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How fintech APIs are transforming financial services

Pinwheel Team

March 3, 2022

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From accessible financial products to on-demand pay access, fintech APIs are facilitating the rapid growth of digital financial services. Simultaneously, they’re transforming old models that have excluded millions of people from accessing affordable financial products.

Nowhere is this exclusion more obvious than in lending. By relying on credit score as the benchmark of consumer financial health, traditional loan underwriting models punish people who live within their means and try to avoid unnecessary debt. When a customer doesn’t have a credit history, lenders are unable to determine their credit risk — even if the applicant is more than able to pay back the loan. The underwriting model needs improving.

One of the solutions to financial exclusion is APIs that pull customer financial data from multiple sources to create a complete picture of a person’s financial health. And the use cases of fintech APIs go beyond underwriting models, facilitating a system of open finance that benefits both financial service providers and consumers.

Fintech APIs are enabling open banking and finance

Financial technology application programming interfaces (fintech APIs for short) allow consumers to connect and share their financial data with different service providers to get access to better products. They are instrumental in facilitating open banking and open finance, bringing together customer data from different sources to create a holistic picture of a consumer’s financial circumstances.

While open banking APIs enable users to share their bank account information, open finance goes a step further to allow data sharing from multiple sources, such as payroll providers and gig and creator economy platforms.

Connectivity to payroll and income platforms is especially key, as they are the foundation of consumer financial data. A bank statement can tell you how much money a customer has deposited into their account over a period of time, but payroll offers data on much more, including their salary and employment. Access to more robust data gives financial institutions and fintech apps the freedom to offer personalized services, from insurance to mortgages.

In addition to enabling open finance, APIs also allow fintech companies and legacy institutions to layer additional banking services into their product without investing time and resources to build the API on their own. As a result, they can quickly introduce new services to their consumers and maintain a competitive edge.

All of this innovation rests on the consumers’ willingness to share their data. Financial service providers are in luck, however, as 86% of consumers say they are open to sharing their data to have a personalized banking experience.

Expanding access to better loans

APIs allow lenders to better determine an applicant’s credit risk by connecting to payroll systems and other income platforms to verify income and employment. Even if the applicant has an insufficient credit score, the lender can still approve their application based on other data, such as their salary and employment duration.

Pinwheel’s income and employment verification product can provide data regarding the applicant’s identity, income, employment, pay stubs, and shifts. Our API platform connects to more than 1,500 payroll systems and gig economy platforms, covering 80% of paid Americans. The wealth of data makes it possible for lenders to easily perform income and identity verification, approve loans for underserved consumers, and even launch products such as paycheck-linked lending.

Pinwheel is the first and only data aggregator in the payroll space that is a Consumer Reporting Agency (CRA), so companies in the financial sector can safely use consumer data for credit decisions while ensuring FCRA compliance.

As for consumer benefits, they can borrow money with lower interest rates, increasing their chances of repaying the loan and improving their credit score. Previously, credit-damaged and credit-invisible consumers often had no other choice but to turn to high-interest loans, which they later struggle to repay. This created a vicious cycle that made it almost impossible for consumers to improve their financial health. 21% of Americans do not get approved for a loan, credit card, or apartment rental due to a poor credit score — but fintech APIs can change that for the better.

Offering earned wage access

Earned wage access (EWA) or on-demand pay is currently one of the most talked-about products in the financial industry. It allows employees to get paid at their own convenience, which gives them more financial control, especially when faced with emergencies.

APIs that connect to payroll systems and other income platforms make it possible for financial service providers to offer EWA to their customers. Pinwheel’s income and verification product pulls data on shifts and paystubs that EWA providers can use to determine how many hours an employee has worked.  Considering 80% of consumers have expressed interest in on-demand pay, EWA presents a big opportunity for financial providers.

EWA can help consumers pay bills on time and avoid taking out payday loans to cover unexpected expenses. The annual percentage rate (APR) for a payday loan in the U.S. can go as high as 664%, and it’s no secret that borrowers often fall into a debt trap that can even lead to bankruptcy — because they have no other choice. EWA, however, offers an alternative.

Enabling self-driving finance

Just like driverless cars have automated driving, self-driving finance automates once manual processes such as investing or transferring money from checking to savings. Self-driving finance solutions can also include automatic overdraft protection to save customers from non-sufficient funds (NSF) fees. And APIs can further facilitate driverless finance by automating processes such as direct deposit switching.

The average consumer has 5.3 accounts in various financial institutions but manually funding those accounts isn’t convenient. Pinwheel’s API, however, enables financial service providers to offer a smooth direct deposit switching process. The API solution has coverage over more than 80,000 employer and payroll platforms and allows users to quickly update their direct deposit settings.

Once customers connect to their payroll provider, all they need to do is specify the amount of money they want to automatically deposit into their account every payday, and the API takes care of the rest. For instance, 20% of their salary could go straight into their robo-advisor account, 10% into their crypto wallet, and 5% into a savings account for their next vacation. As a result, customers can rely on automation to do all the work from the moment they get their paycheck.

APIs make product expansion easier than ever before

Fintech APIs have made it possible for consumer fintechs, lenders, and traditional banking institutions to launch additional products and streamline the integration of new features, all while saving considerable time and resources. Take our client Envel, which was able to automate direct deposit switching in just a few weeks using Pinwheel’s API.

Financial APIs do all the heavy lifting, allowing fintech startups and legacy institutions alike to focus their attention on what really matters — the consumer. And thanks to the abundance of data that APIs can access, the old financial model which has excluded so many vulnerable groups will become a thing of the past.