Integrating Banking APIs: Advantages, Compliances and Challenges

Before we dive deep into Banking API Integration. Lets understand why Banking API or open banking integration were required, with this small imagination.

A click and banking is done!

Imagine :– With a single click the payment is done, the bills are paid, the recharge is done, the balance is checked, and whatnot.

Surely, years back, who would have thought of this? With smartphones being a necessity, we see digital transformation in every sector. Although a little late with its challenge and compliance in integrating bank API for fintech applications. The banking sector has amazingly adopted advanced technology. Banking API Integration has thus became an integral part for every bank.

Customers can ditch waiting in those long queues for hours in the branch of their banks. Even to accomplish a teeny tiny task. 

Today, most of our banking tasks are done with just a tap. No matter how small or big, significant or insignificant the task is. The prudent shift of financial institutions from customer-teller transactions to customer mobile transactions indicates a drastic change.  

Why Do Banks Choose to Go Digital? 

Growing trends are one reason. But another significant reason banks went digital is the ease and automation they can offer their customers. The secret to surviving any industry is to provide the users the ease of taking the service and helping them grow. Hence to accomplish this feat. Banks offered API & its integration.

Some of the most dominant reasons why banks chose to go digital are: 

(1) Convenience and Time-Saving Alternative

Everyone in today’s fast-paced world wants their tasks to be done instantly. No one wants to visit their bank physically. T Mobile & Internet banking is more popular now a days. The best part is thanks to technology, it is extremely convenient and has zero time constraints that a branch generally follows. 

This big change also guided all the financial institutions to establish platforms much more convenient for the customers to operate.

(2) The Extended Mobile Penetration

With the massive surge in the use of smartphones, people love to perform most tasks, especially related to banking, on their handsets. A recent study revealed that over 70 percent of smartphone users prefer mobile or online banking to conduct their banking transactions.

(3) The Value of an Ergonomic Interface

The app’s interface plays a crucial role in attracting users and keeping them lingering there for a long time. An attractive and class-apart interface always fuels the rapid growth of smartphones and their usage for mobile banking. Making the complex task of conducting financial transactions by the customers themselves should be the major aim of any interface related to the banking sector.

(4) Cost-Effective Platform

By going digital, banks across the globe have managed to save a huge amount of money they generally used to spend on new branches and maintaining the staff there. Setting up platforms for mobile or internet banking that are able to perform banking transactions and other related tasks is a single initial expenditure with a relatively low maintenance cost. Check out here cost to develop ewallet app.

(5) Extensive Outreach

The alternatives to traditional banking, such as mobile and internet banking, allow for the elimination of time and location constraints, thereby providing convenience. Such easy functionality with the huge convenience of easy access has boosted the customers’ reach to embrace banking services widely.

(6) Customer Loyalty

One of the major tools used to get customers’ loyalty consists of enhancing customer convenience. With easy access to their financial status, they feel more empowered. 

(7) Competence

Financial institutions, including banks like JP Morgan, M-Pesa, La-Caxias, and Monetise, always focus on designing products that make their own space in the customer segment. However, embracing online/mobile banking as the latest technological platform is no more a competitive leverage but a necessity.  With the same intent all small and large banks started offering and consuming Banking API Integration.

Unlike other domains, the banking segment cannot simply enter the market with a mobile application. There are various government compliances and norms that one needs to stick by. The safety and security of the customers are other important aspects to take care of. Over the years, we have 

Banking APIs: The Driving Force Behind All Online Transactions 

Presently, the payment industry is thriving, constantly experiencing disruption driven by new players, new risks, and continued opportunities. So, who exactly are the key drivers of this shift? Well, they are none other than the robust Application Program Interfaces, aka APIs, which completely transcended the technology. Offering Bank API and its integration is thus now not a luxury but a need for all.

Looking back, APIs have been there for almost two decades, and at that time, they remarkably helped big firms like Amazon, eBay, and Salesforce, making them scale and grow. Since then, they have transformed many industries, brought in new opportunities, and enhanced rewards against the risks of the digital landscape. In travel, API-driven public applications like Expedia & Travelocity enable shoppers to choose their best travel option while the partner, data apps, or device share the information, enhancing sales, service, or logistics. Banking API Integration was provided by Banks.

Many banks and financial firms acknowledge that going to the market with an API-enabled approach will offer them a chance to gain market benefits. For example :- Bank API share some data-heavy information to 3rd party so they can reuse the data for reselling. This add value to the customers banking experience.

Read Also: How to Create a Mobile Banking App Successfully

What Is Banking API? How do banks use API?

To understand an API in the banking context, one must first understand what an API is. An API, or application programming interface, is essentially a piece of software that connects to other software. An API is software that serves as the interface between applications, as the term suggests.

APIs are essential in the Banking as a Service (BaaS) sector. BaaS refers to services that allow banks to offer consumers digital services or interface with other digital services. This is termed as Banking as a Platform (BaaP) or Banking Software as a Service (banking SaaS). BaaS providers like Treasury Prime offer API banking. Additionally, Treasury Prime links banks and fintech directly so that they can develop ties.

A fintech business is often called “Fintech Banking As a Service.” The term “fintech,” which stands for “financial technology,” broadly refers to the technology used in financial operations. Businesses that offer banking as a service (BaaS) help other fintech that needs to integrate banking services into their applications. Fintech includes BaaS, neobanks (online-only banks), day trading applications, payment apps, and other financial technology tools. Top fintech firms include PayPal, Stripe, Square, Gravity Payments, and Affirm, to name a few.

What is Open Banking?

Open banking is getting popular to reshape the traditional banking industry & make it accessible online on mobile devices. Open banking or “open bank data.” in banking is a standard practice that allows 3rd party financial service providers open and easy access to the consumers account for tracking the banking, transactions, and any other financial data from banks and non-bank financial institutions. To offer easy open access banks provide API or application programming interfaces (APIs). Thus open banking allow the linking of accounts and exchange of data between multiple institutions for use. Customers, financial and non-financial entities use this data. Even 3rd party service providers access such open data. Thus open banking API integration is required.

Is open banking the same as API?

Generally Open banking & API banking are referred the same. In fact, API in banking help 3rd parties to build blocks for developing banking solutions for the customers. While open banking provide 3rd parties with the credentials & data of banks customers. Thus they are different. In Open Banking Integration API are utilized.

The Growth of APIs in Banking

A McKinsey survey of 2020 on APIs in banking. Banks use 3 quarter of all the API for internal use. Also, by the end of 2025, the banks plan to increase the number two folds.

5th banking APIs are categorized as “external,”. They support integration with other commercial partners. By 2025, banks want to have twice as many of these APIs available. Last but not least, 5% of banking APIs are “public,” utilized by outside developers for open banking reasons such as generating revenue and participating in ecosystems. The McKinsey analysis shows that banks anticipate using three times as many public APIs by 2025.

The distribution of APIs among the three types shows the priority of APIs for banks. The main goal was to enable agility and partners while reducing IT complexity through internal APIs. Sadly, “innovation” came in just fifth.

Why Does Fintech Rely on APIs for Work?

APIs are an integral part of any digital enterprise and are crucial for successful digital transformation. Looking beyond the IT-driven project, it is vital to understand the need to treat an elaborate API program as a joint venture between the business & technology.

At their very core, these business products are best designed to address a particular requirement. They address it in an appealing, easy-to-consume manner. The more people use API, the larger it is going to be its impact.

Related Blog: Hiring Mobile App Developers? Read this before you start!

Reasons for Banking API Integration

(1) Scale: If a specific set of APIs gains rapid prominence. For instance, payment processing API used in mobile apps increases, then the providers can address that demand. Scans any performance issues & easily scale products.

(2) Developer Portals: Developers need a portal for API access with ease. It enables them to communicate with the other developers and the API host, which helps them learn how to best utilize the API. It also enables the providers to learn from the community and better understand it. This will help drive positive business results for each individual involved.

(3) Analytics & Tracking: With an effective API platform, it is easier to monitor API usage, traffic, API economics, API adoption, run-time performance, and several other measures that point to return on investment performance.

(4) Stability: The current market is evolving, and the vendor landscape is rapidly changing, with traditional technology firms acquiring API management platforms that help them make their overall integration offerings more appealing. Thus, at times navigating through this environment can be quite complex.

More supporting reasons for integrating bank API

(5) Accountability: APIs can greatly contribute to the organization’s digital vision, and this one vital factor makes it enough to embrace & execute an API strategy.

(6) Documentation and Lifecycle: To attain efficiency & effectiveness, you need tools that help manage processes for developing, designing, publishing, deploying, versioning & governing APIs. If we use tools not designed for API, it can lead to errors & can turn procedure complex.

(7) Agility & Speed: Banking & Financial service providers require these two crucial development traits to adequately capture market opportunities. These are best gained when IT and business work together. Acting rapidly and effectively to fund API-enabled opportunities.

(8) Dual-Speed IT: An API layer effectively extracts the data required from the backend systems and makes data consumption easy. This removes any divergences hindering innovations, like web, mobile, or any other.

What Are the Advantages of Using APIs in the Banking Sector?

Fintech or banking is one sector that, although it started slowly, has started adopting the latest technology in an exciting way. We have moved to digital banks, wallets, and cards from mobile and internet banking. From cashless to card less, we have come a long way thanks to the growing APIs in the sector. 

Pros of Banking API Integration

(1) Improve Customer Experience

Your clients depend on you for banking, insurance, wealth management, and other services. A successful client connection is based on timely, accurate account data accessible easily around the clock. Customers may swiftly finish their financial activities and move on when they have a simple route to safe, accurate information. They may be confident that their bank has their best interests in mind when it provides the solution that will satisfy their needs.

(2) Accessible Data Provision 

Your apps must connect due to the large range of core systems (such as FIS Horizon, Fiserv, and Jack Henry) and third-party applications that banks utilize. It provides better access to data, which drives actionable business insight, and boosts productivity and profitability. API retrieve siloed data to represent in meaning way.

(3) Integrate Legacy Systems and Third-party Applications 

Accessing all resident data can be difficult if your bank uses many systems and third-party applications. You cannot access the abundance of data you have gathered if your systems don’t talk to one another. APIs resolve data communication problems. Increasing your investment and the overall worth of your main system and third-party applications.

More pros of Banking API integration

(4) Prospects for Product Development 

Banks and credit unions create in house products frequently. And Generally they distribute those through exclusive sales channels. With the introduction of third-party products and APIs, you may use those products to promote to a larger audience through the financial marketplace ecosystem if you so choose.

(5) Portability of Functionality 

APIs is available when you need them. Your applications can collaborate as new business prospects. Present themselves if they are created utilizing standards like REST and Open API. Their accessibility and modularity enhance the development and use of interfaces.

(6) Automate to Save Time

All banks focus on getting rid of manual chores. Hands-on work requires time and might result in erroneous data, misunderstandings, and missed opportunities. APIs improve data entry and output control while automating manual operations like spreadsheets and human analysis.

(7) Boost Workers’ Productivity 

Due to the sheer number of projects, customer demands, growing regulations, and constantly changing compliance standards, all staff are under more stress than ever. IT and operational employees may work more efficiently and quickly with the use of APIs, freeing up time for them to focus on other tasks. APIs assist in easing the load of data administration and integration. Above all it is frequently connected to time-consuming data integration initiatives.

(8) Boost Security 

The emphasis on security is raised while developing APIs using recognized programming standards (like REST and Open API). Because of their open architecture, which enables greater security, monitoring, and performance, they can be handled as needed, which improves security.

Security and safety have been major concerns as we have started relying on one-click payment methods. Using APIs in the banking sector has its pitfall. The experts are trying to figure out how things would work in the given environment. 

What Are the Disadvantages of Using APIs in Banking?

Some of the major disadvantages of using banking APIs are 

Cons of Banking API Integration

1. Expensive 

The initial cost of using the API and integrating it could be expensive. Ensure your fintech app development company chooses the best solutions to fit your budget and satisfy your customers. 

2. Security 

Security, in general, is a major threat when you expose data online. Since the sector deals with sensitive data, the risk increases several folds. 

Other cons of the Banking API

3. Expert Assistance

When using API, one needs to be an expert. Many technicalities need to be taken care of when working on an API.

Everything comes with shortcomings, but the advantages and the need for API in the banking sector are huge enough to overshadow the online presence. Integrating a mobile application with an API comes with its challenges. 

What Are the Challenges While Integrating Banking API ?

Reliability and Performance of Banking API Integration

To support open banking, banks can develop open APIs. But even then, there’s no guarantee that the APIs will function dependably, given all the different end-user configurations and third-party software they have to handle.

One reason for this is that it is more crucial than ever for developers to be able to test third-party APIs. You must be able to guarantee that any APIs your open banking application uses will continue to be high-performing and accessible to users if you want to build it. In any other case, you risk having API performance issues undermine the seamless user experience that open banking is meant to provide. Thus in Open Banking API Integration security and reliability is of high importance.

Managing Identities

No efforts have been made to develop any form of global identity management system for open banking.

This is problematic since it shows that open banking application developers don’t have a solid method for identifying and following users during integration. Data from banks can be retrieved using public APIs, but they don’t offer a way to keep track of, for instance, which accounts belong to which customers in each bank.

There isn’t a straightforward answer on this front right now. The developers must do the difficult task of integration of their identity management systems into open banking applications and the bank’s APIs.

Inadequate Compliance Requirements

In some jurisdictions, such as the E.U.’s PSD2 law and the British government’s Open Banking plan, compliance frameworks have been established to regulate open banking. There is no government-led initiative to standardize or control open banking in other countries, including the United States.

To create open banking applications, developers must deal with various compliance requirements during integration. That is mostly a political issue as opposed to a technological one. However, it has technical repercussions because it implies that no global technological standards specify exactly how open banking connections and integration should operate or how they can be used. All things considered every bank require to offer Open Banking API for Integration.

Compliances to Abide By –

• AML (Anti-Money Laundering)

As we’ve seen with the regulatory laws, financial companies must stop money laundering. Any fintech company should have anti-money laundering procedures to safeguard customers and remain viable. Financial institutions must also report suspicious transaction information to Financial Intelligence Units following AML requirements. Thus there are special Banking API Integration offered to detect transactions which can be related to money laundering.

The most important compliance in open banking api integration

• KYC Adherence 

Know Your Client regulations govern customer identification before a financial transaction to stop fraud and tax evasion. KYC verification in banking API integration is always the first step of authentication. To ensure that the crucial financial data is only shared with the right person.

• Comply with Data Security 

 Any business interacting with global payment systems is subject to the Payment Card Industry Data Security Standard (PCI DSS). The 12 standards in the PCI DSS that address fintech data protection measures differ based on the nation and card issuer (for instance, Cardholder Account Information Security for Visa Cards in Europe) and Information Security for Visa Cards in the US).

Authorized Signature for addon security.

• Certified Digital Signature 

Fintech firms should incorporate secure digital keys to verify users’ identities for online transactions.

• Client Due Diligence (CDD) 

The CDD regulation mandates that financial institutions create and maintain the following procedures: customer verification, identification verification of account holders, creation of client risk profiles, and monitoring of suspicious transactions. Customer information like names, contact information, dates of birth, nationality is collected for processing. When a customer conducts a financial operation, the system should recognize the customer, check the data and activities for potential hazards, and, if necessary, carry out Enhanced Due Diligence (EDD). Every developer needs to follow this during open banking API integration.

• Adverse Media Monitoring 

AML compliance experts in the fintech industry generally concur that unfavorable media screening is crucial. Although it isn’t fintech legislation yet, this is a useful practice in investigating and detecting financial crimes.

Security risks

An unsaid fact about the fintech sector is that security risks remain a central challenge for effective API integrations. As banks share their user data with third-party applications, protecting it becomes harder as they can’t vet or control it.

Another major challenge is identity management. Although the experts are looking for a solution to this, for now, we have no proven solution to avoid it. Comparatively technology is improving security day by day. At any rate security is always priority in banking API. In any event security research will be ongoing as more secure you build the system. More new ways will be explored equally to breach security. Thus Banking API are always audited for security breaches.

Common Regulations Related to Financial Institutions and Applications 

• The Gramm-Leach-Bliley Act (GLB) is the main privacy regulation in the US, requiring financial institutions to protect customer privacy, offer privacy policies to clients, and provide opt-out mechanisms for disclosing personal information.

• The Bank Secrecy Act (BSA) is to identify and stop money laundering. Financial institutions must keep an eye out for unusual activity on their systems and report any transactions that might be illegal.

• The US Patriot Act governs Customer identity requirements and Know Your Customer (KYC) procedures. Financial institutions must set up anti-money laundering procedures and train staff members to follow them.

• The Electronic Signatures in Global and National Commerce Act (E-Sign Act) outlines regulations for signatures and electronic documents.

• The Truth in Lending Act (TILA), which mandates a reasonable amount of time to make payments, credit card disclosures, rate changes, and payment allocations, tries to protect credit card customers.

• The Truth Savings Act (TISA) requires clear disclosure of fees and interest rates.

More Regulations for Financial Institutions and Their Partners

• The Electronic Fund Transfer Act (EFTA) governs online transaction authorization procedures.

• Financial institutions must have theft prevention software under the federal Red Flags Rule.

• The federal Affiliate Marketing Rule restricts information sharing among affiliates for marketing reasons.

• The EU and the European Economic Area are committed to ensuring payment security through the New Payment Services Directive (PSD2). PSD2 mandates that banks provide access interfaces for payment service providers and client accounts and enforces restrictions on how third parties can access payment information.

• The Financial Action Task Force recommendations and directives from the European Union emphasize the value of KYC procedures and assert that customer data checks reduce the dangers of money laundering.

• General Data Protection Regulation (GDPR) & the ePrivacy Regulation govern the Data access regulations.

Woah! We unquestionably have come a long way, but there is a long path ahead. The fintech app developers look forward to more secure solutions and can offer better assistance to business owners and banks.   

Conclusion 

In conclusion as you move ahead with the API enablement. Thus APIs as considered collaborative products to increase business revenue. It is at board-level & move beyond technological development, and it is a new way to work and create value from the outside in, and it demands commitment from both IT and business. Next, to drive quick wins, you require identifying & understanding key use cases, implementing them, and learning from them. Recognize the area businesses could miss out on and find where the new players are doing well and where you can best use the data for the business. Once you do that, you are ready to garner huge success. 

So if you are looking to integrate Banking API or open banking api integration in your forth coming Fintech projects, Feel free to contact us today as we are one of the leading Fintech App Development Company.