What Are APIs?

The concept of an application programming interface has been around for many decades, but it can still be somewhat hard to understand. To get on the same page, we’ll quickly unpack it here. 

We’re all familiar with digital interfaces made for humans, such as websites and mobile apps. These interfaces take information that might otherwise be unintelligible to most people (such as raw computer code) and turn it into something that most people can easily understand.

Just as there are interfaces made for humans, there are also interfaces made for programs — application interfaces that communicate between programs. Thus the name: application programming interfaces (APIs). As Daniel Jacobsen, author of APIs: A Strategy Guide, writes, an API is “a way for two computer applications to talk to each other over a network, using a common language they both understand.” In other words, APIs convey a set structure for requests and responses so data can transfer between one application and another.

How Do APIs Work?

The process of request and response is at the heart of APIs. For example, an API enables Program A to make a request of Program B and give a response back to Program A, just like a waiter taking an order from customer to kitchen and returning with food. Without a standard for requesting orders and responding with orders, the process wouldn’t work. It would be like going to an Italian restaurant and ordering Japanese food. Chances are, the order wouldn’t work. The same is true with APIs. In order for requests and responses to work, there has to be a shared understanding — a standard method for requesting and responding with data. This is essential to all APIs.

The process works like this: the API provider sends data to the API consumer, which passes it along to a customer

bank API

That might still sound abstract, so let’s turn to an example. If you’ve ever used an app or a website with an embedded map — Uber or Find an ATM, etc. — you’ve used an API. The people who made these apps likely couldn’t afford to re-create the efforts of companies like Google in mapping the entire world, so they instead connected to map services that exist already via an API. 

Types of APIs

There are many types of APIs, including internal APIs, partner APIs, and open APIs.

Internal APIs enable banks, credit unions, and fintechs to choose how they want to use their data and services. The challenge is that internal APIs are often provided by different systems that, depending on the maturity of the institution, may or may not be centralized into a single API gateway. Not using a centralized gateway leads to low adoption of internal APIs across an organization as well as continued siloing of data and services. (More on that later in this guide.)

Partner APIs allow collaboration between banks, between fintechs, and/or between banks and fintechs. By teaming up via an API, partnered organizations enjoy improved security, increased speed, reduced partner costs, and more. If done correctly, partner APIs end up creating a better experience for everyone involved: customers, financial institutions, and fintechs. In all of these cases, partner APIs enable players in financial services to do more together than they could do alone. 

Open APIs are partner APIs that are publicly available to developers outside of a company. This enables permissioned data sharing with third parties and plenty of opportunities for innovation. For more, read the Ultimate Guide to Open Banking.

API Banking

What Is API Banking?

API banking is the process of sharing data via APIs. It enables financial services providers to pick and choose a mix of products that best help their customers. Instead of having to rely on out-of-the-box software, which can make each provider look exactly the same, banks can use APIs to integrate with a variety of fintech companies to customize their offerings.

Open Banking APIs

The definition of open banking varies slightly from country to country, but it generally refers to using open APIs to share data between financial institutions and third-party fintech developers. Open finance extends open banking to include customer data access for a range of services beyond the banking industry, including retail shops, hotels, airlines, car apps, and much more. A different term for this expansion is embedded finance, which highlights how APIs make the money experience omnipresent.

Open Banking API Example

An example of an open banking API is Path from MX. Path is an open API that empowers organizations to move beyond the constraints of legacy systems — such as slow innovation, time consuming and costly upgrades, and inflexible contracts. As Brandon Dewitt, Co-founder and CTO of MX, says, “With Path, financial institutions and fintechs can enjoy the flexibility of more modern cores without multi-year migrations that slow down innovation. Path will help financial institutions and fintechs connect their financial systems through an open API, so they can better understand their customers and innovate faster. With Path, organizations can become true advocates for their customers as they progress along their financial journey.”

Bank API Integration

What is an API integration?

An API integration is when two or more parties have coded to an API. This enables all the benefits that APIs provide (listed below).

In a related vein, an API integration platform enables multiple API integrations. For an example of an API integration platform, see the MX Open Finance Portal, which lets you view, track, manage, and report on who is connecting to your customer’s data. Innovate faster with the vendors and technology providers that serve you, with the flexibility to reduce costly and burdensome vendor lock-in. 

Other Bank API integration examples include bank data analytics, account verification, payment processing, money transfers, loyalty programs, and more. 

Benefits of API Banking

Put simply, APIs are the future of banking. As Vincent Bastid, Secretary General at Efma says, “The most successful banks will use open APIs to generate new customer insights and revenue streams, while also improving customer experience. Many banks currently use APIs internally to improve information flow between legacy systems. In fact, we are already seeing early adopter banks asserting their role in open banking by proactively making their systems and data available to third parties and creating new revenue streams.” This results in increased business agility and revenue — particularly via completely new methods of increasing digital revenue.

In a similar vein, banks and fintechs offer open APIs because they seek secure industry standards that allow for greater innovation and experimentation. Bradley Leimer, co-founder at Unconventional Ventures, writes that “the real prize in open banking is where bank APIs help banking fall to the background to people's everyday lives.”

By falling to the background, endless benefits can emerge for financial services companies. As Jim Marous, co-publisher at The Financial Brand says, “In the past, financial services asked for data, and used it for their own purposes to save them money. Now, banks must use our data to truly benefit us, to stay competitive.” Think of having clean data to power voice-assisted banking, personalized financial guidance, intelligent analytics, smart mobile banking, and more. In this way bank API integration is the future of banking.