The Irresistible March Toward Full API Banking
Across all business sectors, there is a long history of open systems succeeding over closed systems. Now it is the banks’ turn to open up, and what was once unthinkable is becoming a reality. Whether through regulatory obligation or customer pressure, third-party applications and real-time software interfaces will continue to gain access to banking information. And, as it is better to disrupt yourself rather than to let others do it for you, banks worldwide are evaluating their rational response.
The Banking Interconnectivity Logjam
Unlike most other industries, banks operate and communicate with their customers almost entirely from within bespoke, closed-off environments. Access to banking services and data is exclusively offered through bank-owned channels: the bank’s website, the bank’s mobile app, the bank’s branch, etc. And all services offered must be wholly created and owned by the bank. This is completely different than the online connectivity in which customers are immersed the rest of the time.
In-house, resource-strapped IT departments are necessarily focused on maintaining consistent service across a plethora of channels, rather than having the luxury to focus purely on innovation. Consequently, the creativity of products and services offered is restricted by legacy infrastructure, compliance regimens and, to some extent, by their imagination. New entrants continue to disaggregate banks as they unbundle the full-service banking model by offering specialized financial services with a more attractive customer proposition – bypassing the need for expensive channel management.
Opening Up through an API
Firstly, allowing external party applications to request information and originate transactions does not require bank back-office systems to be exposed to an unsecured Internet. Instead, through the use of Application Programming Interfaces (APIs), a software gateway is made for third parties to interact with the bank. APIs have been used by larger banks for many years to ease connectivity within their own systems and channels. This shows that, in many cases, the barriers to openness are not technical. What is lacking is a willingness to open up the jewel box.
Many institutions organize “hackathons” where outside developers compete to create and test new banking apps. Banks provide a platform, sample data and the tools to interact so that FinTech startups can be let loose to create value adding apps and services – many destined for eventual release on the bank’s app store. Emerging challenger banks, particularly those that offer digital-only online services, are ideally placed to exploit API banking in order to innovate. They simply provide the platform that gives access to customer accounts, possibly held externally at other banks, without the need and expense of managing large-scale back-office systems.
The global banking market is certainly not homogenous. In regions with strong, customer-focused regulators such as Europe, obligation is driving change toward open API access under the banner of Open Access to Accounts (XS2A). Elsewhere, innovative banks recognize the inevitability of a need to open up and are exploring their potential roles, but most adopt a wait-and-see approach.
Delivering Ubiquitous Access
Through the provision of software tools and APIs, third parties can build out new products, or interface existing applications directly with bank systems. New ideas are generated, thus leading to innovative new products and services being launched to bank customers. Many banks are looking to take the extra step of marketing these third-party applications through their own online app-stores.
Of paramount importance is who can see what information and how access is controlled, as banks are not about to universally open their systems to the outside world. The API approach gives third party applications highly controlled access to a very narrow subset of data, as chosen by the bank and customer.
The use of APIs has changed the way companies expect to interact with each other, often allowing direct interfaces to be built-in to aid ease and convenience – i.e., corporate accounting packages interface directly to their banks for statements and payment initiation. In the consumer realm, applications can analyze past spending patterns to make appropriate recommendations, or initiate payments from within non-banking applications; for instance, they could allow P2P payments to be made directly through Facebook or Twitter rather than the bank app.
The open API paradigm is all about the data that banks hold, and when, where and how that data is made available to the customers who need it. Payment technology and related services are evolving into more than just a way to simply meet customer demand. Financial executives are actively using payment technology to create and protect against the loss of payment revenue streams. Meanwhile, investment in payments technology will remain necessary for the foreseeable future.
Banks can no longer expect customers to come and visit them on their digital channel all the time. An open API strategy is a chance for banks to meet those customers on the customers’ terms – wherever they choose to live their online lives. By embracing the API model rather than fearing it, banks can accelerate the innovation process and reengage with digital customers in a meaningful and sustainable way, while maintaining strong control over the customer data that is made available. It is the banks themselves that get to decide how far they go along the process.