Banking application programming interfaces (APIs) are an important part of the technological advancements that are reshaping the way customers and businesses interact with money. Tech has changed the way financial institutions do business (e.g., online banking) and the types of institutions that are able to provide financial services to customers.

Below, we’ll explore what API banking is, how it works, how it’s being used, and what benefits it offers businesses.

What’s in this article?

• What is an API?
  
• What is API banking?
  
• How does API banking work?
  
• Use cases and applications of API banking
  
• Benefits of API banking
  
• Emerging trends in API banking
  
• How Stripe Connect can help
  

What is an API?

APIs are communicative protocols—essentially, sets of rules and tools—that enable different software components to communicate and share information with one another. These protocols define the methods and data structures that developers can use to communicate with the software component, whether that’s an operating system, library, or different service.

What is API banking?

API banking is the use of APIs to give authorized third-party applications access to banking services and financial data. Through well-defined APIs, third-party developers (or other banks) can use banking functions such as payments, identity verification, and data sharing.

By using API banking, a financial institution can create an interoperable system that can communicate directly with external platforms and applications—rather than a closed-off entity with proprietary systems. This design facilitates the rapid development, testing, and deployment of specialized financial services.

How does API banking work?

API banking uses a layered architecture where each layer serves a distinct function and all layers interact with each other through well-defined APIs. The primary functionalities that a bank offers (e.g., account management, payments, data analytics) are abstracted and exposed through APIs for third-party consumption. In other words, they’re opened up and simplified to be easy enough for third parties to use.

Starting with the core services layer, each banking function—whether that’s payments, Know Your Customer (KYC) verifications, or transaction history—is encapsulated into a distinct module with its own API. The API adheres to specific protocols and uses standardized data formats such as JSON and XML, which provide a consistent way for third-party developers to interact with the bank’s services.

The API gateway authenticates and routes incoming API calls from external services, acting as a protective layer that guards the core services. When a third-party application wants to initiate a payment or access account data, it sends a request to the API gateway. The gateway identifies the incoming request, performs any required security checks, such as token validation and OAuth authentication, and routes the request to the appropriate service module.

This modular system enables faster, more targeted improvement within financial services. Developers can access specific banking functions in real time without having to interact with or understand the entire system. For example, a fintech startup can build a specialized payments service using just the payment API, without having to integrate all other banking services.

This layered setup lets businesses update or replace each part independently of the others, providing flexibility and easing the burden of maintenance. Businesses can also implement security measures at the API-gateway level to ward off unauthorized or malicious access to core banking systems. Often, monitoring and analytics layers are built on top of these APIs, and they track API usage, latency, and other performance metrics. These analytics allow businesses to spot trends, anticipate bottlenecks, and maintain optimal performance.

Use cases and applications of API banking

API banking enables embedded payments and banking-as-a-service (BaaS). These applications represent the changing nature of financial services and enable rapid development and increased accessibility, as well as a range of financial products that address specific customer needs. Here’s a closer look at these two applications.

Embedded payments

Embedded payments result from the direct integration of payment processing into third-party platforms or applications. This improves the customer experience by eliminating the need for customers to leave an app to complete transactions.

• Payment gateways and APIs: Typically, APIs from payment processors serve as the central element of embedded payments. They process different kinds of transactions, including credit card payments, payments via digital wallets, and wire transfers. Developers use these APIs to establish connections between their applications and payment networks.

• Real-time processing: The capability for real-time transaction processing is what distinguishes embedded payments. The moment a customer initiates a payment, the API calls are activated to process the transaction, validate customer credentials, and update bank account balances—and often, this happens within milliseconds.

• Use cases: Ecommerce platforms are a good example of embedded payments in action. Embedded payments allow customers to check out without needing to switch to another website, minimizing required steps and accelerating the purchasing process. In subscription services, embedded payments facilitate the automatic renewal of services without necessitating customer intervention.

BaaS

BaaS is an end-to-end process that allows third parties to access and use the core banking functionalities via APIs. Often, BaaS providers are banks that offer sets of APIs to enable third-party platforms to launch their own branded financial products.

• Functionality: In a BaaS arrangement, the functionalities can range from simple services (e.g., checking account balances, transaction histories) to more specialized services such as credit scoring, loan origination, and identity verification.

• APIs and third parties: In BaaS, the set of available APIs is comprehensive, allowing third-party platforms to access financial data, initiate transactions, and develop new financial products. Financial institutions, fintech startups, and even nonfinancial enterprises can use these APIs to build various applications such as personal finance managers and specialized lending platforms.

• Use cases: One example of BaaS is a retail business that wants to offer its customers financial products. BaaS lets the retail business provide options such as branded credit cards and loyalty programs without needing to build the financial infrastructure from scratch. Another example is for a fintech startup that offers specialized investment platforms. With a BaaS setup’s APIs, the fintech startup can access banking functionalities to develop its product.

Benefits of API banking

API banking has become an integral part of modern financial technology. As it continues to shape the industry, several key benefits emerge. Here are some of those advantages:

• Rapid development and deployment: API banking can shorten development cycles. With predefined sets of functionalities available through APIs, developers can plug into banking services immediately. This rapid development cycle speeds up the time to market for new products and facilitates faster updates for existing ones.

• Flexibility and modularity: APIs offer developers the ability to select individual functionalities and incorporate them into different applications. Financial institutions and third-party developers can pick and choose which services they want to include in their financial products.

• Strong security layers: It’s common for API banking architectures to include robust security features such as authentication protocols, data encryption, and other measures that are designed to prevent unauthorized access. Often, these security features are built into the API layer itself and offer robust protection for both the bank and customers.

• Scalability: APIs are designed to handle varying degrees of demand. Whether the business in question is a small startup or a large enterprise, APIs can accommodate different scales of operation without requiring a revamp of the entire system. This scalability is particularly advantageous for growing businesses.

• Easier maintenance: Modular API architectures allow developers to update or replace individual components without affecting the overall system. This capability makes it easier to maintain and improve the service without disrupting the customer experience.

• Interoperability: API banking improves interoperability between different systems and services. Financial institutions can easily interact with third-party services, and vice versa, to offer a broader range of capabilities. And this interoperability extends beyond the financial sector to retail, healthcare, and other industries.

• Real-time analytics and monitoring: APIs frequently come with built-in analytics features. These allow businesses to track transactions, usage patterns, and system performance. These analytics can offer actionable insight for business strategy and operational improvements.

• Revenue generation opportunities: API banking opens up new avenues for generating income. Financial institutions can monetize their APIs (e.g., through a pay-per-use or subscription model), letting third-party developers offer value-added services to their customers.

• Better customer experience: API banking facilitates smoother and more convenient interactions for the customer. It can quicken payment processing or make financial management tools more intuitive. Benefits like these elevate the overall customer experience.

These important benefits help make API banking a transformative force in financial services.

Emerging trends in API banking

API banking is quickly developing, with new trends and regulations continually changing this sector. These are some of the biggest emerging trends.

Instant payments

Growing demand and new regulations are pushing for payments to happen in seconds rather than minutes or hours. More countries are developing their own instant payment networks, such as the Unified Payments Interface (UPI) in India and Pix in Brazil.

Some jurisdictions have even mandated shorter settlement times. The European Union, for example, adopted regulations in 2024 that require SEPA Instant Credit Transfers to arrive within 10 seconds.

Broader data access

Beyond account balances and payments, APIs are also being used for richer financial data such as investments, insurance, mortgages, and pensions. This gives more holistic views of customers’ financial lives, enabling more personalized products and risk assessments.

Automation and AI

With large volumes of transactional data flowing through APIs, there are more opportunities (and need) for automated compliance, fraud detection, and real‑time risk monitoring. Businesses are using AI to flag anomalous behavior, verify identities, and monitor transactions.

Regulatory sandboxes

To foster improvement while managing risk, many regulators are offering testing environments (i.e., sandboxes) for API banking where companies can trial new services under light supervision. This helps them explore novel API‑based services with oversight.

How Stripe Connect can help

Stripe Connect orchestrates money movement across multiple parties for software platforms and marketplaces. It offers quick onboarding, embedded components, global payouts, and more.

Connect can help you:

• Launch in weeks: Use Stripe-hosted or embedded functionalities to go live faster and avoid the up-front costs and development time usually required for payment facilitation.
  
• Manage payments at scale: Use tooling and services from Stripe so you don’t have to dedicate extra resources to margin reporting, tax forms, risk, global payment methods, or onboarding compliance.
  
• Grow globally: Help your users reach more customers worldwide with local payment methods and the ability to easily calculate sales tax, VAT, and GST.
  
• Build new lines of revenue: Optimize payment revenue by collecting fees on each transaction.
  

Monetize Stripe’s capabilities by enabling in-person payments, instant payouts, sales tax collection, financing, expense cards, and more on your platform.

Learn more about Stripe Connect, or get started today.