Bank API Integration: A Comprehensive Guide

Modern banks need to be flexible and technology-oriented in order to retain and attract clients and keep up with the competition. One of the ways to do so is the integration of bank APIs that bring optimization and speed to legacy banking processes and services. 

But how do you select and implement the right solution? In this article, we talk about bank API integration in detail, discussing the way such APIs operate and the most common financial API types to consider for implementation.

What is bank API integration?

In banking, an Application Programming Interface (API) is a set of rules and protocols that connects the banking software with third-party applications and enables their communication. In this way, banks can significantly extend their services and reach while customers gain real-time access to their data and banking services without the need to visit the physical branch of the bank. Usually, banks address software development companies for professional API development services to ensure the quality and security of delivered results. 

The simplest example of using a bank API is paying for a Spotify subscription. Spotify is not a financial service but it accepts user payments – and to do so, it needs a trusted and secure payment API to connect with the user’s bank account and confirm the payment. 

Types of bank APIs by accessibility

Since APIs process and transfer sensitive information, security is their top priority. Hence, there are several types of APIs based on their level of accessibility:

Private APIs are only used within the bank’s internal system. A private API connects only the bank’s systems and is not exposed to any external parties. This allows different departments to share information in a faster and easier manner, thus optimizing the banking processes. The majority of banks consider private APIs to be an essential part of their digital environment and implement them from the start.

Partner APIs are the ones that are used between the bank and a trusted third party partner. These apps are typically used to expand the bank’s services and add new sales channels. An example would be a bank partnering with an insurance company so the latter can access the customers’ data (with their consent, obviously) to speed up its processes while keeping them secured. In most cases, partner APIs are designed specifically upon the request from the bank or from the third party and grant access to this one bank only.

Open APIs, as the name implies, are open for any developer to use and to integrate in their product. Open APIs are very popular with fintech solutions that need easy and secure access to the bank’s system. Such partnership is beneficial for both banks and third parties, since the banks increase the accessibility of their services while third parties can significantly elevate their own services through financial data integration with one or several banks. Also, open APIs are usually integrated with several banks, thus enabling a diversity of services and solutions for the users of the third-party application.

As you can see, the use of APIs allows banks to enter web and mobile domains seamlessly and to digitize their services in a user-friendly manner. Now let’s look at the biggest benefits of integrating bank APIs in more detail.

Why bank API integration is important

Bank API transforms legacy banking processes on many levels and brings an array of benefits for banks, their partners, and customers. But if we were to define the biggest advantages of using this technology, we can list down the following:

Streamlining financial operations

One of the biggest bottlenecks for many banks is the complexity of their processes. Due to the huge amount of documentation (often in paper form), manual processes, and the need to validate the requests with every party involved, banks often lack flexibility and transparency. APIs, on the other hand, eliminate these issues and grant banks the ability to speed up and streamline their operations through automation and pre-defined security measures. In this way, various departments can seamlessly share the data with each other in a secure manner, thus greatly saving both time and resources.

Real-time data access

Modern bank clients expect speed when it comes to the execution of transactions (or other financial operations). The simplest example is checking the account balance via the banking app. APIs allow real-time access to the user’s data without the need to visit the physical office and wait until the bank employee verifies your identity and provides you with the requested information. The same goes for bank employees as well: with APIs, they can use various banking systems and retrieve information immediately.

Improved user experience

As mentioned above, modern bank customers expect digitization, speed and efficiency when it comes to banking services. As well, customers prefer to have all their financial information at hand and accessible in a few taps. Since bank APIs connect banks with numerous applications, including personal finance ones, customers are able to freely manage their assets exactly how they need to. In this way, banks can greatly elevate the user experience that they provide while customers enjoy smooth and effective execution of their transactions and other operations.

Common types of bank APIs

In addition to accessibility types, bank APIs can also be divided into different types by their purpose of use:

Payment APIs

Payment APIs are the most well-known type of bank APIs, examples including Stripe, PayPal, and Amazon Pay. The main goal of payment APIs is to enable payments directly from the user’s bank account from a third-party application. So whenever you pay for something online, that’s payment API in action.

These APIs are most often used for online payments and transactions but they also support fund transfers. The use of payment APIs helps customers perform needed transactions securely and without direct interaction with the bank (which speeds up the whole process).

Note that payment APIs do not usually store sensitive information. But in order to use your data for future transactions, payment APIs replace it with a token – a unique set of characters that encrypts sensitive information and prevents its exposure to unauthorized parties. 

Account information APIs

Account information APIs enable users to access their personal information securely via a third-party application, such as a financial management app. The biggest advantage that such APIs bring is the real-time access to the required information. Other use cases include transaction monitoring and real-time notifications that add to the transparency of one’s account and operations. 

Card issuing and management APIs

These APIs help banks and financial institutions issue cards directly from their systems without the need for a third-party partner. So when a user wants to request a card, they can do so in a few simple steps instead of having to visit the physical office and fill in a pile of paper documents. Banks, in turn, also benefit from the use of card issuing APIs as they get more control and transparency over their card issuing and management processes and can collect valuable information about their customers.

Card issuing APIs can be used to issue various types of cards: physical and digital debit cards, physical and digital credit cards, prepaid cards, or corporate cards. Also note that card issuing via a specialized API is fully compliant with all needed regulations and security requirements which is another big advantage.

Lending APIs

As the name implies, lending APIs are designed specifically for lenders to help them with a number of operations, such as decisions on loan approvals, disbursal of loans, or repayment collection. Same as other financial APIs, lending APIs help automate and streamline a bunch of lending processes, allowing lenders instant access to needed information and services.

How bank API integration works

If you decide to implement a bank integration API in your processes, it is important to understand how it works and what its core components are. This will help you select the most suitable solution and configure it properly to ensure secure data transfer.

Understanding API endpoints

Endpoints are the essential components of any API. They serve an important role, allowing applications to access the exact resources that they requested. To better understand the operating principle of endpoints, let’s once again review what an API is.

An API is a set of protocols and rules that helps applications and systems communicate with each other. However, one application can send a variety of requests to a database. For example, in Spotify, you can follow an artist, like an album, or create a playlist. All these are different requests – and each of them is performed via a specific endpoint.

An API endpoint can be defined as a digital location with its own URL where a request is sent. The endpoint defines a specific service (or action) that an API provides. It is important to remember that each endpoint performs one job only. This allows developers to scale their apps easily and to ensure that every request is performed in a secure and efficient manner.

Authentication and authorization

Other critical components of an API are authentication and authorization, responsible for ensuring secure data transfer. Here is how they work.

Authentication is the process of verifying the identity of a user or an application that makes the request. The main purpose of authentication is to verify that the user or the app is legitimate. It is done by providing a user name and a password or via a token-based system.

Authorization is the next step. It verifies that the user or the app has the rights to access the requested information. In this way, authorization helps restrict access to sensitive data and manage access rights. It is performed by using access tokens. 

Both authentication and authorization work together to let only validated and legitimate users access the resources, thus contributing to the security of the system.

Data formats

In order for the systems to understand each other during the information exchange, APIs use specific data formats – you can think of them as shared communication languages. The most common include:

• JSON: a lightweight format structured as key-value pairs. Is most suitable for modern APIs due to its lightweight nature and easy parsing.
• XML: is more complex than JSON and uses tags for data organization. Is often used in legacy systems.
• Plain Text: a simple and unstructured text data used for basic API responses.
• SOAP API: is considered a very reliable protocol for data exchange between the systems. Due to its strict implementation guidelines and a high level of security, SOAP API is often used in banks and financial institutions.

Error handling 

Error handling in APIs refers to the process of handling errors that were returned by the API upon the request. Errors happen when a request cannot be fulfilled and can be the following:

• 400 Bad Request: the sent request is invalid
• 401 Unauthorised: the user or the app that tries to access the resources does not have access or permission to do so
• 404 Not Found: the requested information is not found on the server

Proper error handling is crucial as it not only contributes to the app’s security but ensures clear communication between the client and the server. Some of its best practices include:

• Detailed error logging: useful for diagnosing issues and enables proactive approach to resolving them.
• Provide clear error messages: in order for the client to understand what’s wrong, the error message should be concise yet informative.
• Use error codes: there are standard error codes used to define specific errors so it’s recommended to use them for better clarity and troubleshooting.
• Use retryable errors: if the issue is temporary (i.e., the session expired), offer instructions about how to retry the action.

Steps to integrate a bank API

Bank APIs have become essential for any modern fintech solution so if you are considering their implementation, you need to understand the main stages of the process. Below, we’ll walk you through the main steps needed to successfully integrate a financial services API  in your software product.

Choose the right API

The first thing that you need to do is choosing the right API that will elevate your business and help you meet set objectives. As we already mentioned, there are various types of APIs available so you need to understand which ones your business really needs.

In addition to the API type, pay extra attention to its documentation. An API documentation normally lists such things as API endpoints, its authentication methods, or response formats. As well, the documentation should clearly explain how exactly the API works and how to integrate it properly.

Set up authentication

Proper authentication is crucial for the security of your system so the next step is authentication setup. Banks normally offer their own authentication methods, with the most common ones being the API Keys and OAuth 2.0. OAuth 2.0 is an industry-recognized security standard that implies exchanging tokens to access needed resources.

Connect to API endpoints

To ensure that the API performs the desired action, you need to connect to its endpoints. To do so, study the documentation carefully, choose one of the testing tools, and set up the request. Once everything is done, you will need to test the connection to check whether the selected API works as intended.

Perform sandbox testing

Most banks provide a sandbox environment along with their APIs so developers can test the API’s performance safely, without risking the security of the real data. There are several things to focus on during the testing process:

• The process of making requests to endpoints
• Validation of responses
• Error handling process

Sandbox testing is used to simulate real-world scenarios and monitor how well the APIs will handle the requests and how accurately they will perform them. So in case of any issue, you can quickly fix and retest it, ensuring the high quality of the final product upon its release.

Build the integration

Before testing in production-like environment and releasing the product, it’s important to handle and configure the following processes:

• Design of API requests 
• Error handling setup
• Handling of data parsing and responses
• Data encryption

All these processes are essential for secure and effective API functioning. Also, don’t forget to check whether your app complies with regulations since it’s critical for most of bank APIs.

Test and deploy

Once you are satisfied with the results of testing in a production-like environment, you can deploy the app. It’s recommended that you perform the API integration gradually, starting with a small audience before going big. This will help you better control and monitor the performance and quickly fix any issues in case they occur.

Security considerations for bank API integration

Operation in the financial industry requires stringent security measures and standards and obviously, it covers API security as well. Below we describe the main security considerations and measures for banking API integration.

Use common encryption standards

Encryption is a must-have security practice that helps protect sensitive data by making it hard for a malicious party to understand or access it. When talking about API development, it is recommended to use the following security protocols:

• TLS (Transport Layer Security): is used to encrypt the data in transit between the client and the server.
• AES (Advanced Encryption Standard): a symmetric encryption algorithm that helps ensure secure data storage. 
• RSA (Rivest-Shamir-Adleman): an asymmetric encryption algorithm that is used for secure transmission of keys.

Note that the SSL protocol is still used for API encryption though it is considered outdated and is often replaced by the TLS one. Also note that there are more security protocols that you can use for encryption of your API data – please consult your developers to select the most suitable option.

Use reliable API authentication mechanisms

It’s critical to use robust authentication methods to ensure that only authorized users access specific resources in accordance with their permissions. Here are the key API authentication mechanisms to consider for your project:

API keys. These are unique strings that help control access to an API and help authenticate the apps. Each key is associated with a specific client and is generated randomly. API keys are mostly recommended for simple apps as they offer quite limited security. Note though that it is not advised to store the keys in project files so you don’t compromise their security. Instead, it is recommended to plug them in separately from a bank server via the environment, in which the app functions.

OAuth 2.0. This is a well-known authentication protocol that allows third-party apps to access needed resources without sharing their credentials. The access is granted in the following way: an app requests access and is granted a token, generated by the authorization server. OAuth 2.0 is best used for scalable apps that require third-party integrations.

JWT. JSON Web Token is a compact standard for secure transmission of the data. It’s interesting that JWT can be validated without storing its state on the server. It is recommended to use JWT for stateless APIs and modern apps.

Ensure compliance with main financial regulations

There are two core regulations in the financial industry that  bank APIs must adhere to: PSD2 and GDPR. Let’s look at each of these in more detail below.

PSD2 stands for Payment Services Directive 2. This European Union regulation is aimed at creating a more competitive and open payment landscape in the financial services while also maintaining robust security of the sensitive data. In terms of API, the PSD2 requirements include:

• APIs should provide a high level of security in order to allow third-party providers access to the customer data (with the customer’s consent);
• APIs should support a two-factor authentication mechanism and overall provide strong customer authentication;
• APIs should provide regular reports and logs to support compliance audits.

GDPR stands for General Data Protection Regulation and is also a European Union regulation. Its main purpose is the protection of the customer data and privacy through strict and thorough requirements on data collection, processing, and storage. Its main requirements for APIs include:

• Data protection by design, meaning security measures must be incorporated at the beginning of the development process;
• Effective consent management, so the consent is obtained before the sensitive data is accessed;
• Minimization of the accessed data, meaning APIs should request and process only the minimum amount of data, needed for a request;
• Effective notifications in case of a data breach, so each incident is reported within 72 hours.

Challenges in bank API integration

When planning the financial API integration and development, it is critical to first analyze your current digital environment and identify potential challenges and limitations. The most common ones normally include:

Legacy systems compatibility

Despite the rapid technological advancement, many banks still use legacy software that is not compatible with modern software solutions. Hence, when planning the API integration, you first need to check how compatible it is with your current systems in use. 

Managing latency and downtime

Incorrect configuration of APIs can lead to high latency and downtime, thus negatively affecting the performance of your application. To avoid that, you need to optimize the performance of your APIs, check for existing bottlenecks, and constantly monitor any fluctuations. Some of the best optimization tips are:

• Implementation of effective error handling and retry mechanisms;
• Implementation of redundancy for ensuring continuity;
• Maintenance notifications;
• Automatic redirection of traffic to backup servers;
• Implementation of edge computing;
• Use of caching and load balancing.

Maintaining security

We’ve already mentioned that banks are highly rigorous about the security of their tools and services. This means the proposed software solution should be developed in full accordance with security best practices and should also adhere to the industry standards. Such compliance requires lots of time and effort so banks need to prepare for that in advance. 

Complexity in multi-bank integration

One more challenge that many banks face is the complexity of integrating multiple APIs into a single system. Since there is not one but several APIs to properly configure and implement, the whole process can become too complex and hard to manage. In addition, banks need to make sure that these APIs work well together and do not disrupt the performance of other systems. We therefore recommend that you prepare an integration strategy in advance and thoroughly test the performance of your APIs before plugging them in.

Best practices for bank API integration

Lastly, we’d like to provide you with several best practices for API integration that can help you create a more secure and efficient digital environment:

Use coding best practices from the start

One of the most important things to keep in mind when developing and integrating APIs is to follow secure coding best practices from the beginning of the development process. By writing secure, stable and concise code and covering it with tests throughout the development cycle, you will be able to minimize potential security issues and vulnerabilities from the start. Also, stable and secure code contributes greatly to enhanced API performance and smoother data transfer.

Maintain good API documentation

Documentation often gets neglected or overlooked as software developers tend to focus on more urgent and specific tasks. However, documentation is highly important as it sets the development standards, describes all processes, and explains all specifics of a project. So when it comes to API development, it is imperative that you maintain relevant and detailed documentation that would list in detail how a specific API works, how it should be configured, what authentication methods it uses, etc. API documentation helps not only ensure smooth API performance but also understand how exactly this specific API operates.

Perform consistent monitoring and maintenance

To ensure that your APIs are reliable and available at any given time, you should perform regular health checks. Health checks are automated tests (requests) that are sent to APIs to verify their accessibility, responsiveness, and overall state. The performance of health checks has multiple benefits:

• Early identification of potential issues
• Proactive response to threats
• Improved API reliability and operation

Effectively handle versioning

Proper API versioning helps ensure that older versions are compatible and usable for existing clients while new versions receive all needed improvements. There are various versioning strategies to consider and the choice will depend on your specific needs. Just remember that versioning is an important part of API management and should be supported by documentation so you keep track of the version history and can always roll back, if needed.

In conclusion

APIs are an integral part of any banking system but due to the specifics of the industry, their development and configuration calls for extra attention due to rigid security requirements. To ensure compliance with necessary regulations and smooth and safe operation, it is recommended to partner with a reliable software development company that has experience in bank API integration and API development for banks specifically. In this way, you will rest assured that the final product exactly matches your requirements and is compatible with your current systems in use.