If revenue from fintech companies really is going to more than triple in the next decade, as some have predicted, it’s not going to happen without APIs.
In the last decade, APIs have gone from one tool at a company’s disposal to arguably the tool that allows companies to achieve scale in a cost-effective way— particularly within fintech.
If fintech is akin to a shiny new house on the block, then APIs might just be the pipes and wires that make the house livable.
hat Are APIs?
APIs, which stands for Application Programming Interface, are essentially the pipes that connect servers, applications, and databases from different companies and allow them to talk to each other.
Developers can use APIs to read in data into and out of their own platform, expand functionality without having to manually build every single feature, create software libraries for future use, and remotely control different protocols and technologies.
Why Fintech Is So Reliant On APIs
When it comes to fintech specifically, the prevalence of APIs can be traced back to the concept of open banking, in which financial institutions share data with third parties who can then integrate and build off those services.
Open banking was first introduced by the European Commission in 2015 via the Revised Payment Services Directive, which was meant to encourage partnerships and level the playing field in the banking industry between established banks and startups. That legislation was followed by several other mandates, such as the United Kingdom Competition and Markets Authority, which in 2016 required the UK’s nine largest banks to let licensed third parties have direct access to their data.
And though U.S. regulators have not mandated open banking in any way, most financial institutions have jumped at the opportunity to become more of a one-stop-shop to customers by integrating themselves with trusted third parties.
As Hans Tesselaar, executive director of the Banking Industry Architecture Network, wrote in 2015, “Banks can incorporate the technology from FinTech firms and vendors into the key areas...simplifying the process of adding innovative technology services by piecing together building blocks of flexible services.”
APIs are what enable this integration.
How APIs Are Being Used In Fintech
Some financial firms have prioritized the use of open APIs, feeds that are publicly available to any firm that wants to access or improve them. Others only make their APIs available to certain partners or clients. Regardless, the use cases for APIs in financial services are limitless.
APIs are the backbone of payments and e-commerce platforms, allowing users to send money online via services like Square Inc (NYSE:SQ) and PayPal Holdings Inc (NASDAQ:PYPL) by connecting all manner of websites with credit and debit card providers like Visa Inc (NYSE:V), Mastercard (NYSE:MA) and American Express Company (NYSE:AXP).
Incumbent banks have also embraced this technology. JP Morgan Chase & Co (NYSE:JPM) Head of Open Banking, Treasury Services Sairam Rangachari has said “APIs are going to create a faster, more efficient way” of introducing new products to customers, even if those customers aren’t on JP Morgan’s own app or website.
APIs are also at least partially responsible for the boom in personal finance apps. Companies like MoneyLion, ClarityMoney, and Acorns all rely on APIs from third-party providers for everything from bank account information to performance data. APIs also enable peer-to-peer (P2P) lending platforms like Prosper and LendingClub (NYSE:LC), as well as companies that rely on real-time financial market data. Benzinga, for example, offers market news and data APIs to financial firms across the capital markets ecosystem.
The explosion of APIs has had a two-pronged effect: financial services companies are able to offer more kinds of services than they ever could, and it’s easier for consumers to find the services they need.
“Prior to the widespread adoption for APIs for real-time data exchange, financial service partnerships were really just brand marketing,” said Phillip Rosen, founder and CEO of Even Financial, an API marketplace. “Implementing partnerships via APIs can transform an advertisement into a tool that solves a consumer’s most pressing problems.”
Rosen noted that Even’s marketplace, which connects financial institutions and allows firms to offer personalized financial services, wouldn’t even be possible without the API technology.
"Traditional marketing partnerships work well for products where there is no barrier like credit qualification to purchase, but matching a financial service product needs a greater degree of personalization,” said Rosen. “Real-time APIs are necessary to deliver that personalization in a market where many products are, if not niche, limited to a specific segment of consumers."
The Challenges Of APIs
Of course, APIs do present some challenges. Some banks have legacy technology systems that may not necessarily integrate well with certain APIs. Having a technology stack that can smoothly integrate APIs will also prevent the over-complexity that can come with mass API integration.
And then there are the security concerns. Bankers and regulators have rightfully made cybersecurity a top priority, but the use of APIs does increase the potential for data breaches. This is why it’s important for API vendors and the firms that use them to make sure connections are vetted and secure.
The Bottom Line On APIs
Despite those risks, APIs have acted as the energy that has fueled the growth of fintech and financial services for the better part of the last decade. Like other core technologies that came before it, the use of APIs appears to only be limited by what we can imagine.