Financial institutions (FIs) must increase agility and prioritise innovation. Many FIs initially choose to build their open APIs on-premises. However, they often find it difficult to scale these APIs with customer demand, aggregate and analyse large volumes of new data, and adapt the APIs fast enough to correspond to changing customer expectations. Cloud offers the scalability, security, and cost-effectiveness they need.

Finextra spoke to Misha Goussev, financial services partner solutions architect; Kathryn Van Nuys fintech lead, global startup business development; and Nitin Gupta, global head of financial services solutions and partners, about how the cloud is responsible for microservices and APIs becoming the prevailing archetype, especially when it comes to the convenience and security of sharing data and the agility required for both traditional FIs and fintechs to scale.

The shift from monolithic

Goussev posits that the shift from monolithic applications to microservices is driven by cloud, which has a distributed environment that permits an unlimited number of microservices to co-exist. “Cloud solutions are built using microservices, but on-premises applications tend to be monolithic where it’s more difficult to incorporate microservices and APIs.”

He continues to highlight how it is becoming increasingly difficult for FIs with legacy infrastructure to “leverage the new paradigm without migrating to cloud.” On the agility and scale point, Goussev adds that microservices enable the targeted scaling of specific components instead of the entire workflow.

Since APIs are self-contained, they can be readily deployed and leveraged in a nimbler fashion for innovation. As a result, FIs can introduce new features and integrate them in a more organic way. When powered by cloud, they can now develop, test, and launch new services to customers quickly and cost-effectively.

Gupta explains, “For FIs, this can fuel business growth. For instance, banks can gain a more comprehensive view of their customers to deliver a personalized experience. Insurance companies can make more timely offers, cross-selling home, auto, and life policies.”

In capital markets, APIs bring in data from different sources and expose them to real-time analytics. Van Nuys adds, “the more data you have, the easier it is to surface meaningful trends with the help of the right analytics tools. Cloud can handle massive amounts of data, and AI/ML services live in the cloud. FIs can leverage APIs to connect data sources and use the cloud to analyse all that data faster and cheaper than they can on-premises.”

The open banking generation

Open banking mandates have spurred on a renewed interest in the capabilities of APIs, especially combined with increasing cloud adoption. As banks share their data with developers and service providers, a new landscape is being shaped in which customers are reaping the biggest benefits.

APIs are at the crux of new regulations around the world and have enabled the second phase of the European Union’s Payment Services Directive, the UK’s Open Banking mandate and allowed the Bank of Japan and the Monetary Authority of Singapore to permit API-driven open banking. In addition to this, APIs allow activity to flow through an organisation in real-time, unlocking revenue streams and value propositions at the same time.

Gupta complements this point by stating that open banking regulation “promotes standardisation in banking and payments technology, drives competition among industry players, enhances security of customer account data, and leads to innovation among all parties that utilise bank data.”

Open banking is a natural use case for cloud technologies and microservices architecture. Cloud delivers the compute power, elasticity, and agility needed to process large amounts of real-time data in a cost-effective manner and at the pace to stay competitive. The resilience and security of cloud is also well-suited for a heavily regulated industry that handles sensitive data.

The data challenge

Technology has allowed organisations to reap the benefits of streamlined processes and cost-efficient operations, but it is the combination of cloud computing with big data that is a transformational game changer. The cloud can help companies process and analyse big data faster and ultimately provide analytical insights into how to improve value propositions.

Gupta believes that the “cloud plays an instrumental role in integrating data and improving the interoperability of data.” APIs are open-ended and help make the data more accessible to analytics services.

The symbiosis of APIs and data analytics means that data sitting in a data lake can be easily exposed via APIs and when built in the cloud, data lakes can store structured and unstructured data at scale and run flexible analytics such as dashboards, visualisations, big data processing, real-time analytics, and machine learning. Further to this, for the financial services industry, this results in increased support for compliance requirements, more accurate forecasts, more timely risk assessments and a better understanding of customer behaviour.

The startup level up

While legacy FIs are in various stages of their digital transformation, Van Nuys explains that startups are already making the most of an API-first strategy to unlock a variety of business models and offer banking-like services. Thanks to cloud, these startups are facing a reduced barrier to entry.

One example is industry-favourite Plaid, which provides developers with the tools to integrate transaction and account data from most major financial institutions into third-party applications. In the disrupted new ecosystem where competition and partnerships are heralded, some fintech firms are offering new products and services directly to consumers. Others are developing solutions specifically for traditional banks that help modernise their legacy cores.

Gupta explores how “fintechs and startups are leveraging APIs to connect to each other as well as to traditional firms. Traditional FIs are accelerating a collaborative approach with fintechs in addition to increasing in-house investments. Most of the innovation is happening at the edges, so banks are thinking about how to tap into the new ecosystem. While APIs help improve integration, they still need a cloud strategy for scale.”

Mobile-only bank Monzo built its core banking in the AWS Cloud with a microservices architecture that allows it to leverage the scale and flexibility that the technology offers in addition to eliminating the guessing game around capacity, provisioning, and infrastructure management. Starling Bank was designed and built completely on AWS Cloud to deliver and scale infrastructure on demand while ensuring proper governance by managing developer privileges for releases on AWS via automation with Slack.

The challenger bank also communicated with UK and EU banking regulators on its use of AWS to demonstrate that it could meet all security and compliance obligations. By building a bank with an open API from day one, Starling is natively compliant with the PSD2 directive - putting the bank one step ahead of its established competitors, who must rethink their architectures and strategies to comply. Furthermore, the Starling marketplace enables developers to build their own products and integrations using its API.

FIs may decide to build their open APIs on site, but the challenges of scaling with exploding volumes of demand and customer demand persist. The cloud offers the scalability, security and cost-effectiveness that these FIs need.

There are different paths to cloud, and organizations can choose to go direct or leverage solutions and offerings from cloud specialists. “The AWS Partner Network (APN) is our global community of partners, and our Technology and Consulting Partners help FIs accelerate their cloud journeys, Gupta states. “Partners who achieve Financial Services Competency have deep industry expertise, solutions that align with AWS architectural best practices, and staff with AWS certifications.” Capgemini, Mambu and Xignite are some APN Partners who have developed solutions and offerings that complement a cloud-based API platform.