As the consumer marketplace has evolved, so have the systems underpinning it. In the United States, this has resulted in explosive growth in the fintech space. Financial technology, or fintech, has evolved rapidly to meet new consumer expectations, focusing on ease of use and flexible financial systems — two factors that have not traditionally been an expectation for financial products.
Much of the recent transformation in US-based finance has been driven by the creation and iteration of fintech APIs. These APIs present a modular solution for service design, allowing for rapid innovation, iteration, consumer support, and market responses. In many cases, these APIs have become the backbone of new innovative tracks of development, rendering new solutions in payment processing, data integration, and even identity validation.
In this piece, we’ll examine why APIs have become critical to the fintech success story and how they continue to power innovation at scale. We’ll look at some examples of effective fintech APIs in the marketplace and the challenges inherent in this growth. We’ll also consider best practices for resolving the API sprawl that many companies have experienced with this meteoric rise in demand for integrated solutions.
What Makes APIs Essential to FintechAPIs are the connecting glue between systems. They allow systems with different data sources, different methodologies, and even different tech stacks to collaboratively work towards a common goal. In fintech, this communication enablement is incredibly important.
Financial services are often spread across disparate data sources and services. Bank accounts, payment gateways, loan processing systems, and even customer relationship management platforms all have a piece to play in the data flow, and each ultimately needs to be connected to the core system in some way.
APIs provide an effective and extensible way to connect these systems. More importantly, how they provide this functionality is typically highly modular, extensible, and scalable, allowing for rapid deployment, testing, and scaling without the high overhead of bespoke integrations or product-level pipelines.
These APIs don’t just provide connectivity — in many cases, they also boost connectivity, making their benefits worth their weight in gold. For instance, small increases in transaction speed for a credit processing service can add up greatly when handling millions of transactions. Performant APIs can add up to millions in potential revenue and save consumers decades of time.
This is especially true when considering how many data sources exist today. Instead of giving your login details to a shady third-party integrator, APIs provide consumers the ability to interact with their banking service through a standardized connection. Credit providers can validate the identity of a user without making a lengthy request for scans of someone’s ID card or passport. These features mean lower latency for data, quicker decision-making, and, ultimately, a more seamless consumer experience.
Finally, these APIs unlock huge integration options for technologies that are not traditionally within the fintech space. Obvious services like fraud detection have always been part of financial technology, but what about connecting users to a marketplace of realtors when they decide to sell their homes? What about offering variable payment options as part of an e-commerce platform? These systems open up so much more opportunity for integration that benefits both the user and the provider.
Also read: 10 Reasons Why APIs Are Pivotal to Modern Online Banking Example Fintech APIs in the US MarketTo get a firm grasp on how helpful APIs have been in the fintech market in the US, let’s look at a couple of real-world examples.
PlaidPlaid is an API designed to connect bank accounts to applications and services on a variety of platforms. Plaid works by giving secure access to additional services without transferring user login data, utilizing the financial data itself as a transactional API.
By surfacing this data, Plaid can connect services like Venmo or RocketMoney to consumer bank accounts without introducing security concerns. This allows users to unlock huge benefits without worrying about their data being stolen or having their accounts hacked. This also provides developers the opportunity to create services in the fintech space without having to absorb the cost of making their own SOC2-compliant service — they can simply adopt a solution and start developing right away!
With developer-friendly resources, Plaid simplifies what would otherwise be an expensive and complex endeavor for many developers, opening up fintech to broader innovation and iteration than would otherwise be possible.
SquareSquare is a well-known payment processing service that demonstrates what APIs can really do for a fintech business. While Square started simply as a payment processing solution, it has grown into an entire ecosystem of fintech solutions, offering a comprehensive platform for anything involving financial transactions.
This ecosystem provides a wide variety of functionalities both for consumers and providers. Collecting money for your farmer’s market stall? Square has you covered. Managing payroll for your subcontractors in the millions of dollars? Guess what, Square has it. Managing app transactions for e-commerce at scale? Square can do it.
Square’s APIs aren’t just useful for integrations — they have an additive quality that means developers can build upon Square iterations, deploying new features on their applications utilizing existing endpoints while creating their own novel systems and services. In essence, Square has become a platform-as-a-service solution for fintech APIs, and it does this well.
StripeStripe is another good example of APIs providing functionality at scale. While Stripe started much like Square to provide simple payment processing, it has grown significantly, offering complex services and tooling across online and in-person payment flows. Stripe supports everything from payment management to revenue documentation and presents a unified solution for small businesses.
Stripe has also grown to provide its own solutions for fraud detection, multi-currency support, and even AI-driven systems. Stripe continues to innovate new features that have seen it get wide inclusion across diverse industries, and it’s especially popular with vendors operating in multi-national commerce environments.
YodleeOne great example of a wider-purpose API is Yodlee from Envestnet. Yodlee is an open banking platform that has integrated APIs for a variety of solutions, including benchmarking, cash flow estimates, data modeling, and more.
What’s interesting about Yodlee is that it has positioned itself as an API solution. Given the sprawl issue that underpins much IT development, Yodlee looks like a good one-stop shop to integrate functionality without having to individually develop or iterate on feature-specific APIs. For this reason, it has become a product-first platform for a wide variety of fintech partners.
ChimeFor another example of API-driven fintech in the US, we can look at neo-bank Chime. As an entirely online bank, Chime lives and breathes by its APIs. While Chime does offer services in the market through its product provision for employers termed Chime Enterprise, the application itself is connected through various internal APIs.
This is a great example of how moving away from the classic enterprise has necessitated some changes. Old school banks that handled paper slips and physical deposits had a lot of older archaic processes to fall back on, and so when they pivoted to digital technology, this was often reflected in their product offerings.
Neobanks like Chime, on the other hand, did not have this background. For better or worse, Chime had to completely reinvent the wheel to figure out what online-only banking looks like. A lot of this innovation was powered by the same sort of APIs you would imagine in social media or other web implementations — depositors became users, their financial deposits akin to profile data, and so forth.
Challenges of API Sprawl in FintechWhile these APIs have enabled wonderful innovation in the market, it has led to a phenomenon known as API sprawl. The problem is simple: as companies grow and innovate in new sectors, they tend to adopt new APIs and microservices at an exponential rate. This adds up significantly, resulting in a complex web of interconnected services and APIs that are difficult to manage.
API sprawl introduces some major issues for organizations:
To combat the risks associated with the API sprawl of the fintech growth, many organizations have turned to identity access management or IAM solutions. These solutions are designed to oversee the full identity management of the system, regardless of the sheer number of components involved.
An effective IAM allows companies to define roles and permissions at a granular level. In the case of role-based access control or RBAC, this can sidestep the core issue of API permissions by controlling the flow of information according to user rather than service. These systems also generally offer advanced monitoring, especially in transit data and interactions, allowing providers to detect unusual or unauthorized activity.
Perhaps most importantly for large fintech companies, IAM solutions are a big first step towards ensuring compliance against regulatory requirements. Generating audit logs, validating security protocols, and managing permissions are all factors that must be deployed effectively for regulatory compliance, and an IAM unlocks the ability to align your posture correctly.
Related: Why Identity Control Is Crucial to Secure API Access ConclusionUS-based fintech is heavily reliant upon APIs. And although API sprawl is an issue with the explosion of APIs in fintech and open banking, it’s not an insurmountable problem. With a small amount of awareness and a desire to correct the underlying tech powering the organization, any fintech provider can effectively manage this exposure and resolve the core problem of sprawl at scale.
IAM solutions are a big part of approaching this and can be used to mitigate even the most complex of API sprawl issues. With an eye for attention and systems to support mitigation, fintech can continue to evolve without fear into the next generation of financial technology.
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