API in financial services: the key to the future?
The financial industry is facing the biggest changes in decades. Having rapidly embraced online banking in the late 90s, the pace of digital innovation in relation to end customers has been sluggish - until now. There is a new window of opportunity to offer innovative solutions. How APIs could be the driver and enabler for the future?
APIs should be viewed as delivering two main benefits. First, they are an IT urbanization enabler to improve the ability for siloed systems to talk to each other, and increase development productivity by more quickly assembling services to create more complex products. Second, they are a business booster to more rapidly answer business needs by providing financial data open services, ready to be redesigned in front office tools, wherever they come from: banks, third parties, ERP or clients themselves.
The technical modularisation of information systems is an ongoing process to enable all the components in a system to talk to each other in a smart way and to easily exchange all the data they need to. Large companies, including banks, have traditionally developed IT systems on a standalone basis in silos. Most of those systems are not designed to talk naturally to each other. This is why it is now a permanent mission for enterprise architects to ensure information systems are better modularised. But to achieve digital innovation, firms should not be solely focused on IT; they must also understand how business is now being done and offer a mix of products to design services that are relevant for customers.
Business lines are realising this because client requirements are changing, as firms now ask their banking providers not only to provide applications but also to provide data and information sets, which they can then integrate directly into their own ERP tools or through third-party providers. Some corporate clients now expect raw bank data to be fed into their tools, rather than getting them from a specific area on the bank’s website or from connection tools like EBICS.
It is imperative that each financial institution builds an ‘API Framework’ that enables two things to happen. First, the Framework should feed the IS of clients, directly integrating data without the need for modification. Second, the Framework should be open to third parties, either to other modular services within the bank, or to Fintech and Regtech developers. Such a Framework will help banks to evolve and move away from the assumption that it is necessary to be the ‘Acme’ of financial services: a company that makes everything.
APIs enable financial institutions to offer clients very innovative solutions specific to their needs, which are actually based on quite standardised elements. For many banks, adopting an API strategy will be a way for them to stay in the game.
Head of Payment Innovation
A key strategy for APIs is to standardise as much as possible for individuals or for third party providers that want to leverage bank data, particularly for payments, account reporting, etc. To date, firms have relied on third parties to integrate the data into their systems.
Banks can take a dual role as a service provider and a data services provider. This originally faced constraint from the Payment Services Directive II but is increasingly seen as a new opportunity for the industry. The market is beginning to understand new potentials of the API vision, with banks offering micro-services, which are fairly targeted on features such as specific reports, account balance, status on a folder etc.
The way applications are designed in the future will be very different. This means product designers will have to bear in mind that they are not only designing services, but also have to select and design data provided to customers. They must also make sure that all the different layers of a solution can work together. This isn’t easy for traditional bank product designers, who are used to developing an entire, end to end solution. There is no longer a ‘one size fits all’ – corporate clients can ask for very specific solutions from their banks.
APIs are tomorrow’s links that will help create ecosystems of products and services (i.e platforms), while enabling these ecosystems to be interconnected. In a nutshell, APIs are the lever to open information systems and to get higher value out of them through an exponential network.
Chief of Staff and Chief Digital Officer for SGSS
The first principle of being more API-focused is that financial institutions have in hand services which can be more easily adapted to meet clients’ requirements. Products can be assembled from different services within the bank, which should improve the speed at which solutions are provided to clients. Innovation isn’t always about something new – it also can be about the way elements are put together to serve customer needs. For example, payments and FX could be combined into a single process, rather than offered as different steps.
APIs also allow features to be sourced from external parties, including competitors. If a bank doesn’t have a solution for a particular function, it can source a white label from another provider to offer a complete service to customers. By taking this modular approach, banks can ensure they remain in certain market segments, even if they cannot provide a full range of elements themselves. We can guess that some Fintechs will be interested in collaborating with banks, leveraging their data to provide solutions that make links between banks and corporates. Of course, Fintechs can also mix different API components and offer services to corporates, which could be dangerous for banks but also could offer opportunities to develop new white label channels.
Increasingly, the corporate treasury function integrates more providers, is asking for more complex products, and needs to gain agility in using their financial services and improving the underlying logistics to enable this to work. Anything that delivers greater efficiency and speed will resonate. This is the reason why proposing financial data services offers is on the way to resolve this issues to reduce the costly and time-consuming process of reconciling payments and account information. Treasurers want to support the business, not be a problem for it.