Banking, as we know it, is undergoing a major restructuring. Non-banking financial institutions and neo-banks are challenging traditional banks by prioritizing customer experiences and embedding sophisticated financial services within a host of online customer journeys. While the bulk of customer facing banking experiences and transactions run on bank-owned online and mobile banking channels today, this is set to change. Over the next five years, third party (non-bank owned) digital providers or aggregators are expected to dominate as the primary channel for initiating financial transactions, customer acquisition and customer servicing. As a result of these systemic changes the traditional banking model is at risk of obsolesce. For forward-looking banks, this should be a clarion call to respond to the changed environment by restructuring their business models. And APIs have a big role to play in this.
What are APIs?
APIs (Application Programming Interface) are software intermediaries which allow two applications to communicate with each other by exposing well defined endpoints. APIs are needed to bring applications together in order to perform functions built around sharing data and executing pre-defined processes. The advantage of using APIs to access services is that the calling entity need not be aware of the implementation details of the backend. With a focus on modern B2B usage, an API can be a critical component to integrating data flows with customers and partner systems.
The API Economy
APIs are already powering a whole set of new business models and customer innovations. In the area of banking, APIs provides vast benefits such as easier integrations with disparate systems, ability to leverage partner functionality, and, monetizing internal capabilities by exposing them to the outside world. Banks are not lagging behind – 47% of banks and credit unions in 2021 have invested in or developed APIs and another 25% plan to invest in or develop APIs in 20221.
APIs Given Rise to New Business Models
The rise and ubiquity of APIs has enabled banks to respond to competitive pressures with innovative enhancements and business models.
Embedded Finance: APIs allow financial functionalities to be built into everyday user processes and workflows in a way that makes them invisible and frictionless. Consumers can perform banking and financial services directly at the point of use rather than being redirected to the bank’s website. Think of making applying for a BNPL loan, making a payment or buying insurance seamlessly during a shopping checkout process.
The Banking as a Services: banks can gain wider distribution of their products by offering banking services and products through APIs for consumption by trusted third parties. These non-banking partners typically have large customer bases allowing bank to achieve significantly higher sales on these channels. A well know example is Goldman Sachs/ Marcus partnering with Apple to sell its instalment loans and credit cards on the Apple website.
Financial Super Apps: APIs allow banks to create a single go-to App for all the customer’s financial needs. These apps go beyond traditional banking and leverage partner capabilities to provide customers with access to financial services such as cryptocurrency trading, brokerage services, international remittances, commuter ticket purchasing etc.
Data Aggregation and Personalization: APIs enable banks to provide data aggregation services to customers by consolidating financial information from multiple financial institutions and providing valuable insights and analytics which may be monetized. In countries with formal open banking regulations, API’s allow a bank to provide consolidated dashboard capabilities to business users to actively manage their cash positions maintained in multiple institutions.
The business models enabled with an API first strategy are vast and constantly evolving. At the same time the technological landscape and choices to be made can be bewildering. Therefore, it is critical that a financial institution choose the right partner to provide strategic guidance and a future proofed technology platform for growth.
Leveraging APIs to Enhance Banking Services
At the heart of a solid API first business strategy is a robust digital platform that can drive channel content via APIs. Such platforms provide the internal APIs for channel orchestration, integration with diverse IT systems (Core Banking, Payments, CRM etc.) and a rich set of Open APIs for external integrations. In addition, banks seeking to play in the wider ecosystem of customers, partners and vendors with APIs would also need to consider an API Hub.
Finacle’s Digital Engagement Hub is one such purpose-built API first digital engagement platform. This in conjunction with Finacle’s API Connect platform offers a robust and comprehensive foundation for financial institutions to jumpstart and accelerate their ecosystem-innovation journey without having to build it themselves.
Learn more about Finacle Digital Engagement Hub and Finacle API Connect
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