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How do APIs work in banking?

Branson Low | February 22, 2022

APIs are playing an increasingly important role in today’s world, and banking is no exception. Corporate treasury teams are looking for real-time access to data that can help them operate more effectively across activities such as reconciliation, forecasting, cash management and payments – and bank APIs can deliver the real-time connectivity and richer data they need for the modern treasury.

But how do APIs work in banking, and how can corporates benefit from this technology? Read on to find out what bank APIs are, how to use them, and how they can help your organization.

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What does API stand for in banking? And what is API banking?

In short, an application programming interface (API) is a set of rules that allow two systems to communicate with each other using specific message formats. APIs can be used for in a wide range of contexts, and are becoming increasingly prevalent for everything from sending instant messages to making travel bookings.

So how do APIs work in banking? Bank APIs are a digital channel that represent the fastest and most secure way for a company to connect to a bank. In a nutshell, they establish a direct connection between the bank and the corporation’s system, typically an ERP system. As such, bank APIs make processes and workflows more independent, as no intermediary is needed between the corporate and the bank. Bank APIs also make treasury activities easier and more streamlined by simplifying the movement of money.

How are APIs used in banking?

In order to offer APIs to their clients, banks need to publish bank API specifications. Effectively these are instructions that detail how clients can send requests to the bank API, and how they can receive responses from the bank. This information is published by the bank in the form of an API specification document.

Granted access to API developer portals

Banks that are using APIs typically have a developer portal, which provide guidelines and rules for how developers understand, interact, and adopt the banks requirements for interacting with their APIs. These portals list the bank APIs available and provides the instructions for building applications using this data so that the corporate can integrate with the API.

For corporates, meanwhile, the question is how to use a banking API. This involves connecting with partners who have pre-built and tested their connections, so that the company can bring the information it receives into its internal systems such as the ERP.

Compared to traditional types of bank connectivity, bank APIs provide faster and more nimble connections. As well as speeding up the treasury team’s access to data, bank APIs also enable companies to access richer data that supports more informed decision-making.

How to use a banking API

Let’s take a closer look at how to use APIs in banking, and how this can help corporate treasury teams operate more efficiently and effectively:

  • Enables real-time access to information. By using bank APIs, treasuries can access the data they need on-demand from their banks as soon as they need it, instead of having to wait for information to arrive on a pre-agreed scheduled. What’s more, the data they receive is fully up-to-date, rather than stale. They can also refresh their data as often as they like. This means treasury teams can make more accurate decisions based on current information.
  • Provides greater transparency. Access to real-time data drives greater transparency – for example, the treasury team can use bank APIs to visualize whether they have enough cash before releasing a payment, without having to spend time accessing multiple systems.

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  • Streamlines administrative tasks. Manual and repetitive tasks can be automated, resulting in a better user experience and reducing the associated costs. For example, eliminating the need for middleware means there are fewer barriers between the treasury team and the information they need to access. There’s also no need to reference multiple screens when seeking information, as everything you need is in one place. As a result of these efficiencies, the treasury team’s time is freed up to focus on value-adding analysis, rather than being wasted on manual tasks.
  • Supports richer data. By using bank APIs, companies may be able to take advantage of richer data, including internal reference information and vendor information. This can drive multiple benefits. For one thing, it can enable companies to reduce the number of payments rejected by the bank. When it comes to reconciling the bank’s transaction records with the company’s records, richer data can also help companies streamline and automate the reconciliation process, reducing the number of exceptions that need to be investigated.
  • Reduces fraud risk. The security offered by bank APIs means the risk of fraud is significantly reduced. For one thing, it’s easier to spot potential fraud when you have an audit trail tracking changes to payment information. API connectivity also reduces the number of hands that touch any payment – and the risk of fraud can also be mitigated by the use of OAuth 2.0, the industry-standard protocol for authentication, which uses secure tokens rather than traditional login credentials.

In short, API connectivity means that treasury teams can be more confident that the information they receive is accurate and up-to-date, while benefiting from robust security measures. This, in turn, provides an opportunity to speed up treasury processes, improve reconciliation and manage fraud risk more effectively. Companies can also gain an advantage over their competitors, as well as increasing their appeal when seeking to attract and retain top industry talent.

The easy way to access bank APIs

While it’s clear that APIs have much to offer companies, a key challenge is that most companies need to connect to multiple banks. Different banks have their own APIs, all of which have their own formats and languages, and with varying levels of detail. As such, it takes time and money for companies to build individual connections to each of their banks – so attempting to connect to the APIs of multiple banks is not a realistic option for most companies.

The good news is that instead of connecting to each bank individually, companies can work with an API-based bank connectivity provider to access a catalog of bank APIs, each of which has already been built and tested. What’s more, modern API-based treasury software can harmonize incoming data from multiple banks into a standardized format and deliver it directly to the company’s ERP system – giving treasury teams real time visibility over data, speeding up payments and eliminating manual processes.