After years of gradual growth, the financial services industry saw an exponential rise in the number of FinTechs in 2014 and 2015. Banks were not only compelled to sit up and take notice but in a bid to protect their turf, they developed a combative approach and started competing with these agile upstarts. With time, the approach shifted from combative to collaborative as the concept of symbiotic interplay between FinTechs and banks gained ground. According to a research by Efma, about 91.3% of banks and 75.3% of FinTechs expect to partner with each other in the near future. Collaboration has become the norm and APIs are the key enablers making it happen. And it’s not only collaboration between banks and Fintechs, but collaboration with diverse ecosystems consisting of third party digital natives and individual developers. There is a clear shift from the traditional pipeline to a platform business model, with banks aiming to become distributors or aggregators of products. Some early mover banks are already benefitting from the use of APIs and believe that they have the first mover advantage to become dominant players in the future. What’s more, forward looking regulations such as PSD2 and Open Banking that require banks to open access of customer data to third parties, further put APIs at the center of next generation banking.
There is little dispute that the future of banking is open, and that APIs are the cornerstone of this future. To understand API models in banking, Infosys Finacle studied the offerings of 6 leading banks that have already launched API stores, and found out that these APIs were published in a maximum of 11 categories with most banks restricting them to about 8 categories. These banks had somewhere between 5 to 50 APIs, clearly not a significant number for the industry to claim to have a stable model that earns revenue. Moreover, most of these APIs are running with dummy data in sandbox environment. Banks need a definite API strategy to progress on their platform vision. The fundamental questions they need to ask themselves are:
For every API they expose, banks must be clear about who it is intended for. A bank may expose certain APIs only to a select list of partners, enabling them to create applications that are then deployed within the bank. Or a bank may release its APIs to contracted partners to build apps on top of these APIs. Third, to deliver banking-as-a-service, a bank may choose to expose 100 percent owned banking APIs publicly, so that any third party developer or Fintech company can access it to build its own applications.
Banks must expose APIs in line with their vision. For e.g. transaction related APIs differ in abstraction from non-financial APIs. Thus banks must keep a track of the number and the kind of APIs they expose.
It is important to decide the level of granularity. For instance, will a single API cater to all customer profile updates, or will there be separate ones for address and telephone number? While a monolithic API is easier to maintain and manage than multiple small APIs, it exposes the bank to greater risk and gives users less flexibility.
Most banks currently have APIs running in a sandbox with dummy data. Banks need to have the necessary governance mechanism in place to take their APIs live with production data, which is where the real value lies, and any conversation around monetization of APIs can begin.
Emerging technologies such as AI, blockchain, etc. are potentially expanding the definition of banking. Banks aspire to embrace that definition of banking to integrate banking in the lives of their customers. But they seem to be a long way away from realizing that vision. APIs form the core of every interaction in the digital world, and banks need to move fast to be able to become a distributor of products or to bring external innovations directly to the banking customer.
Why, 5 of the 9 banks could not meet the deadline for PSD2 in the UK. Is that some indication of the ground work needed to realize the digital banking dream?
You might find our paper on ‘Platform Business Model for Banking ‘ interesting, you can access it here.
Infosys Finacle Banking as a Platform Point of View
World Retail Banking Report – EFMA and Capgemini