According to reports, around 87% of Indian households use fintech services. This has made banks and credit unions invest heavily in APIs, which act as digital bridges to securely share financial information and services.
The latest PYMNTS data shows that 47% of lenders have already invested heavily in APIs in 2022.
But why are the banks, lending institutions, and financial services investing so much in API banking? Has traditional banking lost its relevance? Should lenders also follow suit and discard traditional banking completely? Or, is there a better and more balanced approach available?
To find out the answer, let us analyse and compare both banking models’ SWOT (Strength, Weakness, Opportunity, Strength).
What is API Banking?
API-based banking helps customers avail banking services through APIs that use sets of protocols, enabling various software components to communicate and share information. It enables seamless integration with third-party financial apps and services, providing customers with a wider range of financial tools and solutions.
Additionally, it enables real-time data exchange, empowering customers with up-to-date financial information and insights.
Example
Suppose, the customer is using a mobile banking app on their smartphone to pay utility bills, transfer money, or check the remaining balance of their bank account. In these cases, they are interacting with APIs. A mobile banking app on the smartphone connects them to the bank’s online system and provides financial data in real time.
Major Benefits of API Banking for Lenders
Here are some of the notable advantages of adopting API-driven banking:
Faster Loan Approvals
APIs automate the collection and verification of borrower information, reducing manual data entry and speeding up the loan approval process. This allows lenders to respond more quickly to customer requests.
Better Risk Assessment
By integrating APIs that access real-time financial data, lenders perform more accurate risk assessments. This allows them to evaluate a borrower’s creditworthiness based on comprehensive and up-to-date information.
Happier Customers
FIs can offer a more seamless and user-friendly experience by utilising APIs to provide borrowers with instant access to their loan applications, status updates, and personalised financial products.
More Financial Products
Through API integration, lenders can easily offer a range of financial products from third-party providers, such as insurance or investment options, directly to their customers. This diversification can attract new clients and retain existing ones.
Lower Costs
By automating processes and reducing manual tasks, FIs can lower operational costs. APIs help eliminate redundant procedures, allowing lenders to focus resources on more strategic initiatives rather than administrative tasks.
Stronger Security
APIs also facilitate compliance with regulatory requirements by automating KYC (Know Your Customer) processes and securely sharing data with authorised third parties. This significantly reduces the risk of non-compliance.
Access to a Bigger Market
Open banking APIs allow lenders to connect with fintech companies and other financial service providers, expanding their market reach. This collaboration can lead to new customer acquisition channels and innovative service offerings.
Data-backed Decisions
APIs provide lenders with real-time access to financial data, enabling them to make informed decisions quickly.
How is API-Based Banking Different from Traditional Banking?
API-based banking differs from traditional banking on various levels. Let’s have a look:
Operation
API lending/banking solutions can connect 3rd party applications to the existing systems of banks. On the contrary, traditional banking depends mostly on legacy systems and self-contained functions.
Access to Data
While banking with API solutions helps access account data on a real-time basis, traditional banking requires the customer to visit their bank branch physically to carry out banking activity.
Value-Addition
When a bank offers API services, it facilitates 3rd party innovation. Traditional banking offers pre-integrated functions only and that’s too within the bank premises.
Customer Interaction
APIs help banks provide customers with improved customer services through digitised, real-time interactions. However, the services of traditional banks are limited to branch-based, on-premise banking.
API Banking vs. Traditional Banking: A SWOT Analysis
To understand the differences between the two banking models and find out which one is better for lenders, let’s execute a SWOT analysis first:
1. Strengths
API Banking
API-based banking services are efficient, innovative, and highly scalable. APIs enable real-time data exchange and streamline banking processes, fostering innovation through easy integration with third-party services. Additionally, these allow banks to scale their offerings without major infrastructure changes.
Traditional Banking
Traditional banking instils trust and security in customers and partners through stringent regulations and diverse service offerings like loans, credit, insurance, and wealth management.
2. Weaknesses
API Banking
When it comes to API-based lending, they make banks depend heavily on technology. They become highly vulnerable to cyber threats and technological disruptions. Another major weakness of API lending or banking is the complexity and costs while integrating with legacy systems.
Traditional Banking
Traditional banks are often held back by manual processes, slow decision-making, and outdated technology, limiting their ability to leverage advanced banking services and cater to customers more effectively.
3. Opportunities
API Banking
API-based banking offers two major opportunities: open banking and personalisation. Open banking enables third-party developers to create innovative financial apps, while personalisation allows for tailored services based on individual preferences.
Traditional Banking
The Indian government’s push for digital banking and service delivery presents ample opportunities for banks to eliminate legacy systems, adopt APIs for improved customer experiences, and partner with fintech companies to create new revenue streams.
4. Threats
API Banking
Cyber security risks have evolved as the greatest threat for most API-based banks. The security aspects of APIs are threatened by:
- Unauthorised access
- Data leaks
- Security breaches
Traditional Banking
Legacy systems hinder traditional Indian banks from adopting digital trends, risking obsolescence if not upgraded. The rapid innovation in the fintech sector also poses a challenge for banks to balance compliance with innovation.
Final Words
This SWOT analysis summarises that both traditional and API banking have their strengths and weaknesses. But how can these be improved?
The answer to this question rests on two things:
- Maintaining trust and security for customers
- Leveraging APIs strategically
Are you looking for the trust factor of traditional banking and the agility of lending APIs? Get the best of both worlds by choosing Finezza, a complete product suite offering loan origination and management software. It streamlines the lending process for banks, lenders, and other financial services.
For lenders, Finezza offers robust security protocols, personalisation, and developer friendliness in creating APIs.
Contact us to know more.
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