API banking and banking as a service

The benefits of API banking and Banking as a Service

API banking refers to APIs that banks have developed and made available to external parties (for example, customers or software vendors) over the internet. With the right access protocols, a system accessing the API can then receive information about the customer’s bank account, initiate transactions, or make updates. Some of the key benefits of API banking include greater accessibility, facilitation of instant payments,¹ real-time transaction data and alerts, and reduced costs.

Banking as a Service (BaaS) provides third parties access to the bank’s products and services, so that nonbank companies can offer their users banking capabilities, including payment services.² The nonbank company can offer users features only available from a bank, such as holding a cash balance—without having to go through the lengthy licensing process as the relationship with the licensed bank is handled behind the scenes. By integrating nonbanking businesses with regulated financial infrastructure, BaaS offerings are enabling new, specialized propositions and bringing them to market faster.³

Open banking is a technically enabled data-sharing concept that promotes the sharing of information between different financial institutions and authorized third-party providers. It is enabled by APIs that allow secure access and exchange of consumer data by enabling individuals and businesses to share their data with other financial services providers—such as budgeting apps, investment platforms, and more. APIs allow software programs to interact with each other and, in this case, enable third-party financial service providers to access customer data securely and efficiently.⁴

Understanding the limitations of API banking

API banking is not without its challenges and limitations:

Scalability and performance: The volume of transactions and user interactions are constantly changing, so API systems should be designed to scale effectively—ensuring that the infrastructure can handle peak loads and maintain performance without disruptions.

Integration complexity: The process of transitioning to API-based banking systems can be challenging and costly as financial institutions often have legacy systems and complex IT infrastructures that may not seamlessly integrate with modern API technologies.

Interoperability issues: Financial institutions may adopt different API standards, making it challenging for third-party developers to build applications that work seamlessly across different platforms—which could hinder innovation and broader adoption.

Regulatory and compliance requirements: The financial industry is heavily regulated, and financial institutions must ensure that banking APIs are compliant with different regulations and standards, as well as any regional laws. Ensuring adherence can be a challenging and time-consuming task.

User consent: Banking APIs enable sharing user data across different services, which raises concerns about user consent and control over personal information. Banks and third parties need to be transparent about data usage and provide users with control over their data-sharing preferences.

Data privacy and security: Sharing of sensitive customer data and financial information with third parties also increases the exposure and vulnerability of the data to potential breaches, fraud, or misuse.⁵ Ensuring robust security measures—such as requiring encryption and authentication protocols—is crucial.

The future starts now: Explore more API banking and Banking as a Service

The rapid rise of API banking and Banking as a Service is forcing an evolution of the money movement and payments landscape—transforming the way customers and companies interact with money and unlocking innovations that were previously confined by legacy systems and manual processes. Download our full report to see a powerful case study of API banking integration in action, explore the evolution of payment rails, and more.

Endnotes

¹ Real-time transactions depend on the payment solution and rail utilized.
² Christina Anderson, “Not the same: Open banking, open APIs and Banking as a Service,” BBVA, updated February 10, 2020.
³ Andrew Cowley and Neil Malani, “Banking as a Service, explained: What it is, why it’s important and how to play,” Deloitte Digital, October 19, 2021.
⁴ Dwolla, “The future of payments with open banking,” June 12, 2023.
⁵ LinkedIn, “What are the main challenges and risks of implementing open banking APIs?,” March 21, 2023.