Financial Institutions and APIs: An Awkward Embrace

Co-written by Mick Emmett

“Silicon Valley is coming and if banks don’t up their game, then tech companies will take over the industry’s business. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking.” — Jamie Dimon, CEO, JPMorgan Chase

You know how sometimes you catch yourself nodding while reading something that perfectly synthesizes an idea you’ve been thinking about recently? It’s pretty cool. And if you’ve found your way to this article, then chances are you’ll still think it’s cool even if the topic is something like APIs and financial institutions.

Here’s what we’re talking about, via a recent study by the Open Bank Project (OBP) where they surveyed global banks:

“Regulatory requirements and an increased customer demand for innovative and efficient products may force banks to transition towards a more collaborative environment in order to remain relevant and find ways to profit together with other parties. This new environment encourages crossing the traditional boundaries of financial institutions, stimulating a move towards an open ecosystem.”

This is all true in the opinion of Realm Labs. What’s really interesting to us in this statement is the phrase “may force banks…” You can add insurance companies and other financial institutions to that thought. Here’s why:

APIs Aren’t Just for Innovators Anymore

In a previous post about banks and insurance companies being slow to embrace innovation, we talked about forward-thinking organizations like BBVA (blockchain-based international money transfers) and Credit Suisse (blockchain-based syndicated loan product) being exceptions to the rule. While blockchain is a fascinating technology platform that has major implications for the global financial services industry, it’s still early days. But application programming interfaces (APIs), well, they are well-established at this point across many industries as a way for different software programs to communicate. In this recent McKinsey report about capturing the value of APIs, we found this statement to be pretty eye-opening:

“The value at stake is significant. McKinsey analysis has estimated that as much as $1 trillion in total economic profit globally could be up for grabs through the redistribution of revenues across sectors within ecosystems.”

Similar to blockchain, with that much money in play you better believe financial institutions are in on this trend, with only 14% of OBP’s study respondents saying they don’t use any APIs right now. But what really matters is scale — not just trying technology and other innovations out internally or keeping them limited to select participants.

Now, APIs can be private (accessible only to internal developers and those that they grant access to), open (publically available for all developers to access) or some combination of these two. That same OBP study also broke down the API-using respondents and found that less than a third use open APIs (little changed from the previous year’s survey). And that is where the real opportunity is for financial institutions in our opinion. It’s also why FinTech companies — smaller, more agile and less restricted by regulations — have been at the forefront of financial services API usage and innovation.

In an article plain-speakingly titled, “The Future of Banking Depends on Open Banking APIs,” the writer points out some notable FinTech facts that put things in perspective:

  • Nearly one-third of banking customers have a relationship with at least one non-traditional firm
  • According to the World Retail Banking Report 2017, published by Capgemini in conjunction with Efma, FinTech firms are more likely than traditional banks to provide consumers with positive banking experiences

“The Open APIs Are Particularly Good Tonight”

This seems like a good spot for an analogy, and who doesn’t like a food analogy?! So here’s one to illustrate our point:

Most financial institutions — especially the big ones — are a lot like one of those stodgy old-school restaurants. You know, the ones with the traditional wooden chairs and tables, the cloth napkins, and lots of silverware. Oh, and the service takes forever. Even for just a burger and fries! But that place has been around forever, everyone knows what to expect, and lots of people still go. Sure, they crowd skews older, the food is mediocre and it isn’t nearly as hard to get a table as it used to be, but we’re still talking about a lot of people.

Contrast that experience with FinTech companies. They’re more like the fast casual experience. Like a Chipotle or Panera or even Sweetgreens (for the trendier folks). You get a relatively healthy meal, you get it fast, and you can eat it in a sleek, modern cafe setting while you also feast on the free WiFi. But despite the “cool” factor a lot of these places just can’t bring in enough revenue to make the business work and they fold. Who’s to say the new place on the corner will last? Even if their burrito is to-die-for? They still have to bring in the customers faster than they burn through the funding, all while facing a ton of competition.

What we all want is the best of both worlds. In life. In dining. Even in financial transactions. And more and more, we’re willing to ditch the old and established in favor of the new and trendy if we get what we want, the way we want it, and we get it fast. This is especially troubling to financial institutions — not known for speed and innovation — who are stuck making impactful decisions based on quarterly financial statements (i.e., four or five month-old data), which makes it hard to to try new initiatives of any real significance.

The above is underscored in a recent report from Forrester, which found that only 50% of bank customers are willing to keep their existing level of business with their bank, and only 59% are willing to purchase additional products or services. In 2017 customers expect more personal service and more digital options for getting things done quickly and painlessly. We’re used to lightning fast and seamless Amazon transactions now, and many expect their financial service providers to keep pace.

It Ain’t Easy Being Big

Look, we’re not saying it’s easy for financial institutions. It’s one thing to have your Bank of America savings and checking accounts in the same portal with an option to transfer money between them, but it’s a whole different animal to have your Schwab brokerage connected to your Aetna annuity connected to your Coinbase bitcoin exchange account. And there are plenty of legitimate security issues to work through when dealing with financial data and outside entities.

We get it. But we also wonder: Why is there still no “superapp” that can handle most — if not all — of a customer’s financial needs?

Here’s the thinking at Realm Labs:

1) Big financial institutions are bad at integrations.

They tend to be cheap and still rely heavily on legacy infrastructure. To do an integration correctly you need to spend money. At the level of a Bank of America or JPMorgan Chase, we’re talking millions — easily.

There are messy data structures that don’t line up. And infrastrastructure that’s not built to process as much data as fast as is needed. And customer contracts that can’t be migrated without first resolving myriad administrative, legal and technical issues.

Now, with a little more forward-thinking strategy — difficult given the heavy reliance on quarterly financial performance we mentioned earlier — they might be able to build a new application from scratch for less money. There’s also the option of acquiring a startup that’s building something a financial institution wants. Which brings us to…

2) Big financial institutions are bad at acquisitions.

That whole thing about lacking forward thinking? It applies here as well. For starters, acquiring a startup (or even a more established company) means think through the integration logistics because it’s extremely likely that the tech stack is different. Second, there’s some risk involved getting in early with something that might pay off years down the road. An institution would need to invest early — at the seed or Series A round — to ensure that the startup is aligning with a future integration. That’s risky behavior for typically risk-averse organizations (as we recently covered).

OK, Realm Labs. We Get It. But What’s a Financial Behemoth To Do?

Great (fake) question! We have some (real) ideas:

1) Build a “superapp.” Something that looks deep into the customer’s journey and leverages technology — especially mobile — to help them do everything related to the services your institution offers. The customer walks into your bank or insurance company or whatever kind of institution you are, and has some tasks to accomplish — aka their “journey.” But think of this as the customer journey on steroids. The superapp conquers the common tasks, the not-common-but-not-uncommon-either tasks, and even the painful, complicated tasks (like whatever it is the people who are always in front of you are doing while you wait in line growing gray hairs).

2) Make data accessible via open APIs. If [insert pretty much any financial institution name] really wants to add value to their customers then embracing open APIs to significantly expand the range of financial services is the clear path. Doing so means a massive change in mindset. It means spending a lot of money. It means addressing new security concerns beyond all the usual hacking and fraud and other malevolent stuff. It means giving up some control. But that is where things are going; in our opinion, anyway.

Yeah, we know. Not likely for the larger institutions anytime in foreseeable future. But since we’re just offering free advice here…

Beyond the Superapp

Your company has embraced the present — never mind the future! — and plowed through all the barriers keeping your competitors from creating an amazing new superapp. Awesome. Now what?

It’s time to go full-on open banking.

We dive into this fascinating model in an upcoming post. Follow us to get it fresh from the Realm Labs idea farm.

— — — -

DISCLOSURE: We wrote this article ourselves, and it expresses our own opinions. We are not receiving compensation for it. Views shared here are our own and cannot, under any circumstances, be interpreted as an official account of any companies we are associated with — currently or in the past.