How APIs are shaping the future of financial services

Building new financial products is, to say the least, a complex process. It often depends on gaining access to your customers’ permissioned financial data: things like bank transactions, account balances, investments, and credit cards.

In recent years, financial APIs have become a best practice for connecting third-party services with financial institutions for the purpose of exchanging financial data. They allow consumers to quickly and securely share their financial data, leading to entirely new financial tools that offer a better user experience. 

The ongoing shift toward digital solutions continues to transform the financial ecosystem. Financial institutions that can meet changing consumer behaviors and provide an API-based approach are well-positioned to build and define the financial services of the future. 

What is a financial API?

API stands for Application Programming Interface. An API is a software application that allows two different digital systems to interact with one another. Think of APIs as an intermediary that ensures the direct exchange of data.

In the financial services industry, APIs act as an intermediary between institutions that hold consumer data (for example, banks and credit unions) and entities that need to access that information (for example, PayPal and TurboTax). Financial APIs allow developers to programmatically access a financial institution’s data without having to interact directly with their back-end systems. 

In general, APIs provide a faster, more secure, and cost-effective way to share financial data. 

For more information on financial APIs and how they work, check out our article “What is a financial API?”.

→ Need a financial API solution? Core Exchange enables financial institutions to quickly execute Financial Data Exchange (FDX) APIs they can use to connect with Plaid, other aggregators, and organizations.

How are APIs changing financial products and services for consumers?

In the past, because sharing financial data between institutions was difficult, providers often aimed to provide comprehensive product suites, everything from mortgages to savings accounts to financial planning. But financial APIs have changed that. The result has been more financial products and services, and thus, increased competition, which has tended to benefit consumers. 

Because money and financial data are more portable, people generally opt for the best rates, the lowest fees, the most impressive features, and the best user experience. Below are just a few examples of this new generation of financial products:

• The American Express Gold card offers benefits and ongoing rewards for dining and supermarkets, as well as an annual dining credit

• Chime provides fee-free mobile-first banking and accelerated access to direct deposits

• US Bank offers a small-dollar loan product to help customers with unexpected or short-term cash needs

• Betterment provides diversified investing with ETFs, automated investing, and transparent pricing

• Robinhood, the popular trading app, offers no-fee stock, ETFs, and options trading

• Ellevest members receive targeted financial education and investing advice, in addition to portfolio and retirement management tools

It has also enabled the creation of a new class of products and services built entirely on the kind of permissioned consumer financial data that APIs provide.

• Make P2P payments with your bank account (Venmo, Zelle, CashApp)

• Earn rewards on debit card purchases (Point)

• Instantly build a personalized budget using your bank transactions (YNAB, EveryDollar)

• Prevent overdraft fees and predatory loans (Brigit, Dave, Earnin’)

• Buy, sell, and send cryptocurrency (Coinbase, Gemini)

• Get automated investment advice (Atom Finance)

• Round up your purchases for spare-change investing (Acorns, Qapital)

• Get personalized recommendations based on your financial situation (Credit Karma)

→ Want to help your customers improve their financial health? Plaid Transactions enables you to access transactions data for up to 24 months so you provide insights on users’ expenses and help them meet their financial goals.

Do financial institutions offer APIs?

While some financial institutions do offer APIs, their APIs have typically been private; that is, they integrate only with other products or services from the same financial institution, primarily to enhance operational efficiency.

Today, consumer expectations are changing—and so are the banks. People expect their money and financial data to be available instantly, wherever they want it. Regulations like Dodd Frank 1033 have further solidified the ability for consumers to take these steps to access their data. As a result, banks have begun building partner APIs for preferred third-party partners. An example would be the April 2020 Data Access Agreement (DAA) between Charles Schwab and Yodlee, or a similar one between Plaid and US Bank. 

By the same token, it’s not feasible for some financial institutions to build and maintain their own APIs. For example, smaller community banks and credit unions may not have the engineering resources or budget to develop an open API, or they may simply prefer to prioritize other initiatives. Some of these institutions have enlisted third-party providers to help build APIs, or have adopted simpler connectivity methods to enable data-sharing. Plaid has attempted to solve this problem by developing Plaid Exchange.

How is the relationship between banking and fintech evolving?

Navigating a changing industry landscape is never easy, especially for incumbents. Initially, many established firms viewed fintechs as a competitive threat, and many did not see the value of innovating their offerings. By the same token, many fintechs gained access to permissioned consumer financial data using screen scraping, a method that many incumbents disliked.

In the long term, though, both established players and new entrants are united in a common goal: they aim to meet the needs of consumers and offer them the best possible experience. Increasingly, that has led some traditional institutions to see fintechs as potential partners. Some of these partnerships have allowed incumbents to swiftly gain new business, launch new products and services, and migrate away from legacy systems. 

Many fintechs also view banks as important customers, sources of capital, and data-access partners. By working together with established institutions, fintechs benefit from increased traffic, greater trust, and faster growth.

In the United States, this move toward partnership and collaboration has generally been supported by regulators and policymakers, most notably the Consumer Financial Protection Bureau (CFPB). The CFPB’s Advanced Notice of Proposed Rulemaking (ANPR) on Dodd-Frank Section 1033 reiterated in 2020 that consumer control is central to a data sharing ecosystem. As they work more closely together, fintechs and established financial institutions can build jointly-designed solutions that take into consideration each of their specific perspectives and needs, while ensuring that these solutions and standards are good for consumers.

For example, the Financial Data Exchange (FDX) is dedicated to unifying the financial industry around a common interoperable data standard. Plaid serves on the FDX board with financial institutions, data aggregators, permissioned parties, and industry groups to ensure that APIs protect the data and provide the reliability our customers need.

What will the future of banking and financial transactions look like?

This shift toward digital will continue to transform the financial services industry. Those financial institutions that can meet consumer expectations and provide an API-based approach are well-positioned to continue to define the financial solutions of the future.

Traditional financial institutions aren’t the only ones who will feel pressure to pursue an API-based, Open Finance approach. As fintech companies (e.g. Acorns, Robinhood) continue to grow, many are becoming data sources themselves. After all, wouldn’t you like to be able to connect your Robinhood account to your primary checking account? Or your Varo account to your budgeting app?

Financial accounts are only the first type of data that has transitioned to an API-based approach. In coming years, data from the fields of healthcare, insurance, payroll, and utilities are likely to follow suit, and some early adopters have already started. The result will be an increasingly interconnected financial ecosystem, with the difference between incumbent firms and newer entrants increasingly blurred. Meanwhile, consumers will enjoy increased competition (read: more competitive rates) among providers and newer, more consumer-friendly financial products and services.

Building a consumer-oriented ecosystem, powered by APIs

Today’s established financial institutions are the result of many years of evolution in the absence of APIs. They were built as one-stop shops for their customers: a single place to get every kind of financial product, from credit cards to checking accounts to home loans. If there happened to be better rates at other banks, that wasn’t such a big deal; the pain of moving money between financial institutions was simply too great for most consumers.

Open Banking is changing this all. They allow consumers to swiftly and securely transmit their financial data between providers. That, in turn, has enabled innovators to build a whole new class of financial tools. Personalized budgets are generated instantly; international money transfers are processed for pennies; and loans are increasingly underwritten with cash-flow data—all of which would have been impossible ten years ago, without the permissioned consumer financial data that flows through APIs.

This has enabled the flourishing of a new and interconnected financial services ecosystem. Today, it’s normal for consumers to have credit cards from Chase, a home loan from Capital One, and a primary checking account at Chime—as well as a handful of financial apps that pull data from all of the above accounts. Increasingly, financial institutions are prioritizing a digital-first customer experience—including connectivity between their accounts. Institutions that fail to adapt do so at their peril.

Generally speaking, regulators and policymakers have supported the consumer’s right to their financial data, as well as the move toward an Open Finance ecosystem powered by APIs. The shift toward digital money management is here to stay. The more interesting question is the future: what kinds of financial tools, inconceivable today, will be widespread in ten years? And which firms will most successfully navigate the changing landscape?