Banking APIs let fintech companies thrive and compete with established financial behemoths. It’s just a matter of accessing valuable client data stored in banks and other institutions and using it in innovative products and services.
For decades, all client information related to bank accounts was kept confidential to parties other than customers and bank employees. If a client wanted to share this data with another institution, for instance, to get a credit score from a lender, he or she had to apply for an official bank statement, often for a fee. With online banking things got simpler, allowing clients to access their data anytime, anywhere, but it was still hard to obtain this information in a trusted, verified form that could be accepted by third parties.
Banking APIs Unlock The Doors
This is where banking APIs came to help, enabling institutions to directly access client data in banks with a customer’s consent. The idea behind a banking API is simple: log in to a bank account on a client’s behalf and retrieve necessary information from the system. There are two main types of banking APIs, which differ in the way they communicate with banking systems: one kind uses a so-called “screen scraping” technology, which mimics user activity in a transactional system and thus has to be adapted to the online system of a particular bank, whereas the other type use a standardized, universal method of data exchange with banking systems.
The first type of APIs is more powerful, since it allows creators of fintech applications to use a bank’s online features to their full extent, yet it is recognized by some regulators or authorities, or even banks themselves, as a potential security risk, because it needs full user credentials. The latter type is more secure, but its functionality is limited, and it requires banks to embrace the same kind of an API. For now, only a few banks offer APIs to their systems, with Germany being the only country with a nationwide standard for banking APIs.
Get Data, Get More
What is behind all the buzz around banking APIs? Why is it so important to have access to client’s banking data and who benefits from this?
First of all, if it’s possible to log in to a bank account of a potential customer, it means that the identity of the account owner has already been verified by a bank. Thus, the client’s personal information related to this account is reliable and trusted. An owner’s name, ID number, home address and other data can be imported and used by a third party as a part of verification procedure, aka Know Your Customer (KYC). This is very useful as a regulated financial services company is required to conduct KYC of a client before it can start offering its services. KYC usually requires a company to request client’s identity document and make sure it is authentic. In some countries, like UK, a company is also required to ask for a utility bill and confirm that it is authentic. For clients, this means much simpler and faster applications for products and services at other financial institutions. For businesses, instant KYC reduces time and effort required for verification, allows for a purely online application with no additional paper documents or scans, and minimizes the risk of fraud.
Then there is transaction history data consisting of all operations made on a client’s account. With a banking API, a third party such as online lender can access these financial activities within seconds, evaluate them automatically and get a credit score as a result. No paper statements, tedious work of calculating the risk, or hours or even days of waiting for the final decision.
Not only lenders can benefit from the transaction history analysis. Personal finance management software (PFMs) or online services can track account owner spending patterns and incomes to find optimizations, which could result in a better financial status. The analysis could also reveal the truth about current financial products owned by a client; that there are much better credit cards, deposits or loans on the market. A customer can then be offered more attractive deals from other institutions, banks included.
Pushing The Envelope
Banking APIs are not limited to just passive handling of client data. They can be used to make instant payments, for example. Sometimes it’s enough to check the payee’s account balance to allow payment, sometimes locking the right amount needed for a transaction is necessary. And there is also the possibility of making payment on behalf of the account owner. Money doesn’t have to wait until the real transfer is done – payment is accepted once the banking API does its job.
There are many applications for banking APIs, but whatever their purposes are, they allow consumers and businesses to make use of valuable data. In turn, account owners get better deals as well as innovative products and services, while third parties can minimize their costs and risks, successfully competing with big players on the financial market.