3 steps to creating and owning your bank’s API strategy

By Leo Mattiazzi

Use an Application Programming Interface to create connected digital experiences and customer flexibility, even to fast-track internal software development.

Application Programming Interface, or APIs, are a powerful way for banks to securely send and receive financial data across services and apps. They fuel everything from account aggregators to embedded B2B payments.

Many bank leaders, though, still need to make APIs a core part of their operating model. That means they need to take advantage of a huge opportunity to create more connected digital experiences, offer more flexibility to customers, and even fast-track internal software development.

The key to reaping those benefits is a robust API strategy. Consider these three steps to create – and own – a successful one.

1. Define what you want to do with APIs

Every API strategy should focus on the specific value you want to derive from your API connections. Maybe you want to…

Let your customers enjoy third-party experiences. You may focus solely on partnering with data aggregators to allow third-party products (like personal finance management software) to connect to your institution and bring in your customer data. This data-out strategy doesn’t let you control much more than which partners you share data with. But compared to screen scraping, it’s a relatively low-risk data-sharing approach that’s on its way to becoming table stakes.

Learn more about your customer’s finances. Flipping the previous use case on its head, banks can create a more holistic picture of each customer by using data aggregators to connect to partner institutions (whether financial or not). This data-in strategy makes it easy to send customized messaging and, when appropriate, relevant product offers. (Note: only partner institutions will allow this level of data sharing, except in jurisdictions where it’s mandatory to provide data upon request.)

Speed up internal teams’ innovation. APIs eliminate the need to heavily roadmap internal solution development, a seldom-cited benefit. Instead, APIs let teams easily share data and services across disconnected digital tools (e.g., the core banking system, CRM, LOS, data analytics software, etc.), more quickly bringing new experiences and products to life.

Foster ecosystem collaboration and innovation. Banks can use their and other institutions’ APIs to orchestrate different client services, such as a digital marketplace or financial “super app.”

Enable embedded finance. Banks can use APIs to integrate their financial services into other parts of customers’ financial journeys (e.g., allowing invoice payments directly in business owners’ accounting software), creating the streamlined experience that customers love. It’s not a monetization strategy, but rather a differentiation strategy.

Provide banking as a service (BaaS). Banks can create new revenue streams by offering APIs that let third-party fintech partners leverage their financial services. Iowa-based Lincoln Savings Bank, for instance, manages direct deposits for Square’s Cash Card. Square can offer its customers a debit card without requiring them to open a checking account manually. And Lincoln Savings has a new way to generate revenue.

There’s no single best path to go down, and these paths aren’t mutually exclusive. But it’s worth identifying your top API objectives and choosing one to target first. This way, it’s more straightforward to decide which types of connections to invest in (and avoid a costly scattershot approach).

2. Choose (or design) the right APIs for your goals

Different API strategies rely on different kinds of APIs to achieve their goals. They generally fall into three categories:

Internal: About 75% of global banking APIs fall into this category. They’re not intended for third-party use and aren’t accessible to external developers. Instead, they’re typically used to expedite app creation, fast-track software updates, and share data across teams.

Partner: Comprising roughly 20% of banking APIs, partner APIs let third-party software connect to banks (such as in embedded finance) and vice versa (as with an account aggregator or P2P payments app).

Public: APIs in this category are fully available for public use via a portal or digital marketplace (see Deutsche Bank, for example). They can be a helpful way for banks to generate new revenue. But most importantly, they allow banks to innovate with the help of others. While they only make up 5% of banking APIs, 75 of the top 100 global banks use public APIs to support developers across the financial services industry.

Depending on your strategy, it likely makes sense to prioritize one or two API types that will help you quickly achieve short-term business goals – while also evolving your plan for the long term.

That evolution is crucial. APIs aren’t a one-off investment. You can gradually expand the tools available – and the scope of your investment – as you work toward longer-term goals.

It’s also worth noting that API architectures have been around for decades; they’re generally well-understood by technical teams. The barrier to successful implementation isn’t technical complexity, then, but rather a strategic approach that keeps enough of the future in sight.

3. Understand the value of API standards

Unlike some countries, the U.S. does not currently have any regulations that mandate standards for API creation and management. But banking APIs relay customers’ most sensitive financial data. Common API standards – agreed upon by banks and third-party fintechs – are crucial for maintaining secure and consent-driven data-sharing practices.

Consortiums like Financial Data Exchange (FDX) are pushing for just that. With over 200 member organizations, they’re paving the way for consensus-driven API standards that benefit customers and financial institutions. No matter your API strategy, embracing standards like FDX’s is a powerful way to signal your commitment to a financial services ecosystem.

Remember, APIs are a gateway technology

Most banks have APIs on the backburner right now. For many observers, that’s a challenge that needs to be solved.

APIs are the gateway to more efficiency, a better customer experience, and a more competitive footing in the banking ecosystem. The banks investing in a robust API strategy will realize their value for years.