Banking on APIs: Growing by sharing
How banks are re-wiring themselves through open APIs
Banks are no longer in control. Customers are.
So far, banks have called the shots on how customers do business with them; be it the technologies used, the flexibility offered or just plain user experience.
But IT consumerization, driven by the likes of Google and Facebook, has made customers more tech-savvy and put them in the driving seat.
New types of financial institutions such as payment banks are adapting to this shift in trend and offering simpler ways to transact. This has caught traditional banks on the wrong foot.
So, why are many banks slow to respond?
Ironically, banks are among the top spenders on IT and have huge infrastructures at their disposal. Therein lies the problem. That very infrastructure is fast turning into legacy and is becoming more and more expensive (already more than three-fourths of the total IT spend) to maintain.
APIs (Application Programming Interfaces) are a wake-up call. They are the single biggest influence on how banks are evolving. Smarter banks are leveraging APIs to not only provide agility in their partner ecosystem, but also to turn around legacy systems. APIs are being used as legacy wrappers that tap into data otherwise not available.
Such decoupling allows banks to act on data, analytics, and digital technologies, to quickly target solutions for customers. Overall, an improved customer experience without the high CAPEX on physical infrastructure and an optimized OPEX.
Bank of America understood the importance of changing legacy infrastructure and implemented a structure with the help of APIs, where each data center was divided into multiple self-contained components. Improved technology and wide-ranging efficiency initiatives contributed to billions in costs savings in the last few years.
Banks are also slowly shifting to APIs for essential internal processes such as compliance and regulations, leveraging of large data, and back-office management.
The value of reach
The true value of APIs depends on how accessible they are to the wider world.
While an organization can use them to build new products, opening up of APIs provides an interface that can be used by the entire ecosystem for data access, product development, and transactions.
The whole process results in faster product delivery, additional distribution channels, better customer outreach and higher revenues. This drastically transforms how business is conducted.
Danish investment bank, Saxo, built the SaxoTraderGo platform on an open API in 2015. This enabled white label partners and institutional clients to integrate Saxo’s trading functionality into their own applications and systems. Within a year, this platform stood for 60 percent of the bank’s business.
Joining a sharing economy
With open APIs, rapid innovation within the ecosystem creates a ‘rising tide lifts all boats’ phenomenon.
WeChat, the ultra-popular messaging app, opened its platform to third party developers, who then built their services on top of it. This created a network effect, and caused an increase in users that, in turn, increased the number of developers offering services.
Chinese investment holding company, Tencent’s open API platform (which includes WeChat), has around 3 million developers who have developed millions of applications through it.
In 2017, over Chinese New Year, 46 billion payments were processed in just five days! That’s 800 million payments/ hour…. a huge contrast to the 94 million payments that are processed each year through J P Morgan’s Quickpay.
Banking at your fingertips
Not surprisingly, most of Tencent’s payments were on mobile. The ubiquitous nature of mobiles has forced banks to adopt it as a primary mode of customer engagement — starting from text messages all the way to full-feature mobile banking apps. APIs are pushing the boundaries there too. Standard mobile banking services such as account access, transaction ability, and basic customer support are fast losing sheen. Consumers want more.
Banks as the intermediary are becoming purely transactional. Through open APIs, they’re changing how transactions are done by providing a way to transfer money mobile-to-mobile.
Having an account in a physical bank no longer matters. With a click of a button, you can still move funds via phone.
Let’s take M-pesa, for example. M-pesa was first launched as a monolithic application and had several disadvantages such as transaction delays and system downsides. Later, with the G2 API platform, a microservice architecture was adopted. The new version was user-friendly and came with benefits such as integrations, faster transaction processing, and 24/7 availability.
According to a recent study by Massachusett’s Institute of Technology, M-Pesa’s mobile-money service has greatly impacted Kenya’s economy, raising several households out of poverty.
M-Pesa, a mobile based banking service by Vodafone, was launched in Kenya in 2007. In 2016, transactions worth around $65 billion (KES.6.8 trillion) were processed through it. As of 2017, transactions via M-Pesa contribute to estimatedly 31–50% of Kenya’s GDP.
Distance is just a word…
Geographical boundaries are redundant in mobile banking, thanks to the power of APIs. This means, a bank in the US can enter markets such as:
- Singapore and Netherlands, where around 60–61% of transactions are cashless, or,
- Kenya and Botswana, where around 39–45% of transactions are processed via mobile banking.
Singapore is now the chosen destination for German digital bank Fidor’s new APAC office. The move is intended to accelerate its growth in this region.
…and language is hardly a challenge
Localisation is a time-tested formula in software. Delivering information in local languages provides clarity and transparency to users. This contributes to the banks’ objective of protecting consumer interest.
56% of consumers find the ability to learn about a product in their own language more important than the product price, according to a Common Sense Advisory study.
With open API, multiple languages can be supported with the help of third party collaboration. This, in turn, reduces internal resources spent by the bank, and paves the way for global expansion. Furthermore, with regional language support, banks can immediately gain a competitive edge over their local counterparts.
Citibank was among the first to launch a Spanish language mobile platform in 2009. This move was to improve the banking experience for its growing audience in South America.
Open, but secure?
Open API is the buzzword but security remains a concern among bankers and consumers. If acting on data is important for better experience and engagement, someone having unauthorised access to data is equally worrisome.
Facebook’s open authorization (oAuth) technology has transformed user experience by eliminating the rocky path to securing access. With oAuth, information can be securely shared between applications that expose their APIs. This means customers don’t have to retype their passwords each time they want to access their data.
Democratization, the future of mobile banking
Mobile banking generally requires smartphones, but banks can go a step further and facilitate mobile-to-mobile money transfer for ‘not-so-smart’ phones as well.
Smartphones are commonly used in Europe and the US, and less so in developing countries. In India, only 22.4% of the entire population own smartphones.
Banks are taking cue and with REST APIs, they’re providing the same service for feature phone users as well. REST APIs decouple front-end experience from the service layer, making services accessible in all devices.
In India, mobile banking service NUUP, that’s based on USSD (unstructured supplementary service data) technology, facilitates fund transfer through phones. This service is available for smartphones as well as feature phones.
The open API strategy
Very soon, open APIs will be a compulsion, not a choice. In 2018, banks in EU will be forced to go the open API way, thanks to the PSD2 regulation aimed at increasing competition and growth within the EU market. This regulation will break the monopoly that banks have over customer records. It will also enable fintech players to leverage the records to offer insight- and data-driven services to millennials.
Competition will, hence, no longer be just between banks but among everyone providing financial services.
Product co-innovation will be fueled in the EU and due to this, market shares could be taken away from so-far-leaders such as the US. By acquiring revenue streams, EU-based banks may slowly become global competitors.
The only way traditional banks in the US will ever be able to compete with fintech companies is by adopting the open API strategy.
After all, it’s only fair to share.
With digital technology comes the ability to mix functions and processes of the business to create new forms of business value. As if it were all software. This is a radically new approach to thinking about business. It’s the new era of programmable business.
