Financial institutions are opening access to their services through Application Programming Interfaces (APIs).
As financial intermediaries, firms have always integrated with partners in other parts of the financial value chain. Digital technologies have enabled greater standardisation and scale of these integrations. The establishment of digital marketplaces such as Amazon, Apple, Google, Uber and AirBnB have shown how combining services from disparate sources can result in new customer services and business models previously unimagined.
An added incentive is that regulators have recognised that APIs can foster innovation, competition and financial inclusion. Initiatives that encourage or require firms to open up their services include:
- The European Banking Authority‘s Payments Services Directive (PSD2) requiring banks to open access to the payments system through APIs.
- The UK Competition and Markets Authority mandating that retail banks must grant access to their services through open APIs.
- The Association of Banks in Singapore (ABS) and the Monetary Authority of Singapore (MAS) jointly publishing their Finance-as-a-Service API Playbook.
The above chart shows the publicly announced Open APIs for universal banks and payment providers at the time of writing. Many other banks’ APIs are in progress or undergoing closed Beta trials with selected partners.
A similar evolution is occurring amongst capital markets trading firms, brokers and information service providers:
Beyond the financial services ecosystem is a wider universe of services such as Google Maps that developers can combine to create experiences that meet customers’ needs in novel ways.
It’s good business to open APIs
Banks initially feared that opening access to their services to third parties would surrender their role as a trusted advisor to their customers, relegating them to providing commoditised “plumbing” (e.g. connection to the payments system). This is still a threat, especially if other firms provide a better customer experience, and customers don’t mind if their primary relationship is with a provider who can switch to another financial institution at will.
Despite this, there are good business reasons for financial institutions to open up:
Extend your reach: Partnering with other organisations enables you to reach customers you would not otherwise find. This could include bundling services with partners in other industries or membership-based organisations (such as professional and industry associations).
Make it easy to do business with you: Onboarding new partners, enterprise customers, membership-based organisations is much easier with a standardised interface and streamlined, digitised process.
Create new business models: By reducing the friction between customers, partners and institutions, the focus can shift from selling products to helping customers facing significant life events. Bankers already know that customers don’t want a mortgage – they want a home, and whole package that goes with it. Partnering with organisations that offer complementary services, such as conveyancing, removals, engaging utilities can enable them to offer a total experience to the customer. This is much easier when the interactions between partners are simpler and can be scaled digitally.
Don’t be last: As with other digital communities, there is a strong network effect as a community or platform grows. The rapid growth of Facebook, Uber and AirBnB show that communities can appear rapidly, and firms need to be able to participate or risk losing share as customers adopt new habits.
Technical reasons for open APIs
In addition to the business drivers, APIs enable a financial institution’s technical team to provide better services more efficiently:
Upgrading or migrating your core: A standardised middle layer between front and back-office systems reduces the number of interfaces required. It also insulates systems from changes in other applications in the institution’s environment. This can minimise upheaval when you need to upgrade or replace your core systems.
Overcome internal silos: APIs can have as much effect on internal collaboration as on external partnering. By defining standard interfaces for services and microservices, development teams in different parts of the organisation can focus on their tasks, and consume the services provided by applications in other parts of the bank, without having to understand their inner workings. By encouraging teams to publish APIs internally, and also to look for existing APIs before developing new functionality, institutions can reduce duplication of effort and speed up development.
Amplify your skills and capacity: An internal development team is constantly stretched to capacity. There always seem to be more initiatives than they can deliver with the resources they have available. Whether engaging a technology provider to implement a new system, or allowing a partner to build on top of a service you already have, connecting to services through APIs enables the firm to meet more customer needs without requiring more internal development capacity.
What does a good API strategy look like?
While APIs are an enabler of future innovation, and not all future uses can be foreseen, “Build it and they will come” doesn’t make a good business case. In “Making the Case for an API Roadmap“, WSO2’s Chris Haddad outlines several factors that contribute to a successful API strategy.
Define your objectives: Determining the objectives of your API strategy requires identifying the needs of:
- Customer journeys across multiple channels
- Prospective partners in the same or complementary industries
- Digital assets such as web sites and mobile apps
- Internal collaboration, particularly front-to-back office or across multiple lines of business
Determine which API types to encourage: Even with a dedicated API team, best results will be obtained by mobilising skills across the organisation. Your strategy should therefore state clearly the types of API that will contribute most to your objectives.
Make APIs easy for developers: In the “Keys To Successful Real World Open API Strategies“, Programmable Web’s Mark Boyd indicates what “good” looks like to a developer:
- Interactive user documentation
- One-step registration to create an account and begin trialing an API
- A sandbox environment
- Developer support forum
Govern: When publishing an API for consumption, a balance needs to be struck between encouraging innovation and ensuring that the environment is maintained to appropriate standards. This involves managing people, policies and processes. As with other development functions, operational controls and API lifecycle of (specification, design, build, deployment, versioning and retirement) need to be managed.
Monitor API Use: Measuring the growth and usage of APIs is critical to demonstrating their value, identifying usage patterns, performance bottlenecks, obstacles to adoption, and future needs. Metrics and targets should be defined beforehand, and should segment usage by partner/organisation, channel/touchpoint, and correlation with events such as marketing campaigns by both the firm and partners. Revenue may be hard to attribute directly, so showing how API usage aligns with strategic objectives is important in ascribing value.
Manage As a Product: Successful API management requires understanding the business goals of both the firm and its partners, promoting a cohesive API product portfolio, and efficiently evolve the API. Treating an API as a product shifts the focus to:
- Warranty: The API’s quality of service, scale, and longevity.
- Packaging: Defining business capability, tiered service levels, and appropriate context.
- Evolution: Managing releases, shifts in API purpose, or reducing feature bloat.
APIs in Insurance
It’s not just banking and capital markets that can benefit from APIs.
According to the British Insurance Brokers’ Association (BIBA) Executive Director Graeme Trudgill, brokers should view the rapid growth of the sharing economy as an opportunity:
“– It has created a demand for new, innovative insurance products. Insurers and brokers who are able to react quickly to the market needs and produce flexible products could quickly steal a march on their competitors.”
All insurance sectors (life, health, vehicle, property, travel) are set to be revolutionised, not just by sales and customer support through digital channels, but by re-configuring insurance products and services themselves.
The Internet of Things (IoT), by measuring customers’ behaviour and usage of the assets they are insuring, enables better matching and tailoring of products, and better pricing to reflect customers’ actual needs.
But this will only be possible if measurement can be conducted reliably and at scale from a wide range of sensors and devices, and communicated across networks and partner systems. APIs are essential to the integration of these ecosystems.
- Lead generation from channel partners
- Generate quote for insurance (disability, medical protection, health, life, investment, vehicle, travel, property)
- Retrieve data from systems (individual info, vehicle, health record data)
- Process insurance queries (premiums, due date, policy maturity, terms)
- Transmit data to e-claims system
- Retrieve data from e-claims system
- Customer service feedback and complaints
- Distributor/agent complaints
- Submit regulatory reporting
Open APIs are essential not just to unbundle financial services to promote competition, but in enabling the combining or “re-bundling” of financial services with complementary activities.
Successful firms will embrace the opportunities of partnering, and combine their services with the wider digital universe to meet existing and evolving customer needs in innovative ways.
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