Inside the API revolution
The ubiquity of APIs in financial services.
Whether you are ordering a pizza, navigating through a city, downloading a movie, buying insurance or making an online payment, it’s likely that an application programming interface (API) plays a crucial role in the process.
There are already more than 15,000 publicly available APIs, developed by corporations including Amazon, Apple, Google and PayPal, which are then open to other businesses to access and build upon.
For example, an API linking GoogleMaps and the messaging platform Twilio formed the basis for Uber’s ride-sharing app. In addition, such combinations helped companies like Deliveroo, Garmin and Skyscanner take shape and evolve.
The power, efficiency and utility of APIs makes them indispensable to companies in the 21st century. From humble beginnings of simply connecting individual pieces of software in the 1990s, APIs have evolved to allow external developers to expand their scope and range, creating huge commercial opportunities across every business sector.
Today, APIs form such a fundamental and valuable part of the global technology ecosystem that companies will live or die according to the strength of their corporate interfaces. The ubiquitous connectivity of IoT and 5G will only strengthen this movement.
In the world of electronic payments, this dawning revolution will pose multiple threats and opportunities to financial services companies. First the good news: banks still have a huge amount of trust from consumers. This is something they can and should leverage through the smart use of APIs, whether in identity management, based on their long-standing ‘Know Your Customer’ (KYC) programmes, or even in handling healthcare records for example.
Yet most banks have been slow to pick up on such opportunities. They are hampered by legacy IT systems, they deal more comfortably with batch processing rather than ‘real time’ information, and they fear that APIs are among the tech routes to commoditise finance, depriving them of the high revenues and profits they enjoy.
However there are exceptions, such as Spanish bank BBVA, which developed an excellent API which other companies now employ for its back office functionality. But as an industry, banking has dragged its feet. This, of course, has allowed new competitors to enter the space. Apple and Amazon, among many others, have developed payment systems based on APIs, able to link with (for example) a coffee shop chain, a supermarket, or a car. The major reason that Apple and Amazon have not introduced full blown banking services is that they would then face far stricter market regulation, which they prefer to avoid.
The time is fast approaching when banks must take APIs more seriously. The European Union’s second Payment Services Directive (PSD2) obliges financial services companies to open up their systems. Seeking to ‘foster innovation and competition while ensuring a level playing field for all players, including new ones’ (European Payments Council), PSD2 explicitly mentions APIs as a central way to achieve these aims. In the next couple of years, banks will be mandated to open their services through APIs.
The more forward-thinking banks will soon understand, if they do not already, that developing their own APIs and then marketing them to other businesses presents huge opportunities. Just as Amazon’s AWS created its own facial recognition and Google developed mapping software and introduced subscription services, the industry leaders of the future will be those who market and sell their APIs most effectively.
This development is a further iteration of the common observation: that all companies today are now technology-based, whether they sell cars, coal, toothpaste or newspapers. The opportunities presented by APIs are central to another staple of modern business life: automation. Hedge funds now make all their buying and selling decisions through API-enabled technology, which means they achieve the best rates of exchange and best prices at any given second.
Automation, visualisation, prediction and big data analysis are just some of the features integrated and connected through APIs, delivering extraordinary functionality for the businesses of the future. In financial services, they enable companies to achieve faster, lower cost and more flexible payments, with higher security levels and greater customisation. And while the older generation may still have a limited understanding of what they are and what they do, millennials have grown up with APIs as part of their daily lives and are increasingly familiar and comfortable with them.
Just as it is now simple and quick to access mobile apps via Facebook, rather than going through a separate security process in the app itself, the best APIs allow consumers to access services and functions with little friction, improving the on-boarding process and winning new clients.
One potential downside to the rise of APIs is how they advance computerisation: there is a danger that companies lose touch with their customers. This is a long-running debate, taking in automated phone services, online banking and much else. APIs certainly take people further away from the human touch.
But for those who relish the speed, ease and high functionality of the digital age, APIs can and will deliver exactly what they ordered.