‘APIs’ are Application Programming Interfaces. In brief, APIs allow two different pieces of software to interact with one another, and although the concept is far from new – launched by Salesforce in 2000 – they have hit their stride in the financial sector and are quickly emerging as one of the key enablers of competition and innovation in banking.
Following a consultation announced in the Autumn Statement, plans to create a standardised API were given the go-ahead in the pre-election Budget announcement, with a full report on technical requirements due by the end of the year. A key objective is to simplify the process for customers moving their accounts to rival banks and services. Likewise, the initiative is part of plans to spur competition in the banking sector by opening up data to FinTech start-up companies to create innovative new services, as well as enabling the creation of comparison sites such as those already available in the insurance sector. The consultation response document stated: “In banking, APIs can be used to enable financial technology (FinTech) firms to make use of bank data on behalf of customers in innovative and helpful ways. “For instance, through external bank APIs customers can make use of applications on their smartphones which allow them to see clearly how much money they spend on food, and how their spending on food fluctuates through the course of a month or year.” Fundamentally, banks benefit by becoming a little more like a platform for other services and sharing data is good for business. However, data protection laws must still be adhered to and this is something that the customer will be all too aware of.
There are benefits to banks in adopting a sharing culture - banks shouldn’t be afraid of this. It’s not a case of FinTechs undermining the banks. Banks can incorporate the technology from FinTech firms and vendors into the key areas in which support is required – simplifying the process of adding innovative technology services by piecing together building blocks of flexible services. In short, banks can learn about innovative new technologies that can positively impact the efficiency of the business as a whole. However, despite this, legacy issues will remain a problem for banks. The archaic and convoluted banking IT architecture cannot just be ignored because of new legislation on open APIs. For open APIs to offer a real solution to banks, banks need to categorise their confused core IT systems – to enable them to identify the links between their APIs and their core business functions.
If the banking industry can join forces, working with other banks as well as with IT software providers, to define industry-wide standards for banking IT services, IT infrastructure complexity and integration costs would be significantly reduced. A Service Orientated Architecture (SOA), which separates processes into connected business functions, would help to untangle the mess of the current infrastructure into building blocks of pre-defined business services. Working to a set business IT structure that provides a uniform structure across the whole international banking industry would enable banks to ensure that their IT systems and thus their APIs are truly aligned across the industry. Ultimately, alignment in IT infrastructure is where banks can really gain from open APIs and where innovations can be most effective long term, should the industry be more streamlined.
The government’s open API initiative is a great first step, however the government will need to look to industry experts and banking players, who are well placed to give advice on how to ensure that this initiative provides value to the whole ecosystem. It’s clear that there is value in opening APIs for all parties concerned, yet there needs to be some education for all parties to understand the benefits of doing so and to comprehend how to best to take advantage of this. Working from the top down - forcing banks to open their top-level APIs, instead of looking at the aging IT architecture underneath may seem like a quick solution for a complex and ongoing problem - but if we are to truly revolutionise the financial landscape, it is crucial to take a ‘bottom up’ approach. This means starting from the IT legacy systems. By adhering to a standardised core IT framework, categorised into key business functions, banks will be in good shape to identify how this links to their APIs. Banks’ legacy issues won’t simply disappear by focusing on shiny new APIs. Addressing the issue head on will ensure that the government’s initiative has a real chance at creating a sharing culture within banks that encourages innovation – for the benefit of both established traditional banks and their newer counterparts.
By Hans Tesselaar, Executive Director at BIAN