How APIs help people improve their financial health

Americans’ financial health is in dire straits, but fintech apps and the APIs that power them can help turn things around.

February 01, 2022

Tom Sullivan Pic
Tom Sullivan

Tom is a writer at Plaid. He's passionate about the freedom that the union between financial services and technology can create.

While only 34% of Americans were considered financially healthy in 2021, that number is up from just 29% in 2019. Fintech and API technology are among the most impactful factors in powering this upward trend.

In this article, we’ll explore how API technology is helping people improve their financial health, expanding financial access to underserved groups, and creating a more financially equitable world.

What is financial health?

Financial health is a holistic measure of an individual’s financial life. To reveal a more complete picture than limited measurements such as credit scores, the Financial Health Network uses eight indicators to measure an individual’s financial health: 

  1. Spending is less than income

  2. Bills are paid on time

  3. Sufficient liquid savings (greater than three months of living expenses)

  4. Confidence about long-term financial goals

  5. Manageable amount of debt

  6. Prime credit score

  7. Confident about insurance coverage

  8. Planning ahead financially

Financially healthy people are able to meet daily financial obligations, save for the future, and enjoy the present without financial worry or stress. Unfortunately, most Americans are not categorized as financially healthy. However, things have improved slightly over the past few years.

While the contributing factors to these modest improvements vary, increasing fintech adoption is one of them, with the potential to play an even bigger role in the future. 

How financial APIs improve financial health

Financial APIs are the glue that holds most fintech together. By creating seamless and secure connections between people’s bank accounts and the financial apps and services they use, APIs open up a realm of new financial possibilities—many of which can improve financial health. 

API-based fintech tools can improve financial health in many ways, including:

Getting out of debt

High-interest debt, whether from credit cards or payday loans, hangs over many financially coping or vulnerable people. By using APIs to connect with financial accounts and credit cards, fintech tools can provide valuable insights into debt obligations, generate a plan to pay off debt, and automate the plan’s execution. 

Fintech companies are assisting on every kind of debt. Examples include ChangEd, which rounds up spare change on purchases and uses it to pay off student loans; and Tally, which pays off high-interest credit card debt with a low APR line of credit.

Budgeting

Budgeting and planning for the future are central to financial health, but can easily get deprioritized. Bank account connected apps can help people set up a budget and stay on track. That’s where apps like Digit can help users by automatically budgeting, saving, and investing for them. Similarly, YNAB makes it easier for people to make a budget and get their finances in order. 

Avoiding bank fees and predatory loans

Financially coping and vulnerable people are often in danger of overdrafting. The anxiety around these fees, as well as not being able to pay bills, leads many to take out payday loans, some of which have interest rates as high as 600%

Some fintech apps utilize API-connected bank account data to provide a more financially healthy way for people to pay their bills on time. Vola is a prime example of this. The app provides interest-free cash advances to help users avoid overdraft fees and predatory lending, along with setting budgets and building credit scores. 

Saving and investing

Saving for a rainy day and investing for retirement are pillars of long-term financial health. By connecting with financial accounts, fintech apps can automate transfers into savings accounts, automatically purchase investments, and plan and execute on retirement goals.

Branded as ‘investing for beginners’, Stash shows how fintech apps can help people improve their financial health and wealth. The app is designed to help new investors start their wealth journey with thousands of investment options, educational resources, and financial advice. 

Providing more favorable loans 

As many property owners will say, good debt can create wealth. Yet, financially coping and vulnerable people often have the least access to favorable loans and pay the highest interest rates. API-based fintech tools can help lenders issue more loans by using cash-flow data such as spending and saving to calculate a person’s true creditworthiness.

As the first peer-to-peer lending platform, Prosper is a pioneer in alternative, fintech-based loans. Not only do they help people become more financially healthy by getting out of high-interest debt, but they also open up a valuable asset class for investors looking for new opportunities (and ways to help others).

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How API technology is changing the discussion around financial health

In Plaid’s 2021 consumer survey on the state of fintech, we found the majority of people aren’t just adopting API-based fintech tools, they’re changing the way they view and discuss their finances. In particular, people expect to be able to use technology to improve areas like credit scores and investment portfolios. Not only that, they’re more open to discussing these topics with family and friends—something that was recently considered taboo.

Here are a few key metrics that reveal how people are changing their view of finances:

  • 28% of Black people and 24% of Hispanic people say they didn’t track their credit scores before using fintech—an indication that technology is helping create financial awareness and building momentum towards closing historical gaps.

  • 57% of Gen Z says investing is now a topic they discuss with friends. Additionally, 77% of millennials say technology makes them more comfortable talking about finances. Perhaps one of the biggest factors that have been holding back financial health is awareness, or lack of it. With new fintech tools that expand access and stir conversations, more people are becoming aware of and improving their financial health. 

  • 63% of Gen Z says fintech makes them more confident with their money, and 33% say it gives them a better overall financial outlook. Additionally, fintech has helped 71% of Gen Z build better financial habits, while 65% say they’re open to using it to optimize their finances. Perhaps Gen Z is getting the early start with financial health and literacy that other generations lacked, thanks to more convenient options.

Together, these stats show fintech is helping Americans right the course when it comes to financial health. Finances are a complex part of life, and tools that improve awareness and reduce barriers to positive action are making a lasting impact towards bettering financial health. 

In addition to helping individuals improve their financial health, financial APIs are helping financial institutions that serve low-income and underserved populations. 

The Fintech Effect: Learn more about fintech's mass adoption moment

Improving access through minority and community banks

Community Development Financial Institutions (CDFIs) and Minority Depository Institutions (MDIs) bring traditional financial services to groups that might otherwise go unbanked. In fact, Black and Hispanic households are five times more likely to be unbanked than White households, and both groups have less than 25% of the median average wealth than White households. The goal of CDFIs and MDIs is to close those gaps, which financial APIs can help them achieve. 

With large innovation budgets, Wall Street financial institutions can offer high-tech mobile apps and virtual assistants. They can also build API integrations with thousands of fintech apps that give their customers instant access to these services. As smaller organizations, CDFIs and MDIs tend to be more budget-constrained and thus have struggled to provide customers with similar digital experiences. 

While Blacks (82%) and Hispanics (96%) report using fintech more than Whites (88%), the CDFIs and MDIs that serve the most financially vulnerable among those groups have a challenging time providing safe and secure access to fintech apps. That’s because they don’t have the budget to build API integrations. However, newer developments in API technology can allow their customers to enjoy the same access to fintech that Wall Street banks provide. 

Plaid Exchange, for example, is an open API network that CDFIs and MDIs can quickly and easily connect with. Once they integrate with Plaid Exchange, their customers will have access to the 6,000+ fintech apps that use Plaid for account authentication and connection. This allows these more budget-conscious institutions to bypass the need for the tech budgets that larger banks have while still giving their customers access to countless fintech tools that can help them improve their financial health.

API technology is creating a financially healthier world

By safely connecting bank accounts with fintech apps, API technology has been a major contributor to improving financial health and closing historical gaps in wealth. 

For proof consider this: 15% of retail investors in America started investing in the year 2020 alone. In the old world—before financial APIs made it possible to seamlessly fund a Robinhood account, for example—this explosive growth wouldn’t have been possible. 

All across the financial ecosystem, APIs are helping people start their journey to financial health through fintech apps that help with budgeting, savings, investing, and paying off debt. These API-based apps are helping people achieve financial health regardless of who they are, where they come from, or what their financial status is.

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