API Security and Management: The Impact on the Fintech Industry
Solutions Engineer, Kong HQ
The world of financial services is driven by digital experiences. Over the last 20 years, virtually all banking activities have been taken online (an unfortunate change only for fans of pneumatic tubes and pens on beaded chains).
Like other industries that have undergone digital transformation, financial institutions are leveraging APIs to give users a more seamless experience when managing their money. On top of improving customer relationships, APIs also aid financial institutions in managing customer data, developing distribution channels, and overseeing their revenue streams.
Given that APIs make up the connective tissue between sensitive data, organizations, and the public, API management is necessary to create a secure app ecosystem — especially for financial institutions that must meet strict requirements for financial compliance.
In this post, we'll take a closer look at fintech security challenges and regulations that can be addressed with API management solutions.
What is fintech compliance?
Fintech companies operate within a highly controlled environment, which makes their regulatory compliance essential. Fintech compliance is the adherence to guidelines, laws, and rules that govern the financial technology services sector. Its purpose is to detect and control any inconsistencies, breaches, or misconduct within a financial company's technological operations — and, ideally, to prevent them.
Financial regulations protect all parties involved in financial activities and keep customer data (and money) as safe and secure as possible. Ultimately, Fintech compliance helps to preserve trust, as well as a positive public perception of the banking system and capital markets.
Fintech compliance and regulations
Depending on which regulatory bodies they're operating under, fintech companies need to meet several different compliance requirements for handling data, such as GDPR, FCA, PSD2, eIDAS, GPG13, and so on. (All the acronyms!)
These requirements mandate multi-factor authentication for remote transactions, protect government systems with monitoring networks, and enable keys for cross-border transactions. More generally, they ensure legal cooperation amongst fintech companies, establish the consumer's right to privacy and data protection, and uphold a global standard for data protection and security practices.
The role of APIs in the financial sector
APIs (or application programming interfaces) are used to create innovative applications and experiences with existing components. They allow banks, financial institutions, and fintech companies to share data and access services securely. They also provide a foundation for open banking.
Fintech APIs examples and use cases
Since the inception of open banking in 2018, the fintech industry has erupted with growth potential. Open banking is a practice that allows third-party financial service providers to use APIs to access financial data from banks or other financial institutions. By sharing data and accounts across institutions, open banking lets consumers seamlessly move between platforms, create new profiles and transactions, make account changes, and more.
Open banking has also allowed for brand-new digital payment systems that offer services like digital wallets, peer-to-peer transfers, and mobile payment solutions. Plus, consumers can pay directly from their bank accounts or access real-time account data across channels with ease — something that was never possible before.
Open banking gives both lenders and consumers more control over their financial decisions because they can get an accurate, timely read on their financial data. As a result, this process helps to even out banking competition and deliver a better consumer experience overall.
FinTech security concerns
While open banking has driven unparalleled innovation, it's also amplified data and API security challenges for fintech companies.
Open banking depends on thousands of APIs that interact every day between financial institutions. This constant exposure makes APIs an inevitable target for cyberattacks and creates more entry points for unauthorized access, thereby increasing the blast radius (or the overall negative impact of a potential security breach).
Banking system migration
On top of that, most banks that were still hosting on legacy technology are finally migrating their systems to the cloud for a better, faster consumer experience. While this is a net positive direction for online banking, it's also opened the door for mistakes, missteps, and inconsistencies, since any kind of system migration comes with a learning curve — especially for an industry that deals with constant security challenges.
Unauthorized access and malware attacks
The number one liability that fintech companies face is the possibility of bad actors entering their systems and gaining access to sensitive customer data.
Among common threats to data and cloud security are unauthorized access and malware attacks. These include cybercrimes such as DoS and DDoS attacks, SQL injection attacks, XML external entity (XXE) Attacks, and cross-site scripting (XSS) attacks — all of which can expose financial data to the wrong individuals.
There are a slew of other approaches that hackers can employ to inject dangerous data or position themselves in customer communications, such as cross-site request forgery (CSRF) attacks, brute force attacks, and man-in-the-middle (MITM) Attacks. With so many API security threats, fintech companies must make sure the APIs they use are airtight.
Another risk associated with greater API usage in fintech is an inconsistent observability pattern over an institution’s distributed APIs on the market. Observability ensures that an organization’s applications are healthy and functional while helping its teams to predict future problems with those applications.
Essentially, the goal is to standardize practices for authorization. Low observability may increase an organization's mean time to recovery when applications fail, which lowers consumer trust in its digital presence and its ability to securely store money. For banks, that's the worst-case scenario.
To address these risks, financial regulators require fintech companies to maintain a paper trail of API authentication, authorization, quota management, observability, and overall health, so that if there's an incident, they're able to track exactly when, why, and how it happened. At the end of the day, financial compliance makes sure that financial institutions are exposing their APIs and services in a secure manner.
API security and financial compliance
So, where does API security and API management come in?
With the explosion of APIs powering digital experiences within financial institutions, the amount of technology that application development teams use to build those APIs has also skyrocketed. There are now far more protocols at play than ever before, as well as an accelerated pace for infrastructure procurement and application deployment. These new factors make the technology difficult to keep track of — especially when it's spread out amongst various teams. API management steps in to help financial institutions oversee the technology they bring to market.
A strong API management approach allows fintech companies to track, maintain, and streamline governance of their API connections so they can seamlessly achieve financial compliance.
Standardization and scalability
Application teams can use API management tools to standardize their processes for API protection while maintaining a centralized view of configurations. This is accomplished by creating a catalog that contains information about resources and where they're being deployed, allowing developers to reuse information instead of building every API from scratch. Consequently, API management promotes consistency and scalability by ensuring that the quality of APIs improves as their quantity increases within an organization. With tighter governance comes fewer inefficiencies that lead to potential oversights.
As discussed earlier, fintech security is the biggest concern for large financial institutions because they use centralized identity providers that manage the identities of everyone who accesses their network. API management solutions enable banks to successfully comply with standards like OAuth2.0, which controls how consumers are validated by identity providers. It also helps them manage and meet compliance regulations like the ones discussed earlier.
Data governance and privacy regulations
And it isn't just API security practices that benefit from API management: data governance and privacy regulations are made simpler, too. For example, companies in the EU have to meet tight regulations around GDPR and data residency to achieve financial compliance.
Kong Konnect, our API lifecycle management platform for the cloud native era, handles this with multi-region support that lets users dictate where their data and API configuration is housed. Users can choose to operate on Kong Konnect's control plane either in the US or the EU — with further support coming to Australia and Asia soon.
Real-time visibility into traffic and behavior
A centrally managed API platform also tackles the problem of decreased observability. By providing real-time visibility into API traffic and behavior, API management tools allow companies to easily identify where applications fail and find solutions quickly. They also regulate user experience across platforms while ensuring backend issues stay off the interface. These functions help banks protect their brand image and cultivate a high net promoter score while achieving financial compliance.
FinTech cybersecurity solutions
When implementing API management solutions, financial institutions should focus on two key areas of API governance, which include how APIs are exposed and how application teams configure them.
How fintech companies can implement API management
The ideal API management solution should have the following features.
Secure SDLCs —A strong API management strategy employs software development life cycles (SDLC) that are agile but structured in how they deploy APIs. When companies break down API development into smaller, repeatable steps, they can better optimize their protocols over time and accommodate future changes. A secure and thoroughly tested API lifecycle supports API development at all stages and cultivates the best possible end product.
A robust plugin ecosystem —The health of your API ecosystem directly corresponds to the value your APIs provide to teams inside and outside of your organization. A strong ecosystem makes it simple to integrate with identity providers to meet financial compliance requirements, amongst many other things. With Kong Konnect, you get full access to our plugin ecosystem, with plugins like OpenID Connect.
DevSecOps workflows —DevSecOps (which stands for development, security, and operations) is a development approach to design and automation that integrates security throughout the entire software development lifecycle. This practice keeps security at the top of mind when building APIs and emphasizes black-box tests that use business logic, which reveal how APIs will function when the application goes to market.
Strong data encryption protocols —You don't want to take encryption lightly, because it provides vital armor against individuals trying to access your sensitive data. Finding an API management system that ensures all traffic between external parties and internal data storage is encrypted is another feature that should be nonnegotiable in your API management solution.
Authentication mechanisms and role-based access controls —Many financial institutions are gargantuan, and protocols like role-based access control go a long way in managing the scope, spread, and security of these organizations. Such authorization protocols ensure that application teams can only configure APIs they own in order to prevent collision of configuration or update errors.
Once API security measures and management best practices are squared away, it's vital that fintech institutions create a framework that will direct their application teams in securely exposing APIs. Going to market without standards in place for application teams may result in multiple protocols for authentication schemes that will eventually require retroactive cleanup — which can be quite the pain.
A robust framework allows teams to use automation to drive change management and instill a higher level of confidence in the quality of their APIs.
Future compliance challenges
API management has a bright future in compliance because it's continuously evolving alongside technological advancements and challenges.
AI and financial compliance
We've addressed the concept of people entering financial institutions to access data — but what happens when employees leave an organization's network to use external technology?
Chat GPT is the hot topic of conversation right now, and for good reason, because it's changing the way application teams streamline their workflows on a fundamental level. However, AI technologies also present concerns from a compliance standpoint. Are developers using the right code? Are they exposing proprietary information outside of the institution by running it through an external chat server?
The right API management solutions can better regulate how employees use AI-based technologies to keep institutions secure.
Moving to microservices
Another emerging compliance concern relates to how organizations acquire monolithic applications and break them up into microservices. The compliance regulations surrounding microservices are still evolving because they're not only dealing with APIs that are exposed to applications outside of an organization’s network.
However, service meshes help organizations run these highly distributed microservices. For this, Kong Mesh brings authentication, strong security patterns, and observability to all microservices within a distributed environment.
The best API management solutions for financial compliance are the ones that developers don't even notice. By using these tools to eliminate repetitive compliance-driven tasks, application teams can innovate beyond busy work and continue developing solutions that allow their institutions to scale and thrive.
Want to learn more about how the right API platform can help you with financial compliance? Get a demo and discover what Kong can do for you.