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The Role of APIs in Enabling Embedded Finance Solutions

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While not exactly new, the API (or Application Programming Interface) technology has been revolutionising the finance sector for the past decade, if not longer.

For instance, consumer payments made via embedded finance functionality – one of the many innovations enabled by modern APIs – is projected to reach $3.5 trillion by 2026, generating $21 billion in revenue for platforms and enablers.

But what exactly does an API do? How long have they been around? And what role does API technology play in embedded finance?

Keep reading to find out.

What is an API and what does it do?

In simple terms, an API is a type of digital intermediary that enables two different applications to communicate with each other by exchanging data.

Despite having been around since the 1980s, APIs only started to become widespread in the 2000s. With the ongoing rise of Banking as a Service and other path-breaking financial products, API technology is currently undergoing something akin to a gold rush.

Given that many of the digital services we use on a daily basis rely on tailored APIs, this isn’t very surprising. From checking the weather forecast on a smartphone to buying online without interacting with a bank – all this, and far more besides, is only possible thanks to APIs.

How do APIs enable embedded finance?

The finance sector has a long-standing reputation of being difficult to enter. This is chiefly due to a messy tangle of strict regulations and the hegemonic role played by traditional banks, whose deep pockets make it difficult for new entrants to compete.  

By embracing APIs, fintechs and other market players have managed to level the playing field enough to make their businesses viable and to kick-start a new era of innovation. 

How so?

With an embedded finance API, both fintechs and non-financial companies gain access to existing bank infrastructures without having to obtain a banking licence themselves, which dramatically reduces the cost of entry.

In addition, with the legal and regulatory side of things handled by the partner bank, more resources can be reallocated to developing new products and providing top-quality services based on that infrastructure.

The role of APIs in embedded finance doesn’t end here, though. They also benefit companies by extending their capacity for automation of routine tasks, which improves labour efficiency and reduces operating costs.

Lucky for innovators and businesses looking to integrate additional functionality into their existing products and services, APIs are optimised to work smoothly with almost any tech stack. Be it payments, direct loans, insurance policies, loyalty programmes or other financial services – they can all become part of your offering with a minimum of development time and expense.

What financial services do APIs make embeddable?

The popularity of embedded finance is driven, to a great extent, by the modern consumers’ expectation of convenience and on-demand availability. To ensure a truly seamless experience, companies seek to provide their customers with the services they need – where and when they need them.

With this in mind, the answer to the above question is, “Pretty much all of them”. Which particular services a business chooses to embed depends on the industry, target population, and the ways in which consumers interact with the brand. 

For instance, an airline may use an API to embed into its offering a cancellation insurance service or a loyalty programme based on air miles and managed via a branded credit card. The latter also comes with the added benefit of providing the company with a wealth of behavioural data that can be used for laser-focused marketing and for improving existing services.

An online marketplace or platform, on the other hand, may prefer to embed Buy Now, Pay Later short-term financing to boost sales and brand loyalty. BNPL is highly attractive to many shoppers because it allows them to opt-in right at the checkout screen and only requires a soft credit check which doesn’t affect their credit score.

Many other embeddable services could be mentioned here (FX remittance, crypto exchange, multi-currency virtual accounts, and more), but suffice it to say – with the further development of API technology, possibilities for top-quality customer journeys, financial inclusion, and innovation are virtually limitless.

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