What is a Financial API?

Application Programming Interfaces (APIs) have transformed how financial systems interact. They enable seamless and secure data exchange among independent programs while fostering collaboration among various players in an ecosystem.

The emergence of financial APIs has contributed to the birth of fintechs and consumer applications around the world. At the forefront of this movement was Yodlee, which was one of the first companies to pull data from bank websites via webscraping. Yodlee priced its API high and only large institutions could access it.

When Plaid came in and made data connectors available to every company in the market, including startups, the revolution truly began.

The recent growth in the use of financial APIs around the world is just the tip of the iceberg. Companies like Mastercard with Finicity are jumping in the game with, Visa acquiring Tink, Wealthica in Canada, Powens, Salt Edge, and Flanks in Europe, Tarabut Gateway and Dapi in the Mena region, and Vezgo in the crypto space.

According to Statista, the number of open banking API calls is expected to soar to 580 billion by 2027 from 102 billion in 2023. The value of open banking transactions is also expected to increase to 330 billion US dollars in 2027. 

In this article, we will give you an overview of what financial APIs are, their benefits, drawbacks, and their key players. And if you’re curious about how they are used in the finance industry? We will also cover some use cases. 

Let’s dive in!

Understanding Financial APIs

A Financial API is a set of protocols and tools that allow individuals to offer their information to financial service providers. The APIs are like a channel through which users can share their financial information, such as routing number, transaction histories, and even balances with financial service providers who can use this data to offer personalized services to the customers.

They can also facilitate payment, automate trading, and facilitate cross-border payments. The role of financial APIs goes beyond just connecting systems; they also facilitate secure data exchange. They provide controlled access to specific data and functionalities through robust authentication and authorization mechanisms. This way, they ensure that sensitive financial information is shared only with authorized parties.

When a developer builds with Vezgo API, for instance, the financial API can access and aggregate users’ crypto balances and transaction history across various exchanges, wallets, and blockchains. And that is the main use case of what a Financial API does. 

Vezgo API Documentation

Benefits of Financial APIs

Financial APIs offer a wide array of benefits, revolutionizing the way businesses and individuals interact with financial systems. Here are some of them:

Enhanced Efficiency in Financial Operations

Financial APIs bring significant efficiency gains to the industry. They eliminate the need for manual processes, reducing operational costs and time-consuming tasks. For instance, Vezgo API allows developers to integrate with multiple digital currency platforms with just one API. 

Streamlined Customer Experiences through API-driven Applications

APIs empower financial institutions and fintech companies to develop innovative applications that deliver seamless and personalized customer experiences. 

Thanks to APIs, these applications can access and utilize financial data, such as transaction history, account balances, and credit scores, to offer tailored services.

For example, a US personal finance management tool can use Plaid to aggregate investments from about 12,000 bank and investment institutions and complement with the Vezgo API to aggregate portfolio data from multiple digital wallets, exchanges, and blockchains. This way, users have a comprehensive overview of their finances in one place. If the tool was to expand in the Canada, it could integrate with Wealthica’s financial API to connect 150 Canadian institutions.

Accelerated Innovation and Collaboration in the Financial Sector

APIs enable stakeholders, including banks, fintech startups, and third-party developers, to collaborate and build upon existing financial infrastructure. This collaborative approach accelerates the pace of innovation, enabling the development of new products and services that meet evolving customer needs.

Common Types of Financial APIs

Here are the common types of Financial APIs available:

Public APIs

Public APIs provide access to a predefined set of functionalities and data, enabling third-party developers to build applications and services on top of existing financial platforms. For example, payment gateway APIs enable merchants to integrate payment processing capabilities into their e-commerce websites, enhancing the customer checkout experience.

Partners API

Partners APIs are specifically designed for collaboration between financial institutions and their trusted partners. These APIs enable secure data sharing and integration between organizations, allowing them to collaborate on various financial services and products. For instance, a bank might provide a partners API to a mortgage broker, enabling them to access customer financial data for mortgage application processing.

Private APIs

Private APIs, also known as internal APIs or enterprise APIs, are developed for internal use within an organization. They facilitate integration between different internal systems and applications, enhancing operational efficiency and enabling seamless data exchange within a financial institution. For example, a bank might utilize a private API to connect its core banking system with its customer relationship management (CRM) software, enabling a holistic view of customer data.

Exploring Use Cases for Financial APIs

Financial APIs offer a wide range of practical applications across various fields, revolutionizing how financial services are accessed and delivered. Let’s explore some of its use cases:

Open Banking and PSD2 Compliance

Open Banking, driven by financial APIs, has gained traction globally, particularly with the implementation of the European Union’s Revised Payment Services Directive (PSD2). “The PSD2 supports innovation and competition in retail payments and enhances the security of payment transactions and the protection of consumer data.”

Fintech Applications and Third-Party Integrations

Fintech companies heavily rely on financial APIs to create innovative applications and services. By leveraging APIs, these companies can access financial data, integrate with payment systems, and provide seamless user experiences. 

For instance, investment management platforms can utilize market data APIs the like the Nasdaq data to fetch real-time stock prices and financial market data, enabling users to make informed investment decisions.

Personal Finance Management Tools

API-driven personal finance management tools aggregate financial data from various sources, such as bank accounts, credit cards, and investment accounts, providing users with a comprehensive overview of their financial health. 

The new movement of open banking promotes data sharing and fosters competition by enabling authorized third-party providers to access customer financial data through APIs. Allowing consumers to share their financial information securely with authorized service providers and leading to the development of innovative financial services and increased consumer choice.

Thanks to APIs, personal finance management tools can securely access and update financial data, categorize transactions, and provide insightful financial analytics to help users track their spending, set budgets, and achieve their financial goals. A good example is Wealthica. The same description can apply to tax software that aggregate all brokerage transactions via API.

Risk Management and Fraud Prevention

Financial institutions employ APIs to enhance risk management and fraud prevention capabilities. By leveraging APIs that provide access to real-time transaction data, banks can analyze patterns, detect anomalies, and proactively identify potential fraudulent activities. Furthermore, APIs enable the integration of external services, such as identity verification and anti-money laundering (AML) solutions, strengthening the overall security framework.

Payments

Financial APIs are revolutionizing payments by enabling seamless communication between software applications and financial systems. They facilitate instant transactions through multiple payment methods, while providing security through encryption and authentication. These financial APIs enable businesses to offer multiple payment options, process real-time transactions, and effortlessly manage recurring payments. From processing refunds to providing detailed transaction histories, financial APIs have become the backbone of modern payment ecosystems, simplifying processes, improving user experiences, and driving financial innovation.

Challenges and Considerations with Financial APIs

The use of APIs in the financial world also comes with its challenges. Here are the major ones to keep note of:

Security and Data Privacy Concerns

While APIs bring significant benefits, they also present security and data privacy challenges. Financial institutions must ensure API endpoints are secure and adequately authenticated to prevent unauthorized access to sensitive financial data. Additionally, data privacy regulations, such as the General Data Protection Regulation (GDPR), impose stringent requirements on collecting, storing, and processing personal data, necessitating robust privacy controls and compliance measures.

Compliance and Regulatory Frameworks

Financial institutions operating in different jurisdictions must navigate complex compliance and regulatory frameworks when implementing financial APIs. Compliance with regulations, such as KYC and AML, is crucial to prevent money laundering and terrorist financing. Financial institutions must ensure that their APIs adhere to these regulations and implement appropriate monitoring mechanisms to ensure compliance.

Technical Integration Complexities

Integrating financial APIs with existing systems can be technically challenging. Legacy infrastructure, varying data formats, and disparate systems within financial institutions can hinder the smooth integration of APIs. Financial institutions must invest in robust architecture and scalable infrastructure to ensure seamless API integration while maintaining system stability and reliability.

Key Players in the Financial API Space

The use of APIs suggests collaboration across different organizations or systems. The following are the key players in this space:

Established Financial Institutions and Banks

With the help of open banking regulation in several countries, traditional banks and financial institutions recognize APIs’ importance and are increasingly adopting API-driven strategies. Many banks now provide developer portals and offer API access to trusted partners, fostering collaboration and innovation within the industry.

Fintech Companies and Startups

Fintech companies and startups have been at the forefront of leveraging financial APIs to disrupt traditional financial services. These agile and innovative companies build applications and services using APIs, providing customers with enhanced user experiences and alternative financial solutions.

API Service Providers and Platforms

API service providers and platforms offer infrastructure, tools, and support to facilitate the development, management, and integration of financial APIs. These providers provide API gateway management, developer portal creation, and security and authentication solutions, simplifying the API implementation process for financial institutions and developers.

Financial Apis in the Crypto Space: Introducing Vezgo

Having been around for over a decade, the cryptocurrency industry is now considered an integral part of the financial ecosystem. And as such, financial APIs are just as needed in the DeFi space as they’re needed in the financial banking system.

And this is where Vezgo comes in. 

Vezgo is a SOC 2 Type 2 crypto financial API that allows service providers gain consumer-permission access to digital portfolio data, such as crypto balances and transaction histories. And with this data, fintechs can offer tailored financial services to consumers.

Common use cases of the Vezgo API include:

1. Digital banking applications
2. Crypto Insurance
3. Crypto taxes and accounting with support for internal transactions
4. Crypto lending and authentication platforms
5. Financial dashboards 
6. Wealth management applications.

Also, one of the greatest advantages of Vezgo is developers can access over 300 crypto platforms with just one API integration! These platforms include exchanges like Binance and Kraken, Coinbase; wallets like Trust and Atomic; and blockchains like Polygon and Cardano.

It gets even better with the bank-level encryption that Vezgo uses for its security. Every bit of data is secured.

You too can join the community of over 100 companies that rely on Vezgo as their financial API. Send us a mail here.