Understanding the Current Moment in Banking APIs

Photo by Davide Cantelli on Unsplash

The banking industry has reached a moment where it needs to make the best use of APIs. Many factors are in play, including new forms of competition, regulations, and internal “digital transformation” initiatives. The main idea to keep in mind, however, is that banks must innovate with technology if they want to thrive and remain competitive. Today, this means making advances in API adoption and management. 

A Transition from Old “Web Services” 

APIs are making a lot of noise in the banking world these days, but the idea of an API is not exactly new. In fact, the first API-like structures in computing emerged in the 1940s! The term “API” became popular in the 1970s. When banking IT professionals talk about APIs today, however, they generally mean standards-based APIs, such as those that use the JSON programming language and REST protocol. 

Such RESTful APIs themselves represent a step forward from the previous revolution in inter-operation, which saw the rise, in the early 2000s, of Simple Object Access Protocol (SOAP) web services. SOAP and related standards were indeed a breakthrough for application integration, but they proved cumbersome to deal with in real life. While they theoretically enabled universal integration, they took a fair amount of coding and related work, taking additional time of expensive engineering talent, to put into effect. RESTful APIs are much easier and more cost-effective to handle, given their simple, globally accepted syntax and other factors that facilitate their implementation.

The reality, however, is that many banks are still working with earlier iterations of APIs and SOAP web services. These web services and APIs typically represent the “old” model of an API, which is basically a contact between code components. In some cases, they are virtually unmanaged and poorly tracked. The entire approach may be ad-hoc, or partially managed. 

While not all banks are taking advantage, the API world has moved well beyond this traditional “one program talks to another” mode of operations. Rather, modern APIs are managed so they can integrate multiple systems, both inside and outside the bank. Moving forward with new API and mobile-first strategies, as well as ambitious digital transformation programs, will involve overcoming the limits of legacy technology, modernizing APIs, and bringing into a unified API management environment. 

A New Competitive Environment

Banks are currently facing far more serious competition than they have in a generation, if ever. Inside the industry, banks are using technological advances to entice customers away from competing institutions. For example, the bank with a better app, or an omnichannel banking experience made possible with API technology, may appear more compelling to a banking customer. 

Fintech Firms and Neo-banks

Other banks are not the only players in the new competitive landscape. Financial technology (fintech) companies are going directly to banking customers with services like lending, investing, and payments—without requiring them to have a bank account. They’re mostly based on mobile apps. Neo-banks comprise another new competitive threat to traditional banks. In some territories, even telecom companies are getting into financial services. These are banks that only operate online. They don’t have branches, which enables them to operate on a very lean basis. Both fintech firms and neo-banks have the ability to siphon off valuable customers from established banks. Big tech companies like Google, Meta, and Tencent are similarly positioning themselves to go after the banking industry’s clientele.

Changing Consumer Expectations and Technologies

The shifting competitive dynamics are about more than just new entrants into the industry and innovations by established players. The consumer’s entire mindset and expectations have changed. With most consumers now accustomed to services offered by companies like Amazon and Netflix, banking customers expect the same kind of user experience (UX) when they interact with their banks. 

While a bank’s brand may be useful in preserving confidence and a customer relationship, the reality is that the customer will be disappointed if the bank’s app doesn’t feel as intuitive, personalized, and convenient as Netflix. They will be thrown off by a banking relationship that doesn’t provide seamless connectivity to a wide range of services through a friendly interface. Offering recommendations and insights customized to their need of the moment is quickly becoming expected as par for the course. 

The Accelerating Pace of Innovation

The entire financial services industry is undergoing an acceleration in technical innovation. There’s also a revolution in the way banks think about technology. For example, in contrast to the “old days” of expecting customers to visit a branch to access a bank’s services, it is now necessary to think beyond the branch, and the very bank itself. Instead, in a mobile first strategy, a banking app might need to offer access to investment and insurance services, for example, which are provided by external companies. 

In the commercial category, a bank might want to offer an API-driven account management service to corporate treasury customers. In this example, the bank offers the customer the ability to view all of its accounts, including those at other banks. The customer wants an overview of all their bank holdings. The bank that can deliver such a view will be in a strong competitive position. 

The Impact of Open Banking Regulations

Several European and UK-based banks are adopting the Open Banking Standard, and its equivalents like the Berlin Group standard or Australia’s Consumer Data Standards. Some are doing this by choice. Others are being required to adopt the standards by the government. In the UK, the Open Banking Standard arose out of the Open Banking Working Group (OBWG), which wanted to give consumers easy and expanded access to their financial information. Comparable standards and regulations are coming into place in the U.S., driven by the Consumer Financial Protection Bureau (CFPB), and elsewhere in the world. 

To meet open banking standards, banks need to publish open APIs that enable third parties, such as fintech companies, to access banking customers’ data. This is now happening. Banks are treating open banking as a compliance obligation, a business opportunity, or both. While it may be onerous to comply, there is a substantial upside to offering APIs to third parties. Examples include apps that provide an aggregated view of a user’s bank accounts across different banks, simplified mortgage loan applications, and instant approvals. 

One result of open banking is a rising interest by banks in systems to speed up the pace of innovation. An example of this are technologies that allow cloud-based “low-code” automations for integrating banking technology systems and services securely. These automations serve to democratize the world of banking technology by reducing the reliance on expensive engineering resources to experiment with new service offerings. More businesses can build apps that connect with banks than ever before, without having to have the esoteric bank software skill set. 

Improved security is another benefit of open banking. For example, it has resulted in the adoption of standardized security profiles like the OpenID Connect Financial Grade API (FAPI) standard. FAPI is used as the security profile by an increasing number of open banking standards making open banking API connections secure to a similar degree as other banking technology systems by default.

COVID-19 and the Importance of Banking APIs

The COVID-19 pandemic has reinforced the importance of APIs for established banks. There are several reasons for this. For one thing, the pandemic forced many banks to close their branches for extended periods of time. Remote banking was the only way to interact with customers. Banks that were prepared, with good quality web sites and banking apps, were able to meet the crisis more easily than banks that either lacked the technology or relied on outdated APIs. COVID-19 is also driving banks and their customers to cut costs in innovative ways.

Going further, the pandemic has precipitated a number of significant changes to the workforce and the economy in general. While the impacts vary by region, bankers are generally seeing shifts in how and where people work and live. As hybrid work becomes permanent, for example, payroll and time -keeping systems must adapt. This affects banking processes. Or, as people contemplate a future of full-time remote work, they are often seeking new places to live. A bank that can support mortgage applications outside of a customer’s home state, for instance, will be at an advantage in the COVID-19 era.

To find out more, view our CXO playbook for bankers on how best to optimize your API strategy for digital distribution.

Photo by Davide Cantelli.