Why banks need an API strategy to innovate

It’s open season in banking! Open API season.

In today’s blog, we’re talking about all things ‘Application Programming Interfaces’ (more commonly known as APIs) and why they should be on your radar when it comes to your innovation strategy.

Let’s start with a quick refresher on what APIs are, for the uninitiated.

What are APIs?

In its simplest form, an API is a software intermediary. It allows two applications to speak to each other. A technology translator, if you will.

As we head towards (hopefully) sunnier days, you’ll likely be Googling the weather in your hometown. Now, Google isn’t in the weather business, so it sources this information from a third party using an API. The API provides them with the latest weather data in a re-formatable way. This culminates in the ‘rich snippet’ you experience at the top of search results.

In finance, we have seen APIs applied in a range of functions from real-time stock prices through to payment APIs, the backbone of e-commerce growth.

The API Ecosystem

APIs are a massive part of the growing Software-as-a-Service (SaaS) ecosystem. They are the glue, linking together a diverse ecosystem of solutions… and what do we all want from our business solutions? Integration, of course. No one wants to onboard solutions that don’t speak to one another to streamline data transfer, processes and time management!

The unparalleled growth of tech firms is in part related to API strategies. Businesses flourished by piecing together best-in-class digital services to create unique holistic customer journeys. Uber is, arguably, one of the best examples of this. Their value proposition was built by integrating APIs from a myriad of providers like Amazon Web Services, Mandrill, Google Maps, Braintree, and others.

Uber surpassed its initial IPO offering estimation of $75 billion last year. And they did it using other people’s data via APIs. Uber now delivers its own APIs to other businesses, generating new revenue sources.

This is a mutually beneficial ecosystem. API providers are rewarded for providing their services. For instance, eBay generates around 60% of its revenues from its submit a listing API. Conversely, customer-facing entities earn customer experience points for bringing unique services to their base, improving competitive position.

The Financial Services Application 

Banking has been slightly later to the API party, in part due to regulation and in part due to risk aversion. Yet, some key drivers that are pushing API’s onto the agenda of C-suite tables throughout the UK. They are:

• Complex customers relationships: Banking consumers will emerge from the pandemic changed. We’ve gotten used to 24/7, real-time support across omni-channel experiences. There’s a desire for 360-degree finance. Customers want tools, products and services that engage and simplify their financial lives.
• Fintech disruption: From robo-advisors to peer-to-peer lending, fintech is changing the very fabric of the industry. Further, digital-first fintech banks, like Starling, continue to mount considerable challenges to market share with innovative services. Their agile, cloud-based business model allows them to pivot quickly to demand. APIs can help incumbents catch up or partner with these organisations, creating a two way data flow.
• Technology growth: – Cloud services, IoT, and blockchain technology are permeating the mainstream. This wide horizon of technologies makes it hard for banks to specialise in-house. Partnerships will be key battlegrounds where new revenue streams are created, a solid API strategy will drive this.
• Regulatory pressures: Finally, and most importantly, regulatory change forces banks to re-evaluate digital propositions. Open Banking and PSD2 directives, rightly, are giving consumers more visibility over their finances. This should in time improve competition. However, banks that fail to innovate will find themselves lacking USPs after their vast data pools have opened up.

The Banking as a Service Continuum

So this unearths a few questions for decision-makers in banks. How will the traditional banking model evolve with the use of APIs?

Banks have been on a digitisation journey for some time. The new likely scenario is the rise of the Banking as a Service (BaaS) model (which we covered in more detail in this blog), which presents a continuum of choice for banks.

At one end, we’ll have banks that focus solely on customer management and distribution. They will cleverly utilise fintech to deliver core services. On the other side of the continuum, banks offer banking-only services. These types of banks will focus on infrastructure and risk management, leaning on their vast years of experience while the front-end is managed by other fintechs or banks.

In reality, it’s more likely as banks evolve they will fall somewhere along this spectrum. However, APIs will be central to enabling whatever mix of a model a bank chooses to adopt.

Why Your API Strategy Will Help Innovation 

So we’ve covered the broad strokes of what APIs are and why they should be in your thinking in 2021. Now, let’s turn our attention to some functional ways APIs can super-charge innovation in banking:

Reducing Cost

• Fintech’s are competing for coveted access to the bank’s customer base and banks are competing for fintech’s innovative stack. By selecting best-in-class services that are highly innovative that you wouldn’t have had the time or money to build yourself can achieve superior employee and customer experience without the risk of substantial research and development investment.

Improving Speed to Market

• IT banking operations evolve slowly. Complex architecture and aversion to risk have been systemic of historic infrastructure. Using waterfall techniques and large complex yearly releases with little central decision power constrains innovation. Using APIs, banks can expedite service offerings to market, responding to the fluid nature of the new banking customer.

Increased Competition Breeds Innovation

• We’ve read a lot about banks pivoting towards customer-centric models. However, Open Banking allows customers to make choices about the functionalities and services personal to them. As customers can switch between providers and toolkits easily, this will improve innovation, as fintech and banks compete for business on performance and convenience.

The Digital Experience Lag

• The difference between digital-native banks and incumbents is digital experiences. Over the pandemic, almost all customers have become exclusively digital. Legacy banks need to integrate similar experiences, which could be quickly brought in by APIs, allowing them to compete on innovation and drive engagement. We’ve seen this with complementary services like rounding up purchases into investments or savings products.