APIs: the connective tissue enabling platforms and creating thriving ecosystems
Banks are no strangers to the application programming interface (API) universe although they have typically created their own APIs within the confines of their four walls. However, the industry is being invited to change by financial technology firms (FinTechs) trying to grab a piece of their business, as well as by incoming regulations which aim to unlock the doors of competition.
Open banking: danger or opportunity?
This is particularly true with the game changing arrival of open banking, kickstarted by the UK’s Competition and Markets Authority and by Europe’s second Directive on Payment Services (PSD2) in Europe last year. The core concept is similar to that of services such as Google Maps, which allows third parties to incorporate some or all of its services into their own programmes or apps.
Under the new regime, third party providers have access to banks’ customer account data through APIs plus they can consult customer transaction history. The customer’s data remain securely in the bank account and, of course, it is up to customers if and how they share their data.
Open APIs, though, make it much easier for customers to transfer their accounts, manage payments and conduct transactions through other banks and non-banks. In addition, clients can compare and contrast the different offerings and prices as the regulation requires would-be competitor organisations to disclose performance and fee data.
The only option for banks is to act faster than third-party providers who may steal their thunder and offer better functionality, as well as more innovative and reasonably priced products on top of their data and infrastructure. There is also a realisation that increasing demands for API-based modular architectures can create a significant drain on resources due to legacy architecture. However, the change and disruption present the banks and asset servicers with significant opportunities to reinvent themselves, simplify their complicated IT infrastructures and develop and offer new products and services that better meet their customer’s needs.
Banks and APIs: a fruitful collaboration
In the past, many banks had opted for a blanket mass marketing and product-centric approach which did not always take into account the end-user’s demands. Providing a wider selection of APIs gives them the freedom to tap into customer requirements and design more value-added, tailor-made products. Equally as important, it allows banks to enhance their customer service by being able to provide information and respond to questions and complaints in a timelier fashion.
What we have observed in the recent past with payments systems and retail banking is nowadays true for securities services and corporate and investment banking.
Putting the customer front and centre in an open banking world, though, requires not only a reconfiguration of the business-to-business (B2B) model but also of the mindset in terms of building a new, more flexible ecosystem, including all potential partners. Silos have to be broken down, innovation cycles accelerated and a more agile organisational framework constructed. Among the main challenges are the decisions that have to be made regarding the APIs, the internal and external information on the platform and the relationships forged. The agenda also includes, pricing structures, quality of services, types of products and the customers’ ability to integrate the APIs.
Thought and analysis must go into which channels should be used – for example, Symphony or Aladdin as target platforms - for stronger collaboration as well as external communications with outside partners and integration of data from across their networks in a secure and compliant way.
The successful financial institutions will be those who can act quickly and develop a modular business and technical architecture that leverage their value add while dynamically amalgating offerings and data from multiple players.
The larger banks and asset servicers have already moved forward with greater flexibility and functionality via APIs. They have incorporated third-party data, struck partnerships with infrastructure players like SWIFT, software editors, FinTechs and platforms such as Microsoft and Amazon. And the entire financial industry should develop standards for more interoperability between all of these.
Turning data into actionable insights
Banks have also bundled together payments facilities, analytics and reporting as well as information from disparate systems into one package and onto one platform. They are also creating value by turning the data and analytics collected into actionable insights for clients, using AI techniques like machine learning. There is a wealth of information to be found in banking apps, including cash-flow, credit history, mobile location and browser histories.
Although non-banks may pose a potential threat, incumbents have a clear advantage in that they already have a significant and sizeable pool of customers. This is their chance to build upon this by working together with third parties, to form closer ties and improve their understanding of customer needs and create the right products, services and experiences for them today and into the future.