APIs are the rocket fuel for financial services innovation and value creation, being a cost-effective way to create nimble ecosystems in which – ultimately – fintech and banks will be equal partners, writes Ben Goldin
It's almost exactly 20 years since Salesforce launched at the IDG Demo 2000 conference. What's this reached do with fintech and banking? APIs.
While APIs have been around for almost as long as computers, it was arguably Salesforce that first appreciated how critical these were to building value. Salesforce exercised that by giving easy access to the technology, innovation would be stimulated, with the subsequent rewards benefiting all those involved. Its move was quickly followed by many in the tech industry, including eBay, Facebook and Amazon.
From Wall Street to Silicon Valley
Fast forward to 2021 and we're seeing a similar epiphany in banking – one that will have consequences which are just as far reaching. It pivots financial services away from its home on Wall Street towards Silicon Valley, as banks increasingly use APIs to gain access to enabling technology to truly transform the experience they can give customers and also the rewards they can share with investors.
Banks have traditionally spent a lot of money on armies of in-house developers to write bespoke software to solve exactly the same problems as do their rivals, including meeting changing customer demands and complying with new regulations – duplicating efforts and wasting time and money. This has left them sometimes struggling to compete with nimble challenger banks and the platform companies that are increasingly encroaching on their own space.
But the regulators who have pushed for open banking, and the customers whose fast-changing demands are being fuelled by the possibilities of our digital age, have together forced traditional banks to innovate faster and collaborate with organizations. The banks' embrace of APIs has given them access to the new technology provided by fintechs – such as artificial intelligence in fraud mitigation or charge card decision making technology that helps create value – all on a software-as-a-service (SaaS) basis. You might ask what has taken them so long.
Fears over security and banks being locked to their legacy IT systems are partly responsible. No one wants to change the engine as the plane is flying. But the unwieldy nature of old APIs was also a problem. Today's APIs are different: secure, lightweight and simple to understand. Developers don't need special training or lengthy instructions to gain access to and implement them; portals allow them to conduct road tests and begin working quickly. And the vast majority comply with the 3:30:3 rule: 3 seconds to know what the API does; 30 seconds to recognize the entry point and how it is used; and less than 3 minutes to create an account on the portal, get access and start using the API.
Fintech rocket fuel
The rise of APIs that match this rule helps the fintech industry to grow quickly and allowed challenger banks such as BUNQ, N26, Monzo and OakNorth to create business models and customer experiences light years away from those previously provided by incumbent banks.
Rather than working alone to supply a one-stop-shop for financial services, these challengers collaborate having a carefully selected group of dynamic fintechs that provide best-in-class operations so the bank itself can offer best-in-class services. Using APIs to connect the technology that delivers functionality such as reconciliation, credit checking and cyber security behind and account opening, robo-advisers and regular savings in front, these banks compose precisely the type of bank they want to be.
Incumbent banks can easily see how nimble APIs make their new competitors. They know they can no longer be monolithic financial-service providers because that business model is broken. What is more, it has been proven that bolt-on technology doesn't compromise customer security and fidelity. Traditional banks understand that APIs make it possible for them to leverage all their advantages – trust, security, customers, data, sector knowledge and brand – and use fintechs to build effective and efficient ecosystems which cover customer onboarding, treasury, compliance, straight-through processing and offer bolt-on products such as insurance, forex, investor advice, just like the challengers do.
And APIs mean they are able to gradually replace their old technology and pursue an evolutionary instead of revolutionary digital transformation. The icing around the cake is that the SaaS approach is a lot cheaper – providing far superior returns on investment. Citi and Barclays see a return on equity of 13 per cent and 9 per cent respectively, while a challenger such as OneSavings Bank enjoys ROE of 25 per cent.
The democratising force within fintech and banking
A trend towards specialisation seems prone to gather pace. This means that instead of being all things to their customers, a lot of lenders – new and old – will increasingly focus on a handful of technologies that allow them to do fewer things, but each one of these well. That might be providing services for example cashflow analysis and short-term instant loans to SMEs or life insurance and robo-advice to high earners, or small loans for consumer purchases. The fintechs with which they work will be partners and each bank will eventually become one of the participants within an ecosystem of payments, insurance, biometric identity checking, credit-score providers and much more. As the banks work with many fintechs, therefore the fintechs will work with many banks. Ultimately, APIs will be the democratising force within fintech and banking.
Before the decade has gone out, ecosystems of partners will be the norm and banks will no longer be the lynchpin, just one part of the set-up. The end result will be lifestyle banking where financial services take root into customers' lives exactly where they are needed – such as point-of-sale loans or instant overdrafts. Banks will essentially have become technology companies. A bank that offers SME services, for example, could be embedded into the customer's accounting system – a lot more like a widget than a bank – so it can analyse exactly what is needed when.
But perhaps more to the point, these ecosystems will be nimble and prepared for change. By 2030, banks with their ecosystem partners will be able to adapt within a few minutes or hours – think Facebook or Amazon. They will address the new efficiently and effectively. And it's all thanks to the API.