Tech Translated: API banking

The core problem that API banking tackles is steep barriers to entry. “In the past, exclusive access to financial data and the ability to execute transactions created a moat around banks, to their benefit but also to their detriment,” says Justin O’Connor, a principal with PwC US. “This meant third parties could not interact with accounts, which limited the types of financial products and services they could offer during a time when clients and customers were demanding highly customized experiences. With API banking, the potential for innovation and competition promises to revitalize the banking and payments sector.”

API banking emerged as calls for greater access to banking data intensified, following the rapid shift to online banking. This led government regulators, national and supranational banking associations, and fintech companies to collaborate on standardizing data formats, APIs, and communication protocols within regulatory jurisdictions.

Through open banking, any organization can access a customer’s consented profile and financial data, and perform transactions on their behalf, allowing third parties to create such specialist financial applications as budgeting apps, payments interfaces, and accounting software.

“API banking has fully unlocked the digital potential for financial services,” says Sam Wadhwani, a director with PwC UK. “It allows for increased specialization, personalization, and integration, and has led to the emergence of third-party products that complement banks’ core offerings with niche services and high-quality customer experiences.”

In traditional banking models, customers with accounts at multiple financial institutions found it difficult to quickly generate a picture of their overall financial situation; clients who wanted such an accounting lens for their personal finances were forced to combine transaction histories from individual sources themselves. Open banking, by contrast, allows applications to pull data from all the institutions where an end-user holds accounts, creating a more holistic financial view of—and for—a customer. And the technology, once limited to specialized aggregators and other third parties, is now entering the mainstream.

Specific applications of API banking include:

• Payments. Rather than requiring customers to enter card details or create direct debit mandates, API banking allows retailers, e-commerce platforms, or any other third party to take payment directly from a bank account.
• Instant loans and credit scoring. Loans can be approved immediately upon application, because lenders can gain instant access to applicants’ risk level and transaction history.
• Aggregated bank accounts. Individuals, businesses, and their financial services providers can create a comprehensive view of an entity’s financial situation by combining data from multiple sources.
• Specialist tools. Third-party providers can develop tailored customer experiences for niche solutions such as budgeting apps, automated invoice reconciliation, or bill sharing.
• Cross-selling. Opportunities to offer a wider range of products to existing customers can be boosted by leveraging data from those customers’ current assets, liabilities, financial profiles, or digital wallets.

“Open or API banking enables new value to be created for banks, which are able to better serve customers. Primary financial institutions and third-party financial services providers will now have access to the data they need to offer innovative products and services, and consumer banking and business banking customers across segments and sectors will benefit from greater choice and specialization in the offerings banks can provide,” says O’Connor.

API banking presents both opportunities and threats, and the open banking movement is attracting attention from regulators around the world, so financial services providers should be paying close attention—especially their CTOs, COOs, CISOs, chief data officers, and customer experience and product development teams. With an eye to encouraging improvements, regulators across jurisdictions are likely to be monitoring best practices, especially from early adopter markets such as Australia, Japan, Singapore, the UK, and the US. Aside from banking, retailers and cloud service providers will find the most obvious business opportunities, but almost any sector could build useful applications with the right approach.

In jurisdictions where APIs have already unleashed the potential of open banking, businesses across sectors are likely to be familiar with some of the benefits. CFOs in these markets who are seeking better financial products can review the marketplace for suppliers able to meet their needs.

For banks and other financial services providers, monitoring industry best practices and shifting client needs will be more important than ever, as customer expectations continue to shift in response to the rapid emergence of new products and services from both traditional and fledgling competitors via API banking. This competition could threaten existing business models—or, with the right strategy in place, it could open up new opportunities. To quickly adapt to opportunities and threats, financial institutions must maintain effective, flexible foundations, so cloud modernization and digital transformation efforts have taken on renewed importance for the industry. The future will favor the bold.

Learn more

• PwC UK: The future of banking is open
• PwC US: PwC’s banking integration fabric
• Open Banking Limited: Open banking: Expert predictions for 2024
• Stripe: Introduction to API banking: How APIs enable embedded finance and Banking-as-a-Service
• Barclays: The benefits of open banking