Application programming interfaces (APIs) are most often heard in computer science sectors such as big data and cloud computing instead of banking sectors such as working capital or receivables finance. But this, according to multinational banking and financial services holding company HSBC, is changing.
APIs are at the heart of a financial technology (FinTech) trend that allows banks to drive forward technological change within their organizations while not only providing value to customers but also unlocking the value of digital assets they already have but don’t actively monetise.
What’s in an API?
APIs are technology protocols that basically allow various software or components of systems to communicate. Banks can implement these protocols to allow them to package business data and assets and make them accessible for anyone — inside or outside the organisation.
The flexibility of APIs helps banks provide the experience and product customisation customers typically expect of third-party applications. Furthermore, when banks open up their APIs to third-party integrations, developers can build hosted innovative apps customers can then access from the bank’s app store.
Third-party integrations allow banks to address weaknesses in service delivery and enrich their digital client-facing ecosystem. Soon, white-label solutions will evolve as an offshoot of this trend — developed by prominent organisations and made available for paid use by others. From here, it’s a full-blown financial API economy.
APIs Allow Banks to Monetize Data and Digital Assets
This still-emerging FinTech trend is called open banking or open API. It essentially enables financial institutions to integrate third-party applications to their products and services. These APIs allow banks to provide customers a lot of digital financial products, services, and platforms around the banking ecosystem while at the same time being highly monetisable for the banks themselves.
It’s still emerging because various sectors in the industry display equally varied degrees of digital maturity.
Regardless, it’s certainly a trend that’s moving forward — albeit at different rates and stages for different financial institutions — due to a number of factors. The foremost catalyst that spurred the change is increased competition from purely financial technology solution providers that traditional banks need to deal with primarily because it increases customer expectations regarding availability and convenience.
Since banks are always on the lookout for additional streams of revenue and are actively looking for ways to unlock the value of their customer data and other digital assets, open APIs appear to be the right path forward. This is especially true given ever-increasing interconnectivity and digitization, making it even more important for banks to successfully cultivate ecosystems of technological, digital innovation around the volumes of customer data they hold.
Key Drivers Contributing to the Open API Trend
Traditional financial institutions are typically seen as less agile and slower to adopt to digital trends than smaller, leaner counterparts either within the same industry or otherwise. It’s similar to other bulky, slow-moving sectors such as law — they’re simply too big and complex to allow for quick turnarounds that span entire industries.
That said, key drivers are increasing the pace at which trends like open API are being adopted:
- Bank-FinTech partnerships are flourishing, and these collaborations have brought forth an emerging ecosystem that requires a data-sharing economy to work and provide value to clients
- Government regulations and open initiatives are opening up access to customer data that banks hold on other businesses. Such regulation as the European Union’s Payment Service Directive (PSD II) and open API itself are driving this change. National financial regulators in many other countries are evaluating open API’s feasibility for their own financial sectors as well.
- Banks can leverage existing data and digital assets for monetisation, creating new revenue streams.
The challenges that this trend needs to overcome to evolve into its own ecosystem within the wider FinTech landscape, however, are substantial. Just the workings of securing packaged digital assets that typically consists of sensitive client data would be significant. Scale the security needs by as much as big data and cloud computing requires, and it becomes a monumental undertaking.
Regardless, financial institutions will need to work on digital security and risk management anyway, with or without open API. And the value unlocked by open banking via APIs is well worth the effort.