How APIs are crucial to Banking trends like AI, Banking-as-a-Service, and Open Banking

December 20, 2019

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Last month, we looked at 6 key digital banking trends and how they are growing globally and domestically. In this article, we’ll now take a look under the hood at how APIs are driving each trend, and how large banks need to accelerate their API maturity in order to deliver them (as well as some maturity measures to assess your enterprise against).

1. Open banking and APIs

As we discussed last time, open banking is a growing global trend, with several countries moving to implement supporting legislation. Connected data through public APIs is key to this trend.
To participate in a modern open banking ecosystem, large banks need to design, build, and manage their own public APIs with appropriate limitations (e.g. SLAs/NFRs and security policies), to expose to approved third-party-providers (TPPs) and partners.

API Maturity Measure: Do you have well-designed, properly governed and compliant public APIs to expose your data to, and partner with, select TPPs within an open banking ecosystem?

2. Mobile banking models e.g. Super Apps and APIs

We looked to China as the lead in mobile banking models, particularly the super app offering Alipay from Ant Financial. Responsive and adaptable business APIs are key to this trend.
Super apps are, by their very nature, constantly changing and being updated, and to support that they need to be able to talk to back-end systems accordingly (both internal and partner). The way they can do this is via well-matured business APIs.

API Maturity Measure: Do you have a set of well-matured business APIs, which can expose siloed data and functionality (currently locked in legacy systems) to innovative applications for consumption? And, are these APIs adaptable and responsive for change?

3. Challenger- and Neo- Banks and APIs

With the rise of the fintech insurgents we discussed in the last article e.g. Monzo and Chime, the key question in the space is whether challenger banks can scale before incumbent banks can digitize? Exposing existing functionality as business APIs is essential to large banks’ success over insurgents.

Incumbents have existing functionality (on average 95% of functionality needed to support their digital initiatives), but the problem is it’s locked away in siloed legacy systems. The solution is to expose this functionality as a set of business APIs everyone can understand (including product managers and application developers). These APIs can be used internally to rapidly launch new offerings in-house, out-competing insurgents and other incumbents.

API Maturity Measure: Have you unlocked your existing business capabilities as a set of internal business APIs, understandable and usable by both business and IT and ready to be used in innovative digital offerings?

4. Big tech in finance and APIs

A common theme we saw in the last article when it comes to Big Tech entering finance is their dependency on partnerships with existing banks. These partnerships are all dependent on APIs. But, unlike internal business APIs, these partner APIs need to have appropriate limitations and controls (so that big tech can’t mine the data the bank holds and bypass them altogether). What’s more, the partner APIs need to be managed by product managers instead of programmers.

API Maturity Measure: Do your partner APIs have appropriate limitations and controls, with proper management of SLAs and security policies/access controls?

5. AI/ML and APIs

To capitalize on the cost savings AI and ML can bring to banking across front, middle and back-office, the learning machines need to be exposed to the widest data set possible. Large banks have a hugely rich data pool, but all this data is siloed away in bulky legacy systems. To leverage this trend they need to design and develop a set of AI/ML specific APIs to expose this data.

API Maturity Measure: Do you have a set of robust and properly governed AI/ML-specific APIs, to expose your full data set and capitalize on these potential cost savings?

6. Banking-as-a-Service and APIs

Two of the key factors for the emergence of this trend is the heavy cost and difficulty associated with tight regulation and gaining a banking charter. APIs can be used to offer core banking functions as part of a partnership framework to overcome this friction.

API Maturity Measure: Have you successfully encapsulated core banking functions as a set of APIs to support partnerships and offer banking-as-a-service?

A note on regulation…

Clearly a mature API strategy is important in adopting these trends within large banks. But, it’s not just banks and technology companies who’ve cottoned on to the importance of APIs.

Globally, regulators now want to gain exposure into how data is moving through APIs, who owns it, where it’s consumed etc.

API Maturity Measure: Can you easily visualize and report on your APIs (and therefore data in motion as well as at rest)? Can you show the impact of regulator scenarios and how you are supporting legal requirements like PSD2 and GDPR?

Next-stage maturity of API first strategies are vital for success in these trends – how do large banks achieve this?

We mentioned in the previous post that over 90% of IT execs have an API strategy in place. But the reality is that within large banks, the maturity level is only in its early stages.

Currently, the system of APIs is primarily held at the developer level, with IT having provided the infrastructure to support APIs as their own channel.

The next level of this API maturity, and one large banks need to get to rapidly to be able to adopt these key digital trends is to move APIs beyond the IT channel. It involves expanding the usage of APIs throughout the business, further building out the API catalog, and designing and developing business APIs which encapsulate core business functions as reusable assets.

There are 2 vital factors in being able to do this:

The system of record can’t be code
The APIs can’t be built manually at this scale required

Once these factors are addressed, large banks can use a mature API first strategy as part of an end-to-end framework for business transformation, enabling them to become responsive digital businesses, ready for whichever banking trend comes next.

Want to learn the recommended approach for rapidly maturing your API strategy as a large bank? Download our whitepaper on Digital Banking Success.

About the Author

Gemma Sindall
Gemma is a Marketing Manager at digitalML. She has a keen interest in digital strategy and the best ways to merge people, process and technology. Her experience spans Marketing and Client Services in the Technology and Financial Services industries.

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