A key component of every bank’s digital strategy is application programming interfaces, commonly referred to as APIs. APIs power the digital strategies for banks of all sizes and enable new business models that bring together disparate functionalities to create completely new customer experiences. APIs enable mobile sites, connect back-office systems for data sharing and have redefined how banks partner with fintechs by decreasing cost and speed to market for new consumer capabilities.
APIs are key to a bank’s digital transformation success. However, many still view APIs as a technology tool that simply makes connecting different systems easier versus a tool driving innovation to make them digital channels, major growth engines and revenue drivers.
As consumer demand grows for easier access to financial information and transactions, as well the ever-present threat of disintermediation from big tech and others, banks will need to redefine their role in the digital value chain. They’ll need to adopt new digital business models, deliver digital first services and customer touchpoints for a more personalized, compelling customer experience. One way for banks to meet this challenge is to open their ecosystems to partners, exposing and monetizing their business services via APIs to help drive innovation via embedded financial services.
The seamless integration of financial services into a traditionally non-financial platform makes frictionless finance a reality for customers. Good examples are Uber or Lyft where customers can make cashless payments within the ride-sharing app.
By exposing and commercializing their services as APIs, available for anyone to consume and integrate with, banks can create new revenue streams and value, even if the customer touchpoints are not owned by the bank. As third parties leverage APIs that embed services such as banking, payments, lending and data into the consumer-facing apps, banks can create new revenue streams based on the everyday activities of consumers.
With APIs helping banks open their ecosystems over the last few years and becoming a mainstay technology for interconnectivity, most are no longer concerned that distributing their products through partners threatens their client relationships. By embedding into another business’ application and customer touchpoints, banks benefit from having a newly created revenue stream that is marketed by someone else (traditionally a huge cost to banks). This also creates a new stream of customer data back to the bank to build more personalized products in the future.
The opportunity for embedding financial services lies initially in three particular use cases:
Payments can be initiated via APIs in third-party applications, enabling customers to transact in a frictionless, convenient way. Innovators such as Starbucks, Uber and Stripe integrate payments and embed them in their user experiences. These payments are invisible from an end-users’ perspective. The payment is seamless and simply a part of the overall experience.
Additionally, virtual cards allow companies to simplify the process of paying contractors or employees. Instead of cutting checks or issuing direct deposits, companies can pay via a virtual card and receive all or some of the interchange fee.
Companies such as Venmo focus on simplifying the payments process and enable features that allow users to link their bank accounts to make money movement easy and, in some cases, real-time. Venmo also allows customers to apply for the company’s debit card, allowing users to access funds immediately rather than waiting two or three days for funds to settle in their accounts. These cards also work at any retailer and at most ATMs.
With just a few clicks, customers can access the funds they need right from the fintech’s app. Using the bank’s API-based lending services, fintechs can fully integrate lending services at the point of purchase in tailored ways that meet their specific customers’ needs. The entire lending process therefore becomes simpler and more convenient.
A great example of this is LightStream, a lending fintech that delivers a loan experience that allows customers to focus on their purchase, rather than on their financing. Loans may be approved and funds received on the same day as a customer applies.
Integrated investing provides fintechs with the APIs to seamlessly provide investing into their vertical offerings and simplifies the investing process for consumers. Examples in market include Robinhood and Alpaca whose API enabled platforms offer commission-free stock, ETF and options trades, a streamlined trading platform, fractional share capabilities and cryptocurrency trading to buy and sell cryptocurrencies like Bitcoin and Ethereum.
Adopting an embedded finance strategy presents a new opportunity for banks, although it’s too early to tell if this strategy will become a permanent delivery channel that every bank incorporates. However, banks should assess this opportunity to stay ahead of the curve and further extend their digital reach and establish relevance in the future of finance.