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Application Program Interfaces (APIs) are sets of standards and protocols that allow software components to communicate with each other. We use them, typically unknowingly, on a daily basis as we navigate through the digital world. When you watch Netflix, register to a new website using your Facebook account, or view a Google Map embedded in Yelp, you are using an API. APIs, in short, have been instrumental in the development of many of the digital products that are now commonplace in our daily lives.
APIs and Fintech Innovation
Zooming in on the fintech space, APIs are one of the most important factors in the explosion of financial technology products and services in recent years. From payments and lending, to financial data aggregation and fraud prevention, fintech APIs are revolutionizing nearly all facets of the financial technology space.
APIs enable developers to integrate the features of one application into the code of another. This means that developers can use the existing work of other programmers as they build out their products, drastically increasing speed to market. For example, instead of developing their own proprietary account verification system, developers at a fintech companies can simply integrate Quovo’s Authentication API into their code. With account authentication now quickly out of the way, the developers can focus their attention on the product itself.
Fintech APIs can be viewed as the building blocks out of which new fintech products can be built. As more and more fintech APIs are developed and leveraged for new products, the speed of fintech innovation is likely to increase, which has significant implications for the wider finance industry. In fact, an increase in innovative fintech products is a massive opportunity for traditional financial institutions such as banks, and these institutions can play an active role in fintech innovation with the deployment of their own internal APIs.
APIs: Blurring the Lines Between Fintech and Finance
Fintech APIs have significant upside for enterprises who collaborate with fintechs to cost effectively improve their service offerings. By using APIs to integrate niche, non-proprietary fintech products into their offerings, banks and wealth management firms, for example, can meet the ever-changing needs and expectations of their increasingly tech-savvy customers, while simultaneously enabling fintechs to market their products at scale.
However, APIs developed by fintech startups are not the only APIs that are driving fintech innovation. Traditional institutions can share their own APIs with fintech companies, granting them access to their data so that they can develop robust products. This sharing of APIs, often coined as “open banking,” can create ecosystems in which new products and front-end customer experiences are conceived, allowing institutions and fintechs to improve their customer reach and bottom lines. By using open bank APIs, fintech companies are able to navigate through the onerous financial regulatory landscape. With this piggybacking on the regulated systems of the banks, fintechs can avoid the heavy regulatory lifting, remaining agile and focused on product development.
Many prominent financial institutions such as BBVA, Citi, Bank of America, and Capital One, to name just a few, have caught onto this potential, and, to varying degrees, are actively making their internal APIs public to startups in the hopes that they will create the next big fintech product. It is within this cycle of bank-fintech collaboration that the future of financial technology innovation rests.
Some have argued that the continued development of fintech will lead to the displacement and disintermediation of traditional financial institutions. While it is true that many fintech products have been adopted, especially by millennials, in lieu of traditional financial services, the more exciting and realistic endgame is one in which fintechs and banks work together to create innovative products and improve customer experience. In this scenario, which is already beginning to play out, everyone benefits: banks, fintechs, and customers alike.
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