In recent years, the global financial landscape has experienced a remarkable transformation because of the meteoric rise of FinTech.
The industry is expected to attain a staggering $699 billion global market size by 2030. Several factors, including strategic market positioning, the launch of innovative offerings, and the effect of social distancing during the pandemic, have led to this unprecedented surge.
Nonetheless, interconnectivity between systems is an essential aspect of this financial revolution.
In today’s financial ecosystem, the level of connectivity between different entities is at an all-time high. Mobile applications, traditional financial institutions, payment gateways, credit card issuers, and lenders have partnered to improve user services.
The robust tech that underpins these financial transactions is APIs or application programming interfaces.
What is a FinTech API?
APIs are programming components that define the standards that software components have to adhere to when they interact with one another programmatically (i.e., through code). FinTech APIs are the ones that enable organizations to incorporate financial services and banking elements into their applications.
Unknowingly, most users have presumably worked with a FinTech API. For instance, when an individual makes an e-commerce order, the app uses a payment gateway API to verify and handle the transaction.
A personal finance app that employs an open banking API to access account balance information and evaluate expenses is another instance of how these APIs are now a part of our daily lives.
There are two reasons why FinTech APIs are so important: making incompatible systems work together and hiding sensitive system information that could expose users to financial fraud.
By default, most financial platforms are incompatible. They use various languages for programming, call functions, and other technical guidelines. They are built by different organizations using a variety of network protocols and specifications. Consequently, an API has to work as an interpreter.
FinTech APIs also permit the segregation of entities, facilitating a secure data exchange without divulging the logic behind it. This is essential for financial security. With APIs, internal reasoning is protected from severe risks. For example, a hacker might be able to figure out how to steal or corrupt sensitive data.
How Do FinTech APIs Work?
From a programming standpoint, APIs are similar to building components. Like classes and functions, they are placed in your code to carry out specific actions or yield a particular result. When an app user attempts to submit a request (like withdrawing cash from an account), the API sends that request to the third party.
The receiving system then reviews or authorizes the request and transmits details to the application.
Card details are sent via APIs to the payment operator in the background to corroborate the transaction. The data is subsequently sent to the app, which (if successful) validates the order. The API retains a distinct separation between the application and the third party. It also imposes safety measures that prevent unauthorized requests from anyone.
However, this doesn’t mean that APIs are risk-free. Cybercriminals frequently exploit API vulnerabilities. API security is, therefore, vital to FinTech app cybersecurity policies, mainly due to the massive amounts of financial data and personally identifiable information (PII) they handle.
How Are FinTech APIs Used to Improve Financial Processes?
FinTech APIs help integrate payment and other financial service features (e.g., data analysis) into apps. Thanks to APIs, even a non-banking application like a social media platform or collaboration app can be endowed with FinTech capabilities. Some of its key uses include:
1. Fetching and displaying financial data
These APIs enable third-party applications to get hold of financial data like bank account values and account balances. You might be able to look at your Venmo account balance based on your jurisdiction.
Most primary institutions offer APIs for aggregating data. Citibank, for instance, provides a wide range of APIs that enable applications to connect to their accounts, settlements, and security features. Although reliable and safe, bank-specific APIs are restricted to transactions within that institution.
With the global acceleration of open banking initiatives, financial data aggregators will become one of the most influential APIs shaping the next phase of fintech.
2. Verifying user identity through Know Your Customer (KYC) protocols
Know Your Customer (KYC) is a core compliance process in many countries, even though it may adversely affect the user experience. When FinTech app developers oversee KYC independently, they encounter problems like more extended enrollment periods, higher costs, and security risks.
Therefore, KYC APIs offer a simple solution by managing the authentication process and its complexities. They are built by companies specializing in identity verification tools for the financial services sector, with dedicated resources to do so. KYC APIs often employ video interviews and facial biometrics to keep the process seamless.
3. Authenticating user access to the FinTech app
Given the alarming frequency of cybersecurity attacks that the FinTech industry experiences, security is a vital component. And, as the sophistication of cyberattacks increases, it is imperative that protective measures also evolve continuously.
Thankfully, security APIs can be easily integrated into applications. These relieve developers of the hefty burden of creating and executing them in-house.
Organizations can use device-native solutions like Face ID or the Android Biometric Library for biometrics. Also, multi-factor authentication (MFA) brings an additional layer of security, which can be implemented using systems such as the Duo Auth API and others.
4. Processing payments and fund transfers
Payment processors are the fundamental APIs that influence FinTech and the online economy. These intermediaries receive, validate, and handle payments for a range of online transactions, both peer-to-peer and from individuals to businesses. Many of these APIs also work well with automation, making them suitable for executing scheduled transactions.
Stripe, PayPal, or MangoPay are popular FinTech APIs for this use case. According to research, the payments sector is the FinTech segment with the best and most consistent performance. This is because these APIs are required by essentially any FinTech app that involves payment processing.
Payment processors are indispensable since they manage sophisticated payment processes for which developers struggle to create solutions. This includes currency exchange, anti-fraud detection, and cybersecurity.
5. Passing buy/sell trade transactions
Creating investment apps can be challenging, but devising trading algorithms for the market is one of the most difficult aspects of this FinTech segment. Thankfully, organizations don’t have to start from scratch because many excellent broker APIs are created for this specific purpose.
Like their human counterparts, broker APIs purchase and sell assets on the market on behalf of the user. A variety of broker APIs are available. Some platforms offer trading in every market and asset class, including cryptocurrency. Others concentrate only on providing detailed stock information and enabling decision-making.
These FinTech APIs allow investment and trading capabilities to be integrated into other FinTech applications, like personal finance and online banking.
Why FinTech APIs Are a Crucial Building Block for the Industry
The usage of APIs benefits both the app’s creators and the consumers. FinTech APIs save development time since they allow companies to skip building new functionality from the start. If you outsource API governance to a company specializing in FinTech, you may save money on development and upkeep.
However, APIs also allow businesses to provide previously unavailable functionality or services.
Large banks, for instance, have a leg up on their digital competitors since they can provide services like deposit insurance and lending because they have the proper licensing. With Banking as a Service (BaaS), apps may use an API to connect to a bank’s resources, allowing those who don’t have banking licenses to provide banking services.
FinTech APIs are responsible for spurring industry innovation without compromising security or risk.
Next, read Fiserv’s discussion on why open banking is the future of the banking industry. If you liked reading this article, click on the Facebook, LinkedIn, and Twitter buttons on the top to share it on social media.
