Financial APIs are transforming what’s possible in financial services. From new ways to pay to new ways to save, the fintech apps and services built using financial APIs are changing the everyday lives of nearly everyone—as 88% of US adults now report using fintech.
The open financial API ecosystem
Application program interfaces (APIs) connect data from disparate systems that otherwise would not interact, unlocking greater value. Financial APIs provide the data connections to build a whole new ecosystem of financial services.
While there are several types of financial APIs (private, partner, and open), the use cases in this article are specific to open financial APIs. In an open API, data connections are created by a data network. The data network builds integrations into many banks and credit unions, then opens up API endpoints for consumers to access and share their financial account data, including account and routing numbers, transactions history, balances, and more.
A fintech app or financial service can then integrate with the data network. This gives them the ability to enable their customers to connect their financial accounts from any financial institution the data network is integrated with. Now, the customers of many financial institutions can also easily become customers of a financial app or service that’s integrated with the data network.
Think of it like a wheel, where financial institutions are in the hub and financial apps are on the rim. In an open API, the data network acts as the spokes. Within this open financial API wheel ecosystem, there are multiple use cases that API integrations enable. Some are transforming the financial services industry.
These use cases include, but are not limited to, the following:
1. Instant account verification
When opening a new account on a fintech app, a customer needs to authenticate their outside financial account. The authentication step verifies the outside account’s information (account and routing numbers) and ensures that it's open and able to transfer funds.
Traditionally, this authentication step was a long and error-prone process that took days to complete. Financial APIs dramatically increase the speed and accuracy of account authentication.
Instant account verification allows customers to authenticate their existing accounts by prompting them to enter their online banking credentials. This process reduces the amount of time it takes to validate an account from days to seconds, and is the most secure and robust of all account validation methods (see below).
Chime, the fast-growing digital bank, is an excellent example of how instant account authentication can make an impact. In a September 2020 study, Chime found that customers who authenticated their outside financial accounts using Plaid were 3.2x more likely to fund their Chime accounts, as compared to other bank connection methods. They also spent 5x more in the first 12 months.
2. Peer-to-peer (P2P) payments
Financial APIs have unlocked new ways for people to pay each other, whether it be splitting a check or buying a product. In the past, there was typically a manual step required to initiate a money transfer from one bank account to another—examples include checks, debit cards, and even cash. Financial APIs have removed the extra step.
By enabling a direct connection between bank accounts for ACH payments, apps like Venmo and CashApp allow people to instantly pay each other from one bank account to another, removing the extra step and added fees. This has changed the way friends and family share expenses and finances, and enabled merchants to add easy payment options with lower fees than credit cards.
3. Fraud risk reduction
As fintech has expanded and more consumers open more financial accounts, bad actors have taken notice. However, the API tools that enable these new tools can also protect consumers from fraud. One way for financial APIs to reduce fraud is through identity checks.
For example, when someone connects a bank account to fund their new fintech account, an identity API can retrieve information from the connected account and check it against the information provided during onboarding. This API connection can verify data such as name, address, email address, and phone number to ensure that every field from the connected bank account matches what the customer provided at signup.
Cryptocurrency trading app Metal used an identity API to mitigate fraud risk by checking their know-your-customer (KYC) data against the data consumers have provided to their connected financial accounts. In just one month, they were able to prevent 5,000 would-be fraudsters from collecting sign-up bonuses totaling over $75,000.
Learn why more consumers are choosing to pay with their banks.
4. Personal financial management
Most people have multiple accounts for checking, savings, investments, loans, credit cards, and more across multiple financial institutions, which makes tracking the balances and transactions in those accounts quite difficult. Account aggregation—the practice of showing multiple accounts in one app or dashboard—is valuable across multiple use cases, one of which is personal financial management.
Financial APIs enable powerful personal financial management tools to be created by integrating all of these accounts under one app. These tools enable users to not only see how much they have and what they owe, but to plan, forecast, and track their spending over time.
YNAB is a personal financial management tool that uses financial APIs to help people make a budget, get out of debt, and effectively set aside funds for saving and investing for the future. New YNAB budgeters save an average of $6,000 in their first year on the app, showing the value that can be created by combining account data with effective budgeting tools via financial APIs.
5. Expanding credit access
Traditional lending relies on slow manual processes such as requiring loan applicants to retrieve myriad financial documents to prove their creditworthiness—in many cases even printing, signing, and scanning physical copies. It also depends highly on credit score, which doesn’t necessarily paint a complete financial picture for every loan applicant. In fact, the Consumer Financial Protection Bureau estimates that 26 million Americans are credit invisible, also known as “thin-file”.
Financial APIs enable faster and more frictionless solutions for obtaining the financial data needed for underwriting. Instead of requiring a person or a business to track down copies of numerous bank statements, APIs can automatically retrieve their recent transaction history—including spending and saving data—giving lenders a more complete view of an applicant’s creditworthiness.
YouLend, a tech-first lending platform, uses an API-based approach to loan applications that enables 3 out of 4 applicants to skip manually submitting documents. When applicants link their financial accounts using Plaid, YouLend is able to disburse funds in under 24 hours.
6. Pre-funding new accounts
When someone signs up for a fintech app, say for trading stocks, the faster they fund that new account, the more likely they are to use it. The most common way to fund these accounts is by ACH transactions, which can take hours or days to complete. On the flip side, financial APIs can give customers instant access to funds.
By using a balance check API that returns the current balance of a connected account, fintech apps can decide whether or not they want to give customers access to their funds before the ACH transaction clears. Say for example, a customer initiates a $500 transfer from an account that has a balance of $2,000, the app can decide (based on the current account balance) to make those funds available instantly, rather than making the customer wait until the transfer is complete.
7. Automated investing
Investing has historically been limited to wealthy individuals and fund managers overseeing large holdings. The combination of financial APIs and software for automated investing has expanded access to low-cost investing by freeing people from the time it takes to invest, the cost of making trades, and the uncertainty of not only making investment decisions, but also remembering to invest.
Acorns, an automated investments platform, uses APIs to link with financial accounts and then rounds up the spare change from purchases into an investment account. Once funds are in the investment account, the app’s software deposits those funds into a diversified portfolio that it builds based on individual user recommendations.
As the open-banking ecosystem continues to develop, more ways to automate wealth management and investments are sure to emerge.
8. Innovative rewards programs
Rewards programs were historically siloed with one company or one credit card. Financial APIs have consolidated rewards programs to work beyond just a singular brand—without the need for a credit card that charges interest.
Drop is an example of a next-gen rewards program enabled by financial APIs. With Drop, users can link their bank account through a financial API, which automatically uses their transactions history to assign points on purchases for brands that partner with Drop, including Walmart, Amazon, Starbucks, and others. Drop points accumulate in the Drop app. From there, users can redeem points for gift cards across numerous brands including Nike, H&M, Starbucks, Amazon, and more.
Increasing financial possibilities and freedom
One thing every app built using financial APIs has in common is that they’re making the difficulties of managing money easier for consumers. Whether giving faster access to money or making it easier to manage and grow investments, financial API use-cases are creating a better financial experience for consumers while opening up new growth opportunities for fintechs and financial institutions. More waves of innovation are sure to come.
Ben White, who leads research and development on Plaid’s policy team, contributed to this article. He is passionate about the potential of fintech to lead to a more inclusive financial system.