Fintech API: What Is It and How Does It Work?

The banking sector has been facing complexities in financial operations for years now. Then finance technology companies came and used modern technologies to reframe the entire scenario. They utilized APIs to make way for financial institutions and banks.

Because in a financial ecosystem banks and financial institutions can use fintech and Banking APIs to add modern technological features to enhance their offerings of customized services to the users of their applications.

When a series of financial software development services are created using such APIs in a third-party app, the financial data of the user becomes easier to access. This inspires a top-rated financial software development agency to render fintech solutions along with maintaining transparency in their services to the user.

The question would arise as to what is a fintech API that keeps things interesting and how it works. Well, that’s what this article discusses in length.

What is a Fintech API?

A piece of code that enables two different programs to exchange information and functionalities is known as an Application Programming Interface or API. let’s say you want to add some third-party integration to your application, it is made possible with the help of an API.

And fintech APIs are the ones that help finance apps connect with service providers. For example, every payment gateway such as Stripe and Paypal has its APIs. developers can use these APIs to integrate their new applications with these payment processing platforms to offer their services to the end-users. All types of banks, credit card companies, investment companies, and cryptocurrency exchanges can provide APIs.

Why Do You Need APIs?

Why can’t applications make direct contact with the service providers? Why would they need to use APIs?

Well, there are two reasons for it;

1. Diverse tech stacks – Let’s say your banking system uses Java but the personal finance application is written in Python language. It would be just like two people trying to communicate with each other where one only knows Chinese and another only knows German. How would they contact each other? They would need a translator or an interpreter, right? Well, APIs are what you call interpreters for software systems. They are the middleware that interprets between requests and responses.
2. Security risks – The information about how a system works has to be concealed. That’s why APIs are used to limit the access of developers as well as users. Because otherwise internal logic would be left vulnerable to security risks. In such cases, the data might get stolen or corrupted.

How Do Fintech APIs Work?

Let’s say you install a personal finance application on your mobile. So now you would have to add all your bank transactions to this app. And for that, you either manually upload your entire bank statement or keep doing it every time you make a transaction. Or you can just connect your bank account with this application. Once you hit that button to connect your bank account here is what will unfold:

1. The app will use the internet to connect with the API which helps in translating the request. API then sends this translated request to the appropriate place.
2. To contact that [place, teh API has to call on the specific endpoint that banks have assigned to one of their servers. This endpoint will receive the request and will counter that with an authentication request.
3. At this stage the user has to insert their authentication details, once they click submit, the app will send these details to the bank’s server via APIs. the servers will match these details with their database.
4. Once your authentication details are verified and proven to be correct, teh server will approve your initial request.
5. After that point, every time you make a new financial transaction, the records will automatically be sent to your personal finance application.

Benefits of APIs in the Fintech & Banking Sector

In August 2022, a fintech API marketplace in the UK disclosed that the number of successful API calls has crossed the number of one billion. In a report by Mckinsey, it is expected that the public API deployment in the banking sector will be tripled by 2025. Such stats dictate how widely these APIs are used in the finance industry. Here we are going to discuss four basic advantages of using APIs for fintech and banking services.

Accelerated Time-to-Market

Let’s for instance entertain the possibility that APIs don’t exist or aren’t created yet. Then developers would have to write the code for every fintech or banking application in the same programming language. Third-party integrations must also be written in that language. Now, this ought to increase the development time by many folds.

With the existence of APIs, developers can just add things to apps like building blocks. They are easy to refer to in a code and easier to use in real-life scenarios. Thai indicates that using APIs will reduce your development time or product’s time-to-market even if it is involved with many third-party integrations.

Reduced Development Costs

The usage of APIs decreases the development time and that shorter timeline brings down the development costs. Using an API saves hours of work for the developer so, as a result, product owners can save a lot of money they would have otherwise had to spend for that work.

Since the project timeline is shorter if developers use APIs, your development costs will be lower, too. Your total budget can be reduced by around $40 for every development hour saved. And since APIs save dozens of hours of work, you can cut your costs by thousands of dollars. Although APIs aren’t exactly free to use, their costs have better returns on investment and are very useful in the long term as well.

Secure Data Exchange

The best thing about working with APIs is that they never reveal how things work under the hood of a called-on program. It even limits what types of functions and variables a developer can use. And such a kind of data security is what you need in the finance industry.

The beauty of APIs is that they don’t reveal how the called-on program functions under the hood. They limit what variables and functions developers can use. In Fintech and banking, it allows for more solid data security across the industry.

But that doesn’t mean APIs are 100% safe. If a developer doesn’t follow all the necessary fintech API standards to a T, then there is room for potential exploits. And they can be devastating. Some of them include:

• Components with unknown vulnerabilities
• Authorization errors
• Security misconfiguration
• Broken access control or authentication
• SQL injections

Improved User Experience

Third-party integrations are used for the convenience of the users which as a result enhances the user experience. If someone has an American Express Card then they would like their payment app to support their card. If they have a PayPal account then they would like to have a PayPal checkout in an eCommerce app or any other fintech application.

Such fintech and banking APIs save the time of users. We have already seen an example of linking a bank account with a personal finance app and how that saves the time and effort of the user. In such cases, the user doesn’t have to manually do everything as the application uses fintech APIs to do things automatically all by itself.

API use cases in the fintech and banking sector

Payment & Withdrawal Processing

Any app that provides payment or money transaction services or credit and debit card payouts has to use a fintech API. It can be any type of app ranging from subscription-based services like Spotify to an online store such as Zappos.

The topmost examples of payment processing APIs include:

• PayPal
• MangoPay
• BrainTree
• Stripe

However, payment processing APIs must adhere to various guidelines and practices like KYC identity verification, fraud detection, encryption, and more for data security purposes. They are also capable of managing automatic payments, invoices, and currency exchanges.

Investment & Trading

Fintech APIs are largely used in the fintech sector for processing and integrating stock market data, both past and real-time information. Such information provided by APIs helps analysts make predictions using proprietary algorithms.

Traders can also leverage the fintech APIs to trade their assets on multiple exchanges from a centralized platform. It also comes in handy to centralize all the data on different account types that are provided by retirement plan providers, banks, and brokerages. Some of the trading and investment APIs are mentioned below:

• Alpha Vantage
• Marketstock
• Barchart
• Finnhub

Banking Integration

Apart from making payments, you can’t even add your banking information in the app without using fintech API. such APis are more useful in B2C personal finance and budgeting applications. If your bank is offering an app that allows you to integrate your other bank accounts in it, it is also using banking and fintech APIs.

Even in a B2B segment, payroll or bookkeeping software uses aggregated financial information that is obtained with the help of banking APIs. in addition to that, financial analysis, multi-bank expense management, multi-currency management, B2B invoicing, and more are handled using banking and fintech APIs. to name some of the fintech APIs that empower banking integrations are:

• Yodlee
• Syncfy Connect
• Plaid

Blockchain & Cryptocurrency

Similar to stock trading, exchange platforms, and multiple asset types are also included in blockchain as well, all of them can then be integrated under one user interface using an API. adding multiple wallets in an application or aggregating cryptocurrency exchange rates will be easier after that.

Blockchain APIs can also help facilitate smart contracts which are automatically executed when some specific conditions are met.

Many platforms like Avalanche, Polkadot, and Binance Smart Chain build such smart contracts. And they are aggregated in a single place using APIs. The real-world events can also be tracked and logged with their help. For example a change in an UPS status from “on the way” to “delivered”.

If you wish to put the cryptocurrency or Bitcoin as an option payment method for users then you can do that too using APIs. some of the Blockchain APIs are:

• Bitquery
• Coinbase
• Blockchain’s Exchange

Final words

It would be a mistake to underestimate the fintech implementation of APIs. Without the leverage of such small pieces of code, no fintech app can ever offer an amazing user experience. They wouldn’t be fast or affordable either.

From multi-exchange stock trading to online transactions, everything is empowered by fintech and banking APIs. They also integrate cryptocurrencies into an app and aggregate information from multiple sources. So, I think it is safe to say that fintech APIs aren’t going anywhere and McKinsey’s prediction about accelerated adoption of APIs is going to come true.