Modern Banking APIs - From 'Nice to Have' to a Critical Success Factor

Do you remember when bank transfers took hours to arrange and days to process? Today, we can send money between accounts and banks somewhat instantly. Application programming interfaces (APIs) have significantly transformed what’s possible for customers, banking service providers, and finance partners.

APIs address two of the current challenges in financial services. First, they can enable banks to bridge the gap between traditional, monolithic legacy systems towards hybrid cloud banking. Secondly, they facilitate collaboration between ecosystem partners, improving the customer experience and creating new value-generation opportunities.

The finance sector has undergone a period of rapid change, with new technologies and disruptive new entrants, such as challenger-banks, robot advisors, and payment processors with micro-lending capabilities, leading to changing customer expectations for incumbents. This shift has been accelerated by the pandemic and the transition to a cashless society, with online shopping and Customer-to-Customer(C2C) transactions – even new financial products such as Crypto and Peer-to-Peer(P2P) lending. It’s only a matter of time before the traditional banking system is replaced by new, cloud-based solutions enabled by APIs. APIs aren’t a ‘nice to have’ but a critical success factor.

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What are APIs?

APIs are interfaces that manage interactions between two pieces of application software. They enable banks to securely share customer banking, transaction, and financial data within internal ecosystem or with third-party providers (or TPPS).

APIs have been around for decades. However, during the past few years, the web incarnation of APIs has emerged and enabled entirely new capabilities for both businesses and IT. Today, APIs are no longer a mechanism for integration – they have evolved to become a key value driver for banks. Modern Open APIs allows both humans and machines to easily read and communicate data in a standardized manner.

We can classify APIs into two categories: internal and external. An internal API is used when customers log in to their banking app to check their balance. The app connects to the provider’s internal system, dragging through data on how much (or how little) the customer has in their account. Internal APIs operate flexibly and agile, optimizing the user experience.

External APIs perform the same function, but enable data access and financial transactions between banks and third-party providers, including websites and apps. APIs also enable customers to interact with payment providers, such as Klarna, Square and Stripe.

Whether internal or external, APIs facilitate seamless and instant connections for customers. APIs are at the heart of the modern banking experience, with some banks increasingly open about their APIs and strategy. Adopting an open-source approach has enabled several digital challenger banks – such as Monzo, Starling Bank, and others – to establish a foothold in finance. APIs are inherently open-source, a change in the culture and approach adopted by banks in the past.

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Deep dive: The relevance of Open Banking

Financial services organizations face a choice. They can adapt to the new ecosystem, or they can lead it. Modern orchestration platforms like MuleSoft and Apache Camel are at the forefront of developing new technologies and integrating APIs into solutions. As a result, they’re in a stronger position to extract value from the process and deliver better customer experiences – and it all starts with APIs.

One major driver towards the speed of APIs is Open Banking. Open Banking is transforming the banking industry by allowing financial service providers to access financial information from banks and other financial institutions using open APIs. Modern customers demand a seamless online experience. Interactions with their finance providers must be personalized, convenient and fast. In addition, banks must offer a secure, multichannel experience that customers can have confidence in.

Open Banking is clearly the future. Industry statistics show that open banking is forecast to have over 60 million users, with a (Compound Annual Growth Rate) CAGR of over 50%. Driving this trend is increasing control, flexibility, and functionality provided by APIs.

Customers expect a seamless experience where communications and operations are streamlined across platforms. Instead of taking days to send money to a friend, they expect FI leaders to overcome legacy burdens and streamline operations execution within seconds. Integral to that is APIs. Technology can give customers total transparency and complete control of their data and their money.

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What are the advantages of APIs for banks?

APIs are transforming finance for banks, businesses, and customers. There are five key areas where APIs are impacting financial services through a decoupled architecture via a dedicated API layer:

1. Integrate with the customer’s current products such as insurance and payments
2. Providing new revenue channels and capturing new market segments
3. Increasing the efficiency of internal collaboration and reducing time-to-market for new solutions
4. Safety and security

We explore these themes and how they will impact banks and fintech businesses below.

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1. Integrate with the customer’s current products such as insurance and payments

Organizations must invest in developing APIs and create the necessary conditions for integrated financial services within the technologies and platforms that appear in the existing ecosystem that customers are already a part of. Integrated financial services will provide a complete overview for the customer on how certain insurance products can impact their economy and get certainty of the suggested risk mitigations from the insurance.

2. Providing new revenue channels and capturing new market segments

New challenger banks, payment providers and other financial services needs incumbent collaborators to quickly enter new markets. By collaborating with startups and companies capturing markets not currently covered by the bank, additional revenue can be generated and a long-term position in multiple markets can be ensured. Banks will not only need to provide user interfaces to regular customers through applications and webpages, they also need to provide user interfaces to developers and startups through well-curated developer portals. Additionally, the pandemic has fundamentally changed customer behavior, with over 50% of us preferring to manage our daily banking online or through apps. Estimates suggest that by 2024, 130 million customers will be using open banking platforms – and potentially, many more.

Banks face a race to remain relevant. They must refresh their customer offer to reflect the changing demands, and APIs are critical. Banks can build and deliver innovative digital products, services, and customer experiences using APIs. Access to a catalog of open-source APIs enable financial institutions to react fast, responding to customer demand with new products that will retain existing users and attract new ones.

Fintech businesses are increasingly accelerating the user experience, increasing engagement with digital platforms. APIs enable banks to replace non-intuitive and outdated interfaces with exciting and engaging platforms that perform across all devices.

3. Increasing the efficiency of internal and external collaboration and reducing time-to-market for new solutions

APIs enable finance providers to innovate faster, dramatically cutting time to market. New products can be developed quickly and rolled out to customers faster as banks and fintech businesses can integrate existing applications. For example, if a bank wants to add a new feature or service, it is much easier to use an existing API instead of building a new one. This frees internal resources, including time and talent, to focus on business-critical challenges and emerging opportunities.Armed with APIs, financial institutions can also extend their services and products to other banks to offer additional products to customers. Vice versa, banks can offer embedded or partner products, like insurance.

4. Safety and Security

Customers are concerned about the security of their data and the protection of their identities – and APIs play a role in ensuring this. Despite using open-source software, APIs encapsulate secure by design principles and reduce risk of poor design. They’re reutilized and not re-engineered for new purposes, enabling grant-controlled access to services. As a result, they allow banks to meet all business and regulatory requirements, such as the Payment Services Directive 2 (PSD2), in a standardized way. APIs ensure that customer data is protected, but they can also unlock its power. For example, banks can use transactional data captured to predict customer needs. They can then up-sell and cross-sell financial products to consumers, including in-house products and those of partners.

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Three priorities for APIs

The benefits of incorporating APIs are clear. Fintech businesses and banks must leverage API strategies that set them on a course to become leaders in Open Banking. By doing so, they can effectively monetize APIs and realize new API-based business models and revenue streams.

To achieve this, financial service businesses must prioritize three things:

1. Prepare for the European market and a world of interconnected services: Europe is developing a strong capability in Open Banking, with growing customer demand for solutions. Those banks and businesses that can use APIs to improve the customer experience will be the most successful.
2. Add new distribution channels and create new innovative ventures: Fintech businesses can profit by adding new distribution channels and by becoming preferred partners to third parties with strong distribution capabilities.
3. De-risk change and innovation: APIs enable businesses and banks to take risks by reducing costs and accelerating development timescales. The ones willing to take risks will enjoy the most significant rewards.

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