combine data assets and functionality from different systems.
The problem with using APIs to connect systems and products it can often seem more like plug and pray instead of plug and play. Even though a platform comes with its open, API-driven architectures does not mean third-party connectivity is without problems. A lack of industry standards means different languages (or API elements) must speak at the integration level without a universal translator.
Integrating API technology comes with numerous other concerns including internal systems, procedures, key performance Indicators, data management and integrity, security, standards of communication, and governance. Integration is also complex – involving critical business functions like account management, payments, loan management, credit cards, as well as client relationship management (CRM), finance, and accounting applications. Additionally, increasingly more enterprise applications are becoming cloud based – further complicating the process due to the technological differences between on-premise and cloud-centric integration approaches.
These are some reasons most enterprises have failed to capture the value they initially envisioned from APIs reported McKinsey. In many cases, a rush to build APIs without a thoughtful strategy has created a mess, with redundancies, poor maintenance practices, and limited transparency canceling out many of the potential benefits.
The API Shop
A trio of API sets provide key roles central to API led connectivity:
- System APIs deliver a way to shield the customers’ information from modifications to the central or core systems. Financial institutions can exchange an existing scheme with a different or new one without changing the API externally.
- Process APIs generate or shape data according to business requirements. These provide logic and planning, but do not communicate with end systems directly but instead connect to system APIs to get its data.
- Experience API (or xAPI) provide the specification for learning technology that permits the collection of data from a variety of personal encounters. This API captures data in a consistent format about a person or group's activities from many technologies.
With their growing significance, developers need a place to shop for APIs — or shop them to others. The API marketplace allows developers a one-stop shop for everything from integrated onboarding to features such as security issue tracing.
Typically, an API marketplace comprises several components, including an API manager, gateway, security and developer areas. It collects, categorizes and presents the published APIs. A significant marketplace goal is to use and recycle APIs. Therefore, a marketplace usually ensures APIs are searchable and have the correct categorization connected to them.
The marketplace model lets financial institutions continue to provide and develop their central services, but also provides an opportunity to fill gaps with carefully chosen tech partners.
This approach also levels the playing field for API providers as the marketplace increases exposure for API developers of all sizes, especially those seeking a bigger fintech presence. They can also market APIs based on types and how they interact with consumers, third parties and applications.
NXTsoft’s OmniConnect Platform, which securely connects fintechs to financial institutions and ensures safe and reliable integration, is an open banking marketplace for all API needs. NXTsoft has connectors built for 99% of core accounting systems and delivers connectivity to over 700 financial institutions with 2,000 connections in place. The company provides access to its partners through its API Marketplace. They have connected financial services systems, loan platforms, customer relationship management (CRM) platforms and other banking enterprise systems.