In fintech (financial technology), APIs (application programming interfaces) connect different technologies and services and are behind many now-ubiquitous services, such as banking apps and instant stock trading apps.

Fintech services, which are largely powered by financial APIs, make up a large and growing market. Global fintech investments totalled $113.7 billion in 2023. Financial APIs are the channels through which different financial platforms communicate and share capabilities. By setting the rules for data exchange, these APIs enable interoperability between disparate systems and create new possibilities for user engagement and service delivery.

Financial APIs increase access to financial services and empower new businesses to improve their offerings. They promote innovation and allow businesses to create tailored experiences that meet and exceed consumers’ evolving expectations.

Below, we’ll explain how financial APIs work and how they are changing fintech.

What’s in this article?

• How financial APIs work
  
• Key features of financial APIs
  
• Businesses that use financial APIs
  
• How APIs are impacting fintech
  
• Benefits of using financial APIs
  
• Security in financial APIs
  

How financial APIs work

Financial APIs, or application programming interfaces, are software intermediaries that allow different financial applications and systems to communicate and exchange data. They bridge financial institutions (e.g., banks) and third-party services (e.g., budgeting apps, investment platforms).

Here’s how financial APIs work.

• Request: A user initiates a request through a third-party application (e.g., checks their bank balance on a budgeting app).

• Authentication: The API authenticates the request, confirming that the user has authorised the third-party application to access their financial data.

• Data retrieval: The API retrieves the requested data from the financial institution.

• Data formatting: The API translates the data into a standardised format that the third-party application can understand and use.

• Response: The API sends the formatted data back to the third-party application, which displays it to the user.

Key features of financial APIs

Financial APIs provide accurate financial data while upholding the high standards of security and compliance that the financial industry requires. They are powerful tools for building sophisticated and secure financial applications. The key features of financial APIs include:

• Real-time data access: Financial APIs allow individuals and businesses to access financial data in real time, which is particularly important since many pieces of financial information – such as stock prices, currency rates, and account balances – change frequently.

• Multi-factor authentication (MFA): Financial APIs incorporate multi-factor authentication so only authorised users can access sensitive financial data. This authentication process might involve a combination of passwords, biometric data, and one-time codes sent via SMS or email.

• Secure communication: Financial APIs typically use SSL/TLS encryption for all data transmissions to protect data integrity and confidentiality. This ensures that all data sent between the client application and the API server is secure.

• Documentation and software development kits (SDKs): Financial APIs typically come with comprehensive documentation including detailed instructions, best practices, code samples, and troubleshooting guides, as well as SDKs for a variety of programming languages.

• Scalability: Financial APIs can handle varying loads of requests, and can scale to meet the needs of small applications and large-scale enterprise systems.

• Transaction and payment processing: Financial APIs facilitate different types of transactions including payments, transfers, and refunds. They can connect directly to payment gateways, banks, or other financial institutions to process these transactions.

• Regulatory compliance: Financial APIs comply with relevant financial regulations and standards such as Payment Card Industry Data Security Standard (PCI DSS) for payment data and General Data Protection Regulation (GDPR) for data protection in Europe. This compliance helps businesses avoid legal issues and maintain trust with consumers.

• Error handling: Financial APIs have error handling mechanisms that communicate any errors that occur during API calls to the developer or application. This includes detailed error messages and codes that help diagnose and resolve issues quickly.

• Unified APIs: Financial APIs can act as a single point of access for multiple financial services and institutions, simplifying the integration process and allowing developers to add features from different financial institutions without partnering with each one individually.

• Analytics and reporting: Financial APIs often include analytics and reporting features that help businesses track and analyse transaction data, monitor user behaviour, and generate reports for financial planning and auditing.

Businesses that use financial APIs

Businesses other than banks use financial APIs to provide financial services to their customers. Here’s a rundown of the types of businesses that use this technology.

Fintech companies

• Personal finance apps: These apps use APIs to aggregate financial data from accounts, track spending, create budgets, and provide users with financial insights.

• Payment processors: Companies such as Stripe use APIs to enable businesses to accept online payments.

• Neobanks and challenger banks: Neobanks and challenger banks are digital-only banks that rely on APIs to connect with traditional financial institutions and provide banking services through mobile apps.

• Robo-advisors: These automated investment platforms use APIs to access market data, manage portfolios, and execute trades on behalf of clients.

• Lending platforms: Peer-to-peer lending and online loan providers use APIs to assess borrower creditworthiness, process loan applications, disburse funds, and automate loan processes including origination, underwriting, and disbursement. APIs also allow these businesses to provide customised loan products based on borrower financial data.

Traditional financial institutions

• Banks: Increasingly, banks are adopting APIs to offer open banking services, which allows customers to share their financial data with authorised third-party providers.

• Credit unions: Similar to banks, credit unions use API to improve their digital offerings and offer members access to better financial tools.

• Insurance companies: Insurance providers use APIs to simplify claims processing, gather customer data, and craft personalised and usage-based insurance products.

• Wealth management companies: Wealth management companies use APIs to provide personalised investment advice, portfolio management, and automated rebalancing based on individual risk profiles and financial goals.

Other types of companies

• E-commerce platforms: Online retailers use APIs to integrate payment gateways and instalment payment options and to provide personalised shopping experiences based on customer spending patterns.

• Accounting software providers: Accounting software companies use APIs to connect with bank accounts, automate bank reconciliation, and generate financial reports.

• Real estate platforms: Real estate websites and apps use APIs to verify income and employment information, assess affordability, and facilitate mortgage applications.

• Government agencies: Government agencies use APIs to collect financial data for tax purposes, distribute benefits, and track economic activity.

How APIs are impacting fintech

APIs drive innovation in fintech by facilitating access to financial data, collaboration between companies, and business opportunities for platforms outside the financial sector. Here’s an overview.

Democratisation of financial data

• Open banking: APIs have enabled the open banking movement, through which customers can grant third-party providers access to their financial data held by banks. This has opened up opportunities for fintech companies to develop innovative products and services tailored to individual needs.
  

Faster time to market

• Reduced development time: APIs provide pre-built functionalities for common financial tasks such as payment processing, account aggregation, and data analysis. This reduces the time and resources required for fintech companies to develop and launch new products.

• Modularity and reusability: Fintech companies can integrate and combine APIs to create new financial solutions, which allows them to focus on their core value proposition rather than build from scratch.

Improved customer experience

• Personalisation: APIs enable fintech companies to access and analyse customer data and create personalised financial products and recommendations. This leads to a more tailored and engaging user experience.

• Integration: APIs allow fintech apps to integrate with other platforms and services, providing users with a unified and convenient experience across different financial touchpoints.

• Real-time updates: APIs can provide real-time access to financial data, allowing users to make informed decisions.

Collaboration

• Partnerships: APIs promote collaboration between fintech companies, traditional financial institutions, and other technology providers. This leads to the development of new business models, products, and services.

• API marketplaces: API marketplaces allow fintech companies to discover and integrate APIs from different providers, accelerating innovation.

New business opportunities

• Banking-as-a-service (BaaS): APIs enable BaaS, which allows non-bank entities to offer banking services by using the infrastructure and licences of established banks. This opens up new revenue streams for banks and allows fintech companies to enter the market without a banking licence.

• Embedded finance: APIs enable the integration of financial services into non-financial products and platforms, creating new revenue opportunities for fintech companies and enhancing the value proposition of existing products.

Financial inclusion

• Accessibility: APIs can help bridge the gap between traditional financial services and underserved populations by providing access to affordable and convenient financial products through digital channels.

• Alternative data sources: APIs can use alternative data sources such as mobile phone usage and social media activity to assess creditworthiness, creating greater financial inclusion for individuals with limited credit history.

Benefits of using financial APIs

Financial APIs offer numerous benefits for businesses, from easier onboarding to new revenue streams. These benefits include:

• Personalised financial services: Businesses can use APIs to access and analyse a customer’s financial data and offer them products, services, and recommendations based on individual needs and preferences.

• Easier onboarding: Financial APIs create easier customer onboarding processes by automating identity verification, account opening, and risk assessment procedures.

• Better user interfaces: By integrating APIs into their platforms, businesses can provide users with a more intuitive and user-friendly experience, with features such as real-time account updates, transaction categorisation, and spending insights.

• Reduced manual labour: Financial APIs automate manual tasks such as data entry, reconciliation, and reporting, freeing up valuable time and resources that businesses can use to focus on core activities, such as lowering operational costs.

• Faster development: APIs enable businesses to quickly integrate new financial features and services into their existing platforms, reducing development time and accelerating time to market for innovative products.

• New revenue streams: Businesses can use financial APIs to develop new value-added services such as personalised financial advice, investment management, and insurance products, generating additional revenue streams.

• Partnerships and collaboration: APIs facilitate collaboration between businesses and financial institutions, promoting innovative partnerships and joint products and services.

• Access to new markets: Financial APIs can help businesses reach new customer segments by creating tailored financial solutions through digital channels, expanding their market reach and customer base.

Security in financial APIs

Financial APIs handle extremely sensitive data, and security is the single biggest risk in building and using them. APIs create an increased attack surface, exposing more endpoints and potentially increasing vulnerabilities. Integrating multiple APIs and managing their security can be especially complex.

Best practices for protecting APIs include following security standards such as the financial-grade API (FAPI) guidelines, limiting data access to only necessary permissions, using multi-factor authentication and strong passwords, tracking usage patterns and detecting anomalies, and educating users on how to protect their data and recognise potential threats.

Security features

Here are the core security features and processes involved in financial APIs.

Authentication and authorisation

• Strong Customer Authentication (SCA): SCA requires multiple factors to verify a user’s identity, usually something they know (password), something they have (phone), and something they are (biometrics).

• OAuth 2.0: This protocol enables secure authorisation for third-party applications to access user data without sharing their login credentials.

• OpenID connect: This layer on top of OAuth provides identity verification for users.

Encryption

• Transport layer security (TLS): This encrypts data in transit between the API and the application or user, preventing interception.

• Data-at-rest encryption: This protects data stored on servers from unauthorised access.

API gateways

These act as intermediaries between the API and the consumer, managing traffic, enforcing rate limits, and filtering requests to prevent attacks.

Input validation and sanitisation

This ensures that only data that is properly formatted and safe enters the API to prevent injection attacks.

Threat detection and prevention

• Intrusion detection systems (IDS): These monitor network traffic for suspicious activity.

• Web application firewalls (WAF): These guard against common web attacks such as SQL injection and cross-site scripting.

Security processes

• Regular security audits: Continuous testing and vulnerability assessments help identify and address any weaknesses.

• Data minimisation: Collecting and storing only necessary data reduces the potential impact of a breach.

• Incident response plan: Having a well-defined plan in place ensures a swift and effective response to any security incident.

• Compliance: Depending on where they operate, financial APIs must adhere to regulations such as GDPR, California Consumer Privacy Act (CCPA), and the revised Payment Services Directive (PSD2).