Driving innovation with APIs
Amit Aggarawal | SVP, Product Management, FIS
November 02, 2020
In simple terms, APIs enable connectivity between systems and platforms. But they also boost innovation by allowing data to be extracted, shared and combined to create new propositions that add real value. In this paper we consider how APIs empower financial institutions to do new things.
Innovation isn’t only about doing new things, it is also about doing things in new ways. Application Program Interfaces (APIs) facilitate both and can boost innovation, particularly in financial institutions with technology that is not designed to be open. How?
An API is what an API does
APIs facilitate conversation between different platforms, which may be within the same organization or with third parties. They are in effect, the “vital senses” that receive and transmit information between a financial institution and the outside world. In practice an API can offer access to data or the ability to perform a task, such as to authorize credentials or make a payment to a third party.
Open banking and open systems
Although APIs are not new, they have recently gained a higher profile throughout financial services. APIs are the prime technology driving open banking initiatives around the world. Although open banking initiatives differ between jurisdictions, they share the common objectives of giving customers and members access to their own data and empowering them to combine it with other data to do new things. For example, a supermarket app may facilitate payment directly from a cardholders bank account, to reduce friction and offer a better user experience. In this example, everyone benefits – the consumer enjoys an easier purchase, so the financial institution and the supermarket have a happy customer.
While data exchange was possible before APIs, they make connectivity much easier, flexible and cost effective. And in many cases, such as our payments example, the data must be exchanged in near real time, so APIs offer the only practical way to maintain connectivity between interested parties.
APIs as potential products
In the digital age, data emerges as the universal currency. APIs enable companies, such as financial institutions, to provide access to the data held in its systems to customers and members or third parties. In this sense, APIs can potentially be marketed and monetized as products. This is already happening in many sectors, and we use APIs every day, for example, when we use our smartphones to book a hotel or travel tickets. “Open” APIs mean that any authorized company can potentially access the APIs to deliver new, engaging customer propositions.
Financial institutions use APIs extensively to improve systems connectivity, for example to retrieve stock prices or currency movements from third parties. However, with the rise of open banking, many institutions are considering how APIs can drive innovation and also position them as providers and consumers of data.
One of the biggest challenges faced by established financial institutions is that vast volumes of data is typically held in separate legacy systems often spread across different departments and geographies. Much has been written about the challenges posed by a “siloed” systems architecture and the difficulties of extracting data to create new services for customers and members. While in the past, data extraction and collation may have been prohibitively costly, APIs can offer an integration layer across multiple systems. Data can be extracted, stored and harnessed to boost innovation.
Transforming the financial industry
Institutions of all sizes can evaluate new ways to serve customers and members better. Free from the confines of a closed architecture, they can “cross-pollinate” data from multiple systems to generate exciting value propositions, for example to combine customer and member data from multiple systems in a personal financial management app.
From financial products to consumer journeys
However, the real transformational potential of APIs, comes with integrating financial institution systems with third party systems. In practice, financial products are nearly always part of a bigger journey, for example, the search for a mortgage as part of the search for a house. Consumers tend to look at a potential purchase before they decide how to finance it. Historically, the search for a financial product begins when the consumer journey is well underway.
With most customer journeys beginning online or mobile, APIs empower financial institutions to position financial products where and when people need them. Open banking creates a new world of possibility for bank innovation and creates an opportunity to develop an entirely new market for financial products that includes:
- Real-time decisions on personal lending, for example in the car showroom
- Mortgages – finance offers can be positioned earlier in the customer journey, for example, when browsing properties
- New geo-sensitive advertising that promotes products where and when they are wanted
- Initiating payments as part of a seamless customer experience
- Harnessing the power of transaction data to enrich and improve the customer experience
With open APIs, financial institutions are free to choose their entry point in the consumer journey.
APIs are a major strand of transformation and are potentially a source of competitive advantage. This is welcome news for all financial institutions, but particularly those wishing to avoid an immediate technology renewal. APIs can support transformation while honoring the investment made in systems over many years. A successful API strategy must work with the existing technology stack and should not require a core platform replacement.
Financial institutions should talk to their technology partners and find out how APIs can boost innovation and insulate an institution from technology change.