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API adoption: banks pick up the pace

Nilesh Vaidya

An application programming interface (API) is a software intermediary (or set of protocols) that allows two applications to talk to each other. APIs have become crucial for the future of banking because they help to create stronger and more dynamic customer ties. Many industries have used internal APIs for years and technology giants such as Facebook, Uber, Google, and Netflix have experienced tremendous growth using APIs. In the face of increasing competition, APIs are now pivotal to the future of banking as a way to quickly innovate and meet rapidly changing customer demands.

APIs set to drive the future of banking

Broadly classified, APIs fall into three categories:
• Private, which are internal to the firm and facilitate information flow between siloed legacy systems
• Partner, which are used primarily to integrate firm systems with third-party partners
• Open, which unseal the firm’s systems to third parties.

More and more APIs are enabling banks to seamlessly collaborate with stakeholders (including FinTechs and third parties) to achieve their digital goals, thereby creating value-based market offerings for the customers. With regulators across the globe pushing for API adoption (such as PSD2 in Europe), banks will eventually be forced to share data with collaborators.

However, when compared with other industries, financial services lag in API adoption, and there is a lot of potential for increased uptake in the coming years. Banks, especially those outside of Europe, will need to take a more proactive approach toward API implantation instead of waiting for regulatory compliance to become mandatory. In addition to helping banks embrace agility and faster innovation, APIs help banks develop new revenue streams and reduce time to market for new products and services. APIs also enable banks to gather actionable customer data across various sources for understanding consumer preferences, thereby opening the door for customized products and services.

API strategies and initiatives taken up by banks

API adoption is gradually increasing, with banks devising different implementation strategies. Regardless of their size, banks are using APIs to explore new territory. For example, Citigroup is using APIs to collaborate with third-party developers to create new products and services, especially for corporate customers. Some banks are implementing APIs to encourage collaborative innovation with third-party partners, suppliers, and other firms. Citibank, Fidor, and BBVA have developed an API marketplace in order to collaborate with various stakeholders (including FinTechs) regarding new concepts for online banking, customer data, cards, payments, and accounts.

In an interview for Capgemini’s World Retail Banking Report 2017, the CIO of a leading global bank said: “APIs are nothing short of essential to banking’s future. They are going to drastically change the way we do banking and banks will have to find their place in this new environment to become a winner.”

Banks are also using APIs for tighter system integration to enable fast and agile services as APIs can break silos, improve systems coordination, and significantly boost the speed of processes and transactions.

Another way in which banks are leveraging APIs is by decoupling various architectural components to build independent, scalable platforms, and greater resiliency. The move from a point-to-point infrastructure to a more federated model reduces development costs and improves ability to rationalize applications. For example, Wells Fargo is using open APIs to unbundle their banking products so customers can pick and choose services. APIs also help banks create stronger customer relationships by connecting them with the right products. For example, solarisBank created a platform for FinTechs to take their services to the market via an organization that is fully licensed as a digital bank.

Additionally, banks such as Barclays, Royal Bank of Scotland, and Citigroup are conducting hackathon events during which developers collaborate and compete to identify business problems and solve them through technology. RBS has held 48-hour “Blue Bank hackathons” during which developers, designers, and entrepreneurs create solutions around various banking themes.

Standardization and best practices

API standardization initiatives such as the global Banking Industry Architecture Network (BIAN) and W3C Web Payments Interest Group, the UK’s Open Banking Working Group, the Open Financial Exchange in the United States, and Germany’s Open Bank Project are expected to spur further adoption of APIs. The goal of these initiatives is to enable harmonization of standards, thereby achieving interoperability, making collaboration between stakeholders easier, and providing a greater incentive for banks to adopt APIs.

However, in addition to taking advantage of available standards, banks deploying open APIs will need to leverage best practices such as scalability (to ensure that unexpectedly high or low digital traffic can be managed), advanced security features (tiered security to allow appropriate access and control for various user types), control (closely monitoring and controlling the API portfolio to ensure business processes are consistent and efficiently managed), and revenue generation (direct, through per-transaction or other fees, or indirect via new types of businesses, greater market share or cost savings) to ensure the best return on bank investments.