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Bridging the Digital Divide with APIs

9 July 2020    
Bridging the Digital Divide with APIs

Technology today is hardly considered the disruptive medium it once was, and that notion is becoming more relevant as we progress into an increasingly digital future. Today, banks are adopting all sorts of technological processes when they once were opposed to anything other than their legacy systems. The reason is simple: technology is the ultimate enabler of speed, convenience and efficiency; terms that are all too desirable for both customers and institutions in the finance sector.

As FinTech keeps on rising around the world and bringing in new innovative concepts that complement it, banks and traditional financial institutions are more and more coming on board the tech train, and the inevitable union is achievable through one key component of technology: application programming interfaces or APIs.

With banks increasingly shifting towards digital services, the nature of new digital banks is becoming more of a technology platform than a bank as we know them. However, legacy banks and traditional financial institutions have always been the core of the industry and have established finance as we know it, exceling at fundamental risk management and regulatory processes in order to bloom like they did for hundreds of years. FinTech entities understand that and are not looking to compete but to join forces with the value they bring; traditional FIs bring stability, security, access to many resources, and regulatory compliance that are otherwise inaccessible by young FinTech companies. FinTechs that manage to find a suitable banking partner will greatly benefit from the aforementioned advantages, in addition to not needing a banking license since they will be part of the conventional finance industry under their legacy partners. All this symbiosis is basically enabled by the use of APIs, the bridge that fills the gap between the physical and digital finance industry.

Incumbent banks are heading towards a seamless integration of FinTech processes, whether through partnerships, mergers or temporary collaborations, and as such are opening up their once-closed banking infrastructures to third parties that will allow such an integration. APIs hold the key to connecting these banks to technology through software providers and tech vendors, acting as a common ground on which programmers and third parties anchor their software to access a bank’s or FI’s infrastructure, enabling two-way communication and the agreed-upon sharing of resources between these entities. 

There are many key areas of digital finance development that are made accessible via APIs, and it is those areas that ultimately decide what the end financial product or service looks like in the hands of consumers. The presence of APIs and their programmable functions allows for each party to do what they do best; FinTech companies and startups focus on innovation and developing the best possible user experience while making use of the banks’ resources and various services via APIs, and on the other hand, conventional institutions focus on their core competencies while providing the robustness and reliability of their age-old systems for FinTechs to engage with.

APIs are becoming more abundant in banks around the world, and they are typically defined as open or closed. Open banking APIs mean that they are made freely available to any company that wants to use them on a global scale, allowing them access to gathering customer information, viewing a company’s financial state and much more with little hassle and minimal delays, such as what some multinational banks in Europe are currently offering. Closed APIs are those provided by banks that only allow certain entities to access them based on specific conditions, such as certified partners. 

On the customer side, APIs are well-established on our smart devices and enable us to make all sorts of transactions every day. People can seamlessly manage, control and analyze their payments on the go through various digital applications, all of which need APIs to communicate with that person’s bank. 
A common example of this is making an online purchase or processing a payment through online website for instance. Mobile payment applications and digital transfer services are all dependent on payment processing APIs whose proper implementation allows the streamlining of those services and therefore grants users fast and easy access to their finances.

The use of APIs yields several benefits for financial services to all parties involved, and perhaps the most important of which is increasing cost-effectiveness for institutions while simultaneously increasing the quality and quantity of available services to consumers. This is achieved through banks providing customized experiences to individual customers, as opposed to relying on a ‘one-size-for-all’ approach. In this scenario, customers get a personalized solution by choosing the financial components (programs and apps) that they actually need while discarding the ones they don’t, and banks in turn lower their costs by giving their users choices and not needlessly spending on generic comprehensive solutions. 

FinTech APIs additionally empower investment management activities, where individuals can provide access to their portfolio information to their brokers or advisors, facilitating their tasks by pooling all the customer data in one place and saving them time and effort in the process. 

Other applications include customer authentication and verification processes such as KYC (Know Your Customer) applications, enabled through RegTech (regulatory technology) APIs that connect customer biometrics like fingerprints to a central database, in order to secure and authenticate access to accounts. 

APIs also provide a security and privacy aspect to digital finance that is contributing to FinTech adoption worldwide, as customers increasingly understand that substantial efforts are made by banks to secure their bank accounts, leading to the promising growth and continuous development of the FinTech industry into the future. 

As the line between traditional and digital finance gets thinner over time, all underlying technologies in both industries are benefitting from innovative technologies. Technologies like KYC (Know Your Customer), biometrics, digital regulatory compliance, e-payments, artificial intelligence (AI) and much more are all in need of properly implemented APIs to make their mark on conventional FIs, maximize their full potential and therefore benefit the financial institutions, FinTech companies and both of their customers in the best way possible as they move forward together.

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