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Rashid explains the zip code validation API in his YouTube video, highlighting the availability of premium APIs at a cost and his discovery of a free working API. The API provides zip code validation and information on state, country, and city. Both premium and free APIs offer similar results, making the free API a valuable option. The free API is open source, supports multiple countries, and is easy to integrate. The response includes postal code, country, state abbreviation, and other necessary information for zip code validation.