Financial APIs (application programming interfaces) are the data connections fueling the rise of fintech. By creating a secure data connection between a consumer’s financial account and fintech apps, financial APIs make it easy and safe for financial account data to be used for things like investing, budgeting, saving, paying off debt, earning rewards, and more.
The adoption of fintech and financial APIs happened fast. According to Plaid’s consumer survey, the percentage of US fintech users grew from 58% to 88% from 2020-2021, a 52% increase in just one year. This rapid adoption highlights the immense value of fintech in modern life.
Three trends are driving the migration from traditional financial services to fintech (and financial APIs with it):
1. Better choices for consumers
Fintech solutions simply make life easier and better for consumers, which is why people use them. When surveyed, 93% of US consumers who use fintech say it saves them time, 78% say it saves them money, and 73% say it reduces fear and stress. Fintech is able to create these dramatic improvements because it fills gaps left by traditional financial services.
Take Chime, the neobank that offers fee-free checking accounts, no-fee overdraft protection, no minimum balances, fee-free ATMs, and the ability to build a credit history without incurring interest fees. By filling these gaps left by traditional financial services, Chime strongly appeals to US consumers, helping the company reach 12 million customers in 2021—only 7 years after its founding.
Chime’s success shows that consumers are eager for what fintech brings. The proliferation of fintech has given rise to a ‘fintech ecosystem’ where consumers can choose from many different apps for services like investing, banking, payments, and more.
In fact, the average US millennial uses 4.3 fintech apps, while the average Baby Boomer still uses 2.6. Additionally, 3 in 4 consumers say that the ability to link their account to fintech apps and services is a top priority when choosing a bank. This fintech ecosystem could only exist with financial APIs, which link consumers' financial accounts to the numerous fintech apps they use.
In response to the consumer thirst for fintech, investment in fintech has taken off. Fintech investments hit over $915B in 2021, nearly doubling the total for 2020. Consumer preferences drive the trend, while investments and technologies like financial APIs enable it.
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2. A changing regulatory landscape
While the rise in fintech is mostly consumer driven, changing regulations support the use of financial APIs as well. That’s because APIs increase consumers’ transparency and visibility into their financial situations, and improve competition and innovation.
Under Section 1033 of Dodd-Frank Wall Street Reform and Consumer Protection Act, financial institutions are obligated to make their customers’ financial information accessible to them. By securely opening up financial accounts to outside fintech apps via APIs, financial institutions are giving customers the data access they need. That’s because data access gives consumers a choice of how and where to use their financial account data, and to use it in a way that best suits their financial needs.
More formal rules around consumer data access are likely coming, as the Consumer Financial Protection Bureau (CFPB) announced an Advanced Notice of Proposed Rulemaking on Section 1033 of the Dodd-Frank Act in November of 2020. What this means is that the federal government is taking open banking seriously, and likely intends to regulate in what should be a positive way for consumers. This was further cemented by the July, 2021 executive order that “encourages the CFPB to issue rules allowing customers to download their banking data and take it with them.”
Financial APIs free up financial account information for consumers to use as they see fit. Whether for a budgeting app or peer-to-peer lending, open banking data gives consumers the access that regulations like Section 1033 require. Given the direction the US government seems to be going, it can be expected that API-driven open banking solutions will thrive in a friendly regulatory environment.
3. Increasing technical standards
Just as regulations are changing to support financial APIs, so are technical standards. Financial Data Exchange (FDX) brings together participants from across the financial data ecosystem to design common API standards. The goal is to ensure that consumers have safe and reliable access to their financial data.
Higher technical standards further cement the role that APIs play in fintech. That’s because no other methods of connecting consumer financial data to fintech apps can match the high standards made for APIs.
According to Ben White, Policy R&D at Plaid, “Plaid sits on the board of FDX and is committed to working with the consortium to design technical standards that ensure the principles of control, access, transparency, traceability, and security.”
Mass fintech adoption also puts pressure on financial institutions to provide their customers with open access to fintech. To ensure customers have a safe way to share their financial data, financial institutions are beginning to adopt the FDX standards as they partner with data networks and third-party fintech apps that allow their customers to ‘plug in’ to the fintech ecosystem.
For smaller financial institutions that lack the developer resources to build their own high-standard API integrations, Plaid Exchange offers a solution. If a bank or credit union integrates with Plaid Exchange, their customers can instantly join any of the 5,500+ fintech apps that use Plaid. This is an easy and secure way for financial institutions to empower their customers with access to the fintech ecosystem and maintain high technical standards at the same time.
Accelerate your open finance journey: Empowering customers with data connectivity
The long-term implications of financial APIs
For consumers, the benefits are abundant of using products built on financial APIs. They not only get more choice on how to access and use their financial data, they also get a plethora of new tools to help save, budget, invest, earn rewards, and get to their desired financial state. It’s no wonder that consumer expectations for financial services are changing as the possibilities grow.
For fintech companies, connecting with financial account data via APIs provides stability and dependability. It gives them more power to create innovative apps based on consumer-permissioned data, and makes it easier to enter into new markets (or even create them).
Mass fintech adoption and record-setting investments reveal that the fintech revolution is revving up. This ongoing shift to an API-based financial ecosystem means that consumer financial data is accessible but safe, data reliability is ensured, and choices are abundant.
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.