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How APIs Are Transforming Digital Banking in 2024

Michal Maliarov
8
min read

As banking gets more digital, the need for simplification and automation is becoming more apparent. A significant part of that leads to the adoption of APIs (Application Programming Interfaces)in banking. While APIs have been here for a long time, the current surge in digital banking is driven by the demand for real-time payment solutions, advances in open banking regulations, and the necessity for enhanced customer engagement.

API Banking Market Report 2023: Industry Overview, Size, Share, Trends &  Forecast till 2032
Global API Banking Market 2023-2032 (By industry)
According to Research and Markets, the global API banking market is set to grow at a compound annual growth rate(CAGR) of 23.4% from 2021 to 2028.

Understanding APIs

An API is essentially a set of protocols and tools that allow different software applications to communicate with each other. In banking, APIs enable institutions to connect with third-party developers and fintech companies, creating an easy-to-use ecosystem that connects banks, apps and users. They can be developed and seamlessly used for almost anything. This is crucial for digital banks, allowing them to quickly create and launch new products to stay competitive. APIs also reduce development costs by using existing solutions, such as enriched transaction data from providers like TapiX.

Imagine an API as a waiter in a restaurant. Just as a waiter takes an order, API facilitates the communication between different software systems. When a user makes a request through a banking app, the API takes this request to the bank's backend (the kitchen), retrieves the necessary information or performs the required transaction, and then delivers the result back to the bank app (the table).This seamless interaction ensures that the digital banking experience is smooth and efficient. It also saves valuable time since many APIs can be developed externally or used pre-made from third-party partners. 

APIs according to accessibility

Open APIs (External): Open APIs are publicly available and allow third-party applications to interact with a bank’s data and services. These APIs are focusing on enhancing customer experiences, creating apps that help users manage their finances or build new payment solutions that integrate with banks infrastructure.

Private APIs (Internal): Internal APIs are used exclusively within the organization and are not exposed to external users. These APIs connect the bank’s core systems, such as core banking, CRM, and payment processing, and enable communication between different internal systems, facilitating efficient operations and seamless data flow within the bank.

Partner APIs: Partner APIs are shared with specific, trusted third-party partners. These APIs enable banks to collaborate with partners to offer enhanced services to their customers or expanding service offerings such as budgeting tools or investment platforms.

Did you know? In Europe, regulatory frameworks like PSD2 have supported the adoption of Open APIs, with over 77% of banks embracing this approach.  

APIs according to communication

Among the various types of APIs, REST (Representational State Transfer) API stands out for its simplicity and scalability, as it plays a crucial role in facilitating seamless interactions between clients (such as mobile apps or web interfaces) and banking servers. Other notable API types include:

SOAP API (Simple Object Access Protocol): SOAP APIs are known for their robust security features and standardization. They use XML for message formatting and can operate over various protocols like HTTP, SMTP, and more. Mostly used for complex transactions or secure communication with financial institutions.

GraphQL API: GraphQL APIs allow clients to request exactly the data they need, making it more efficient and flexible compared to REST. As a result, they are mostly used for fetching complex data structures, reducing over-fetching of data, and optimizing mobile app performance. 

The choice between APIs depends on factors like communication protocols, data formats, and specific use cases. While open REST APIs are the most common and popular ones in use, it always comes down to bank's goals.

What is API-led architecture?

After choosing the baseline APIs, it’s important to see how all the pieces fit together. For this, modern neobanks are adopting an API-led architectural approach. It’s structured into three primary layers: Experience APIs, Process APIs, and System APIs. Each layer serves a distinct purpose, and together they create a flexible system that, if applied correctly, streamlines operations and integrates diverse data sources depending on bank's needs.

Example of API-led architecture

Experience APIs: The top layer is designed to cater to specific user experiences across different channels. This includes mobile applications, customer service interfaces, branch office systems, web experiences, and credit card services. These APIs ensure that users have a consistent and personalized experience regardless of how they interact with the bank.

Process APIs: The middle layer processes the data from various sources to perform business operations. These APIs sort through underlying systems and streamline complex business logic, making it easier to reuse services across different channels.

System APIs: At the core, SystemAPIs provide direct access to the systems of record such as databases, main frames, document management systems, and third-party applications. These APIs are responsible for handling CRUD (Create, Read, Update, Delete)operations and ensuring secure and efficient access to data.

Whatever APIs you choose, it's important to have them properly connected to a digital bank structure and its multi-layered architecture.

How is Swisscard using TapiX API?

Swisscard first partnered with TapiX to comply with Mastercard AN4569 mandate but slowly transformed how their customers engage with transaction data. TapiX's robust capabilities provided a comprehensive framework to meet and surpass AN4569 requirements with merchant name and logo, business address and contact details, while also adding GPS location and purchase category. Swisscard implemented the enriched transaction data solution ensuring that cardholders had access to detailed transaction information directly within their banking apps and online interfaces.

In a quick 3-month integration, TapiX's data met and surpassed AN4569 standards, enhancing the overall payment experience for our users. We value our cooperation with TapiX as it grants us instant access to accurate global merchant data.
Alex Friedli, ChiefOperating Officer at Swisscard

Read the full story

Buy vs. Build Model

When implementing APIs, banks face the decision of whether to buy pre-built solutions or build their own. This decision can significantly impact their operations, financial health, and service quality. Buying pre-built APIs offers numerous advantages, including faster deployment, access to specialized expertise, and cost efficiency. These solutions allow banks to quickly implement new features and stay competitive without the heavy investment of time and resources required for internal development.

Pre-built APIs come from vendors who specialize in cutting-edge technology, ensuring that banks can leverage the latest advancements without having to develop these in-house. This not only saves costs in the long run but also enables banks to focus on their core business activities and strategic projects. Enhanced features such as detailed transaction data enrichment with high accuracy, coverage and detail are also much easier to implement through these APIs, which might be challenging for banks to replicate internally.

Overall, while building APIs offers greater control, the benefits of buying pre-built solutions - such as quick deployment, reduced costs, and enhanced service quality - often make it the more strategic choice for banks in 2024 and beyond.

This decision is crucial and depends on the bank’s specific needs and strategic goals.

Integrating APIs into a digital bank is also influenced by how they are priced. Different pricing models cater to various needs and usage patterns:

Pricing types

Freemium Models

This model offers basic access for free with charges for premium features.

Best For: Startups and small businesses needing to experiment with the API before committing to a paid plan.

Pay-as-You-Go

This model charges based on the number of API calls or transaction volume, similar to what TapiX uses for its services. Request TapiX API Pricing

Best For: Businesses with unpredictable or fluctuating API usage, such as seasonal services.

Subscription Models

These plans offer predictable billing with various tiers.

Best For: Companies with consistent API usage that prefer predictable billing.

Revenue Sharing

This model involves sharing the revenue generated from API usage as a form of payment.

Best For: Payment aggregators and businesses that integrate APIs into their own revenue-generating products.

Custom Pricing

Unique financial plan focusing on banks' specific needs, ensuring they get the best value.

Best For: Large enterprises or businesses with unique requirements that don’t fit standard pricing models.

It's clear that APIs are the driving force behind the digital banking of 2024.Understanding these APIs is not just about technical knowledge; it's about recognizing the transformative possibilities they hold in creating a connected, efficient, and innovative banking ecosystem.

About author

Michal Maliarov

Senior insider

A creative enthusiast who has spent half of his life in the technology industry. Passionate about fintech, AI, and the mobile tech market. Navigating the thin line between the worlds of media and advertising for over 10 years, where he feels most at home.

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