Understanding API and How it Works

API—which stands for Application Programming Interface—are digital tools that allow different software applications to communicate and interact with each other. In other words, they act as a bridge for specific data between two separate applications, allowing different, often unrelated software applications and systems to work together seamlessly. APIs are everywhere. From the user end, you often don’t even know that the work they do is even happening. 

APIs come in all forms (we’ll delve into this more later) and are used for a variety of purposes.

Common Uses of API:

Social media: These let developers integrate social media features like sharing, posting, and commenting, into their apps, and allow users to push their posts on other platforms or communication channels (like email). 
Payments: Ever pay for a purchase using PayPal or Apple Pay on a website? An API was there to help accept those payments and process transaction information securely.

Mobile: Apps on your phone often use APIs to access real-time data, such as your location, current weather information, or social media updates.
Smart home devices: Your smart home devices, like Nest and Ring, use APIs to communicate with other devices, like your phone or other home smart devices, as well as services, like the National Weather Services.

How Exactly Do APIs Work?

Usually, the process goes something like this:

The client application, like an app on your smart phone or website, sends a request to the server application for specific information or some other action to be performed. Requests are usually sent over the internet using HTTP (Hypertext Transfer Protocol), the coding language web clients and servers use to speak to each other. 
The server application receives the request, interprets it (figures out what the request wants), and processes it. This might involve accessing a database or making some calculations.
The server application prepares and sends back a response to the client application. The response usually includes some kind of data, like text, images or videos, geolocation information, or authentication data.
The client application finally receives the response from the server and uses it: updating its interface, performing an action, or displaying the information to the user.

Rather than building everything from scratch, APIs allow developers to reuse existing data from other applications and third-party providers, saving time, effort, and money. And APIs can result in a better customer experience, too, by allowing them to pay for things quickly and securely, integrating the different forms of communication (like texting and social media) that they use, or simply helping them see what the weather is like at home. 

What are the Common Types of APIs?

As both a consumer and as an individual in the financial industry, you probably already use a variety of API types every day. There are many ways to classify APIs, but they are often commonly broken down into these basic categories. 

Open APIs

Open APIs are not open-source, but rather APIs that are publicly available. They can be used by anyone and are designed to provide an easy, standardized method for third-party developers to access a company’s services and data. Like many Facebook or Twitter APIs, they are often owned and designed by the company whose data the API is designed to access and are “open” in order to get more people to integrate a company’s platform with their own websites or apps. 

Open APIs are entirely free. Their cousin, ‘public APIs’ (though the terms are often used interchangeably) sometimes have a fee to use them, though they are still available to anyone who will pay. One example are Plaid APIs, which can provide access to banking information like account balances and transaction history, and can be used to help build applications including personal finance management tools, investment apps, and lending platforms.

Partner APIs

Partner APIs are the opposite—they aren’t available publicly and only authorized developers can access them. Data accessible in partner APIs may be more sensitive or more valuable, which is why a limited number of companies or individuals are invited to use the partner API to access it. They often feature more robust privacy protections, too, like more complex authentication procedures. Apps like Google Maps and companies like Amazon Web Services, Shopify, and Ticketmaster all have their own partner APIs that allow restricted access to certain data.

Internal APIs

Internal APIs are just as they sound—they are designed to be used internally, within one business or company. Because they are often developed in-house, they are more common with larger corporations and financial institutions. They may be used to coordinate human resource information, like payroll and benefits. They can also be used to track inventory at large, chain stores. Or they may be used to coordinate customer data, like purchase histories, with marketing campaigns.

Composite APIs

Composite APIs (also called ‘mashup APIs’) integrate two or more separate APIs to combine data to create a more thorough result. For instance, a weather API may bring together a number of different weather reports to generate a more accurate forecast. Likewise, a financial outlook API may bring together several financial reports for a more accurate financial forecast. Or a travel API may comb through dozens of websites for the best hotel deal. 

What are Some Benefits to Financial Institutions Utilizing APIs?

As a financial institution, there are endless ways in which APIs can be used to make your operations simpler, make your digital offerings more robust, and get the most out of your marketing dollar by effectively targeting customers.

Compliance: A number of APIs, like Accuity and Refinitiv, can help automate sanctions, PEPS, and AML screenings, as well as KYC compliance.
Helping your customers manage their own finances: Many APIs connect customers’ bank account information to financial management tools, allowing them to track their purchases and create budgets based on their spending patterns—and these tools are a great way to increase your customer engagement, too! Additionally, APIs can help customers bring together their account information from multiple financial institutions into one platform, to help them get a clearer understanding of their financial picture and simplify managing money.
Processing payments: Banking APIs like Dwolla can help financial institutions process ACH (Automated Clearing House) payments, wire transfers, and balance transfers. You may also use SWIFT APIs to process cross-border payments, as well as APIs from credit card companies like Visa or Mastercard to process credit card transactions. Additionally, payment gateways like PayPal or Stripe also use APIs to communicate between businesses and banks to facilitate online transactions. 
Keeping accounts secure: Your bank may already use a variety of security APIs to help authenticate logins and keep accounts protected. One example is OAuth, which is used to let users give third-party applications access to an online account without sharing their login credentials. Plaid uses OAuth to connect to financial accounts. Another common example is FIDO (Fast Identity Online), which allows customers to log into accounts securely using biometrics, including fingerprints and facial recognition.
Customer analytics: there are many different types of APIs that can help banks analyze their customers and their behaviors to effectively market the right products. These include customer Segmentation APIs, which help banks segment their customers based on criteria such as demographics, behavior, and preferences, helping them create targeted marketing campaigns and personalize their offerings. Churn prediction APIs can help banks predict which customers are likely to leave to help them develop retention strategies.

Develop Your Digital Marketing Strategy

With so many digital marketing tool options—from APIs that optimize marketing campaigns to SEO software—it can be hard to stay on top of the latest trends and developments and get the most out of your marketing budget.

Our knowledgeable team can help you navigate the possibilities, creating an effective marketing plan that uses both digital and traditional marketing techniques to not only reach your customers but also give them a quality user experience. Schedule a consultation today to get started!