APIs – the answer banks have been looking for?
Need of Specialists
While banks are struggling to cope efficiently with rising customer expectations, new technology-backed entrants- supported by agile business models and unencumbered by complex regulations, are taking advantage to gain market share. In order to survive in the new disrupted economy, banks must change, they must adapt. In order to undergo a landscape transformation (with an eye towards the future) without disrupting present operations , banks need to fragment their systems and combine the best of what exists internally with what is best on the market. The banks could focus on what they excel at and leave the rest to the new FinTech specialists, which would not only ensure more efficient operations but the subsequent white label innovative products would go a long way in attracting new customers while minimizing the attrition of their existing customers. Commoditized offerings can hence be sourced to Fintechs who can provide these at lower cost and yet, effective solutions while the high value added services can be provided internally by the bank.
However, while the cost effectiveness and number of choices available are important factors for the customer, the ease of use and the near-real-time manner in which their bank account data can be integrated into their own systems are key when they choose their principal bank. The bank, thus, needs to ensure that their partners are seamlessly integrated into their systems in order to offer a comprehensive, consolidated and consistent customer experience. In order to do that, strong integration technology is required with uniform standards being adopted for use by global players – both Banks and traditional IT service providers as well as FinTechs. This is where Application Programming Interfaces (APIs) come in.
The Evolution of APIs
Most APIs are proprietary, specific to certain software applications thereby limiting their openness, flexibility and interoperability. While recent regulatory reforms such as PSD2 in Europe have forced the banks’ hands by making standard and open APIs mandatory, the emergence of these open APIs has also provided a platform for banks to partner with Fintechs and develop innovative solutions for their clients and generate incremental revenues, increase market share and customer stickiness which would then become difficult for the next Bank to break into.
Open source technologies are being used to enable third-party developers build financial applications and related services. Banking data is hence available for use in real-time in third-party applications which allows better analysis and forecasting and enables more informed decisions. The technology allows secure data sharing and provides more options and channels to the consumers to interact with their bank. It helps the bank reduce its cost of operations and manage risk effectively.
Collaborative partnerships are already developing among traditional industry players, FinTechs and other organizations to drive innovation and differentiation in bank products and services. Citibank has leveraged industry APIs to enable third-party developers to create new products and services via its mobile banking platforms. The Spanish bank BBVA has partnered with Dwolla (a bank transfer platform) to support real-time payments by leveraging the latter’s FiSync API. A South East Asian bank as well as an Indian bank have published set of APIs to third party developers which opens up nearly 80-90% of their banking functionality for prototyping through artificial data. It must be pointed out here that the distinction to be one of the first banks to move in the direction of Open Banking goes to the French bank Crédit Agricole which launched its own app store—the CAStore—as an online marketplace providing third-party developers with technology tools to create apps. Banks are also looking to connect into a wider ecosystem of Fintechs to offer complementary products and services in regions where a corporate bank’s client has a presence, but the bank may not (or may have a smaller presence). This ensures new revenue streams and improves customer experience since the customers now have access to a wider range of complementary products and services.
What’s there to Gain for Corporates?
Corporate customers stand to benefit from this transformation as much as their retail counterparts. Many customers are frustrated with their bank’s slow progress in seamlessly integrating their services into the customers’ increasingly digitized supply chains. Not only do open APIs resolve this issue, but third-party services could be more easily accommodated and encouraged by corporate banks. In a scenario where a corporate is owning and managing an ERP supporting the core business, it now doesn’t need to log into the banking platform to carry out banking transactions but instead trigger API calls to bank’s system through a secured system integration between its ERP and Bank. Through the APIs, the corporate can enjoy the convenience of instant payments or receivables from their ERP thus reducing the TAT for doing time critical financial transactions. Information tailored to the corporate can be accessed by giving the required credentials and these can include their account statements and transaction options to pay through bank accounts, cards & wallets. APIs can help corporates generate cash flow analysis and funds management and can also provide them access to general information such as account details, loan rates, fixed deposit rates, mortgage rates, financial tools, routing numbers, credit card offers and any other recent launches of offerings. Portals like Expedia, Lastminute.com which have existed much longer and provided typically retail customers the benefit of comparative analysis among the offerings of different airlines and hotels on a global basis are now starting to give similar benefits to corporate customers as well.
What are the challenges?
Though the current outlook of Open Banking API looks promising, it will take some time for banks to reap the benefits. Banks face challenges in building, owning and ultimately operating the solution productively. For banks to dive into the playground, the transformation cost will be high due to initial investments- predominantly the partnership cost with solution providers and also the cost of upgrading the existing legacy systems which are not fully automated or digitalized.
Banks will have to weigh the most profitable proposition – either build and maintain the APIs themselves or outsource the same to other solution providers. Banks could also face the challenge of changing people’s mindset since a significant percentage still view API integration as just another banking channel. In order to make this entire journey innovative, banks will have to innovate processes, culture, incentives, performance management and organization skills across their staff.
The Way Forward
Despite these challenges, there is little alternative for banks but to go digital through API integration. Realizing API-led connectivity is not a discrete goal, but rather a continuous journey, much like Open Banking itself which can be only be realized in incremental steps. API and Open banking are encouraging productive competition amongst solution providers and making banks focus a great deal more on owning their customers, their data and their experience. They believe that significant value lies in providing financial institutions with tools, resources and technology to help them adapt to the change cohesively as this sure will pave a new era of banking in the near future- one that will not just focus on the front end but instead on the entire corporate financial value chain.