August 19, 2016
Innovating Financial Services with Banking APIs
By Konstantin Rabin, Kontomatik
Traditionally, financial services and banking have been among the most conservative industries. Then fintech happened. Companies composed of just a few talented and motivated developers started taking slices of the financial pie and “disruption” became a media buzzword applied to what used to be cautious industries. But, while quite a few banks have joined in the innovation, a key issue remains unchanged—banks do not provide APIs.
One often hears that “data has become the new oil” and, while such companies as LinkedIn, Facebook and many others share data using APIs, banks continue to hold the information about their clients under lock and key. This is changing, however, and without the involvement of banks. Some developers working in financial technologies have realized it would be much easier to craft fintech applications if a connection between an app and a bank existed and created the tool to make it happen. But what, exactly, is a banking API and what it is capable of?
What is a banking API?
A banking API is a tool that lets applications access financial data of users with their consent. The process works like using Facebook or LinkedIn to log in to a third-party app, but in the realm of financial services. Instead of filling out a bulky registration form on a Website, users just click a button and the browser grabs data from the current Facebook or LinkedIn session. With banking APIs the process is, of course, different, due to the security measures. But not so much.
An application that wants to access banking data will ask users to authenticate to their bank using their login credentials. This is still the case even if they are already logged in to Internet banking in another tab. Once authenticated, an application gets access to that user’s registration, account and transactional data.
For example, you may be using a certain tool to manage your finances. Considering that most of your expenses are settled via a card or a bank account transfer, it would be advantageous for this app to be synched with your bank account. Otherwise you would need to enter each transaction manually or dig into the process of importing various .csv or .xml statements.
Why is financial data useful?
Seamless integration of an individual’s banking data with the outside world is certainly a great benefit, yet it is just a tip of an iceberg. Let’s take a look at three main benefits of the banking API for businesses.
Most companies that offer financial services are required to perform Know-Your-Customer procedures. Typically, this is a time-consuming, labor-intensive process. When done offline, it might require customers to visit a bank branch, wait in line and, potentially, not have all the required documents. To perform KYC online, users have to supply scanned copies of documents, which sometimes may include even a utility bill.
Whether, as a customer, you have to authenticate yourself online or offline, it is still an unpleasant process that delays the use of an actual product or a service. But, if you really think of it, why do you need to get identified every time you register at a new company? Wouldn’t it be better if these companies could somehow communicate and perform KYC based on the data obtained from the source of your registration? This is where banking APIs come in handy.
In the last two years, for example, German online microlender Kreditech doubled its conversion rate using such technology. Instead of requesting a client to upload the documents and proofs of residence, Kreditech was able to actually verify the identity of a client with just a few clicks.
Understand Your Customer
Identifying your customers does not really mean understanding them. Google asks you for hardly any information and, sometimes, only requests a phone verification. Nevertheless, this company tracks your searches, behavior, interests and so on. Based on the data obtained through the usage of its services, Google can display ads that are more likely to be compelling to the user.
The same can happen in the financial industry. If a company can access a customers’ transactional data and analyze their spending habits, it can serve truly tailor-made offers that are more likely to be useful for and, hence, adopted more often by customers.
Provide More Convenience
Do you remember when upgrading your phone took forever? Unless you had all your contacts backed up to a SIM card, you’d need to spend hours copying contacts, re-sending important messages and so on. Today we live much more advanced technological lives and enjoy full synchronization of our accounts across multiple devices. Yet this is not the case when it comes to finances.
Moving from one bank to another can be a time consuming process too. While Bank A can certainly offer more competitive products than Bank B, it is the latter that has all of your predefined payments, address book and other features that you have spent years setting up. With a banking API, a user can import all of his settings with a single authentication.
When Alior bank launched AliorSync, for example, it managed to attract new clients by ensuring that all of their current banking settings would not be lost.
Banking APIs will be the fuel of financial innovation over the next few years. This technology will power up new services that will transform the way we treat our financials as well as will assist in developing banking systems and enabling merchants to gain access to the customers and data they need more easily.
Konstantin Rabin is head of marketing for Kontomatik . Based in Warsaw, Poland, banking API provider Kontomatik connects to more than 90 banks in the U.K., Mexico, Brazil, Russia and the EU. Email Kontomatik at email@example.com or simply tweet to @Kontomatik.