In the last few years the financial landscape has been drastically changing shape, with new technology entrants coming onto the market and offering innovative solutions to financial services. The FinTech wave has even made its way onto the political agenda – Chancellor George Osborne announced a plan to boost competition by encouraging banks to open up their Application Programming Interfaces (APIs) in his pre-election Budget statement.

Launched by Salesforce in 2000 APIs essentially allow the communication between two different pieces of software. The government is hoping that opening up data to FinTech start-up companies will boost competition in the sector – enabling these newcomers to create innovative new services, based on the standardised banking API. For example, with access to this banking technology, developers could build innovative user-friendly apps that allow consumers to manage their spending and directly link to their bank accounts. It is planned that the initiative will also lead to banking comparison sites, such as those that are popular in the insurance industry.  

While the government’s initiative to standardise APIs has been largely reported as a competition boost in the banking industry, banks should welcome this move towards a ‘sharing’ culture. APIs are the key to collaboration between FinTech players and banks should embrace this with open arms. This is not a case of FinTechs versus the banks - beyond the benefits to the consumer and new financial technology companies, banks also have a lot to gain through opening up their APIs. With their creaking IT legacy systems, banks have often struggled to innovate at the speed with which customers demand. By embracing an open platform, banks can simplify the process of adding innovative technology services by piecing together building blocks of flexible technology – outsourced from FinTech players, or even other banks who specialise in a specific service.

However, this does not mean that the underlying legacy issues of archaic and convoluted banking IT architecture can just be ignored. Opening up the top level APIs without addressing the core banking issue underneath is purely masking the real problem. For open APIs to offer a real solution to banks’ technology issues, banks need to make sense of their confused core IT systems – in order to ensure their APIs link to these core business functions. 

By collaborating with competitor banks, technology experts and FinTech newcomers, the banking sector can define industry-wide standards for banking IT architecture – cutting through the complexity by categorising core IT into clear business functions. Aligning to a framework that is standardised across the whole international banking industry would enable banks to ensure that their IT systems and thus their APIs are in sync across the landscape. 

The government’s open API initiative is a step in the right direction to boosting banking innovation, however the government will need to take advice from industry experts and banking players, if it is to ensure that this initiative provides true value to the whole ecosystem. Applying a top-down approach – forcing banks to open their APIs, despite their creaking legacy IT architecture may seem like a ‘quick fix’ to boost banking IT innovation, but for real long-term benefit, it is crucial to address the problem from the bottom up. By categorising and standardising their IT architecture, before considering where their APIs fit within this, banks can embrace a truly open approach to innovation.