Even seasoned banking professionals can feel a little out of their depth with open banking APIs. That isn’t surprising, given that most aren’t programmers, but the technical details aren’t necessarily crucial for most stakeholders. For non-technical personnel, the critical question is not so much “how do APIs work,” but rather “how much should we value a core system that takes advantage of APIs?”

The answer is “a lot.”

An “open” core banking system – one that uses APIs to connect different financial services systems and providers – allows an institution greater flexibility in its operations, opening the door to new integrations, innovative technologies, greater efficiencies, and better customer service. Open banking via APIs has seen rapid adoption across the financial world, and customers have come to expect–and even demand–the features and conveniences of an open system from their banks. Institutions that don’t take advantage of this technology risk losing out to the competition.

Learn more about how open banking is unlocking opportunities for financial institutions like yours by reading our white paper.

What is an API?

In essence, an API, or “application programming interface,” allows separate systems to communicate with one another when they otherwise couldn’t. Fintech research and advisory firm Celent compares the role of an API to that of a waiter in a restaurant. The customer and the chef are in separate rooms and cannot communicate with one another. The waiter collects necessary information from the customer–their order–and delivers it to the chef, who then uses that information to produce the desired result: the customer’s meal.

The API also defines what information is shared between the two systems, communicating only what is necessary. The waiter will happily take orders from the customer to the chef, but would politely decline if the customer asked to tell the chef about their day.

APIs have been around for decades, and their use is not limited to financial services. You use APIs every day and probably never think about them. Uber, for example, does not have its own maps software, despite navigation being an essential function of their platform. Instead, Uber automatically pulls data from Google Maps through an API and provides it to its users and drivers. Google itself uses APIs in a similar fashion. Google can provide up-to-date weather forecasts in its search results, despite not operating its own weather stations, because of an API connection with a weather forecasting company.

What are Banking APIs?

Banking APIs are no different in principle from any other, but are specific to banking software, allowing separate applications and even financial institutions to share information.

APIs have existed since the beginning of computing, but have become particularly important to banking software with the rise of REST APIs, which are fast, lightweight, and reliable.

APIs are a particularly effective solution to a problem that has arisen for banks in recent years. Since the COVID-19 pandemic, customers have come to expect 24/7, real-time support across all banking channels. Allowing each of a bank’s systems to communicate efficiently ensures that customers receive up-to-date information and support no matter where or when they engage with the bank. Customers want a unified experience with as few roadblocks as possible, and APIs help deliver it.

How are APIs Used in Open Banking?

While as much a philosophy as a technical architecture, open banking, in its simplest and most concrete form, is the foundational layer of APIs that enable third-party developers to safely and securely push and pull data in real time, as well as build applications and services around a financial institution.

Uses for Banking APIs

APIs’ inherent flexibility makes them well-suited to a wide range of uses in nearly any computing context. Naturally, the practical applications of banking APIs are just as many and varied. Let’s look at four common uses and how APIs help banks modernize, optimize, and streamline their operations.

Banking APIs for Integration

Longstanding institutions may be running part or all of their operations on legacy systems and code. While these systems may have addressed the institution’s business challenges at the time of their implementation, they are now often obsolete and difficult to integrate. For example, a bank’s outdated checking account system might not be able to communicate with its CRM or mobile app.

Newer technologies–that consumers increasingly expect–rarely integrate natively with legacy systems. Replacing these systems is costly and time-consuming, and many institutions are hesitant even to risk tinkering with them at all.

APIs help legacy systems communicate with newer ones by serving as a reliable translator between them. This creates a bridge between new and old, extending the usable lifespan of existing systems, without having to alter the legacy code and risk errors in the process.

Banking APIs for Connectivity

Before the proliferation of APIs in banking, financial institutions could still connect and share information on behalf of a customer. Patricia Hines (Head of Corporate Banking for Celent) uses the example of Quicken, which could pull information from a user’s bank by logging in as that user. There is a potential concern here: in this case, Quicken has access to all the information the user does, including their full checking history. With digital privacy more important than ever, handing over the keys to one’s personal data is likely to give anyone pause.

As noted before, APIs don’t just allow systems to communicate, but also regulate what information can be shared. For example, an API connection between Quicken and the user’s bank might give Quicken access only to 30 days of checking history, rather than all of it.

With REST APIs as fast and lightweight as they are, this information can also be pulled in real time, ready at a moment’s notice. This isn’t just good for consumers, who expect quick service, but also for institutions, which can access customer information faster. This real-time connectivity is particularly beneficial for commercial customers, who often have multiple accounts that need to exchange up-to-date information.

APIs for Platform Banking

APIs enable banks to act as modular platforms through which non-bank businesses can offer financial services, seamlessly integrating tech between the two. The company can pick and choose from the bank’s services to provide to its customers, without needing its own banking license. The business also gains access to the bank’s regulatory expertise, helping it stay compliant.

Take a neobank like Chime, for example. Despite offering savings and checking services, Chime is not a bank, but rather a technology company that integrates its app with traditional banks (in Chime’s case, The Bancorp Bank and Stride Bank). A slow, cumbersome integration between the consumer-facing app and the bank would naturally be unacceptable to users, but the real-time connections APIs provide make this kind of partnership viable.

Banking as a Platform (BaaP) extends the bank’s reach to new customers, albeit somewhat indirectly, and enables it to capitalize on its existing resources and infrastructure through new revenue streams.

Banking APIs for Innovation

The ability of banks to easily integrate new technology on a modular basis opens a wealth of options for new products, services, and behind-the-scenes measures to improve efficiency. With the fast, easy integration that APIs enable, banks can even play catch-up if they have lagged behind the competition in innovation.

If a bank wants to add to its offerings, its team doesn’t have to go through the effort and expense of building a new product or service itself. The institution may not even have the in-house resources or expertise to do so. APIs allow fintech companies to offer these products and services and seamlessly integrate them into the bank’s existing systems. The result is a marketplace of innovative, modular technology solutions offered by a variety of providers, from which the bank can pick and choose what’s right for its business.

If the bank does wish to build a new product or service itself, APIs can smooth that process as well. Seamless integration of new technology isn’t reserved for third-party vendors. The modularity of a system that leverages APIs allows the bank to use a standardized method to add new tools they develop to their systems, without drastically altering the underlying code, something many banks are naturally hesitant to do.

APIs can also improve internal efficiency within existing workflows. Two systems within a bank might not communicate efficiently or at all, requiring substantial manual work for the bank’s employees. An API can bridge that gap, reducing workload and improving efficiency across the board. An API might also integrate a new automation tool into an existing system, freeing up employees’ time and reducing the risk of human error.

In short, APIs enable data sharing that can consolidate previously siloed systems, rapidly adopt new technologies, and address evolving business needs. Using APIs for open banking creates a central hub that integrates additional capabilities such as customer relationship management, digital banking, and lending into a bank’s core banking platform.

Security Considerations for APIs

As with any technology partnership, due diligence is key to mitigating risks associated with data sharing and third-party data breaches. With proper security controls, you can protect your institution and your customers’ data while leveraging open banking and the benefits of APIs.

• Protect your systems: Be sure to safeguard your digital services, core platform, and any other sectors placed into your open banking ecosystem.
• Develop security processes: Your bank should also ensure you have secure processes in place, including managing file transfers to avoid vulnerabilities.
• Understand your controls: Do you have the proper controls in place if using AI? You should understand how AI is being used to minimize your risk of data mining for unintended purposes.

Take Advantage of the Potential of Banking APIs

Open banking via APIs is full of exciting potential for every financial institution. In today’s industry, your core system should take advantage of those possibilities, because the competition certainly is. You can’t afford to be left behind.

Check out our white paper to find out more about how open banking is transforming the banking sector.

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