APIs: the key to modernizing Fintech

by James · October 20, 2022

In recent years, the financial industry has undergone a digital transformation. But how can traditional financial institutions keep pace with the updated regulatory standards and consumer preferences of the new digital era? Audrey Hall, Chief Product Officer at Brightwell, lays out the case for APIs and all they bring to the table.

The sun is setting on the traditional banking model. Over the past decade, the world’s largest banks weathered the financial crisis during the Great Recession. But to ensure a similar situation doesn’t happen again, regulators are now requiring banks to adhere to additional compliance standards to avoid legal penalties and fees. For example, the 2010 Dodd-Frank Act put new safeguards in place for financial institutions, requiring some of the nation’s largest banks to undergo periodic stress tests to ensure they can weather another crisis. Although these commitments evolve over time, they require constant attention and product adaptation.

As the financial services industry undergoes a digital transformation, traditional financial institutions (FIs) must apply the same regulatory standards to their digital banking practices and services. However, meeting compliance standards in a digital financial environment is no small feat.

Outdated legacy systems make implementing new systems challenging for existing IT architecture. Many of these systems were constructed more than 50 years ago for electronic money transfers and card services and have either been abandoned by fintechs or supported by patchwork infrastructure additions that further complicate new updates. Although this transformation is difficult, traditional financial institutions cannot afford to digitize their business model. According to a recent report, 90% of consumers in the US and Canada use online and mobile financial applications to manage their money. Furthermore, 59% of consumers use digital apps, products or services to send money to friends, family and businesses locally and abroad.

With so many services available, putting consumers at the center of business decisions is critical to fintech success. Not only do banking and fintech leaders need to keep up with new trends, but they need to continuously address ever-changing customer pain points. Now more than ever, finance leaders are questioning how they can create a digital architecture that will not only meet customer needs and increase the bottom line, but also meet the ever-evolving regulatory standards in the industry. Could APIs be part of the solution?

See more: How technology leaders are using APIs and microservices to drive digital transformation

Table of Contents

What are APIs?

APIs, also known as application programming interface, are lines of code that act as communication tools that take requests, translate them, and return responses. This revolutionary tool enables data sharing in today’s connected world. As online commerce boomed from 2000 to 2002, digital giants like Salesforce, eBay, and Amazon developed APIs to allow developers to access commerce data for a wide variety of uses. Fast forward to today, APIs have opened the door to interoperability, enabling different financial systems to communicate with each other easily.

Yet the financial services industry is still trying to understand the benefits of APIs. In fact, McKinsey estimated that most banks are still in the developmental stages of understanding how data-driven businesses powered by APIs shall work. In fact, banks are taking baby steps towards implementing APIs and seeing positive returns from their progress. It has been proven to increase customer satisfaction and business expansion by creating new revenue streams and a more tailored customer experience, as well as cutting costs and increasing internal efficiency.

APIs have the ability to empower fintechs to integrate new offerings to create a more personalized experience for end users that further attract and retain customers. Currently, fintechs, banks and other payment services often use open banking APIs to connect to a user’s bank and retrieve their balance, while providing a separation between these entities, ensuring a secure data exchange for users. For example, in 2018, BBVA launched its BaaS platform, Open Platform, in the US. Open Platform uses APIs that allow third parties to offer customers financial products after passing strict compliance and security checks without having to offer a full suite of banking services.

The service also enables companies to connect to a core digital banking platform, where they can access its APIs. Banks are also using APIs to develop mobile apps to allow customers to access their account balance on the go, quickly find ATM locations or use a virtual debit card for a contactless shopping experience.

For cross-border payment transfers, slower payment methods such as SWIFT, international bank transfers and paper checks have paved the way for APIs. In particular, APIs can help fintechs meet the growing demand for fast, convenient and secure money transfers. In addition, APIs can be used to easily integrate the remittance infrastructure into existing applications that do not currently offer it. Although they have been around for many years, APIs are now proving to be indispensable for organizations. Using a thoughtful approach, APIs can transform your business by accelerating go-to-market plans and allowing users to pivot quickly as customer expectations and industry trends constantly change.

In today’s fast-growing and highly regulated market, APIs can help fintechs meet ever-changing compliance standards that vary rapidly from region to region, provide access to the countries consumers want to send money to, enable fintechs to launch new services on the market quickly easily, and most importantly, makes the process of moving funds to and from different platforms easier and faster.

Better adaptation to consumer needs

In today’s digital world, consumers demand more transparency, security and speed from their money transfer services. By requiring minimal coding to implement, offering secure payment transactions and speeding up a go-to-market strategy, APIs can benefit fintechs, enterprises, banking institutions and startups.

APIs benefit not only the company implementing them, but also the overall customer experience they provide. They have been proven to reduce response times for data uploads and help simplify automated processes in applications. In powering mobile and web applications and Internet of Things (IoT) devices, APIs are used as a simplified way to transfer business-critical information. They play a key role in digital and customer experience initiatives for businesses of all sizes.

APIs can be the building blocks for digital transformation of a business, but to do so these organizations need to define what API-enabled features they need and the infrastructure required for their team. In addition, it will be important to measure the results of these efforts to optimize the organization’s API program and continue to develop the solution.

As customer preferences and the global standards for transactions continue to evolve, API integrations are the answer for banks to meet customer needs.

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