Modernizing retail banks with API economy and what the future holds

April 5, 2022

Business digitization has reached even the most traditional sectors in pursuit of new models and opportunities. Companies seek to compete in the market and add value to their offering. 

Due to constant innovations, the financial sector was forced to start digitizing, beginning with online banking, then moving to mobile banking, and now with open banking there are many new opportunities for the fintech ecosystem to offer hyper-personalized services to customers. 

How Open banking is changing Financial Services

Open banking or open bank data is a financial system regulated by laws that enable the exchange of financial data and information among banks and financial companies. Users also gain control of their financial information and can use it in any way they wish. 

Furthermore, this requires a better knowledge of customers -as banks have to share the financial information with other companies to access this data and thus – offer products or services in line with the user’s needs. Open banking, in turn, provides better capabilities to banks and financial institutions to offer more personalized products and services to customers

As a result of Open banking, the – Fintech-companies which offer different types of financial services to clients started to increase in popularity by providing more efficient digital solutions and better customer service

Fintech companies offer users a better user experience by embedding technology in their products, streamlining complex financial procedures, allowing greater accessibility and faster speed with automation-. They -offer greater personalization, seamlessness, and transparency to clients

With increased competitive pressure from Fintech companies, banks had to adapt to compete and not lose their customers’ loyalty. Instead of considering Fintech as mere competitors, banks started to develop a collaborative strategy, by sharing financial information digitally and by using Open banking to work together with tech companies for the benefit of both sectors. Thus, banks were able to provide their customers with external services from other companies, or they could offer their services through third parties. 

The use of API economy for collaboration between banks and fintechs

To collaborate with fintechs, banks rely on  API economy, a mechanism based on the use of APIs which generates a profitable return for the company, either economically or strategically. Large financial institutions handle hundreds of APIs daily, which act as a layer of integration between internal and external platforms to exchange data. With a microeconomy effect, the APIs became a form of digital asset for companies. APIs, also known as Application Programming Interfaces, are made to deliver value for a specific business solution.

The emerging economic effect enabled by companies, governments, non-profits, and individuals using APIs to provide direct programmable access to their systems and processes defines an API economy. At its core, it provides two dimensions of benefit: 

  1. Adopting an API economy restructures and organizes internal systems to support innovative new projects uniformly—reducing maintenance costs and increasing agility.
  2. APIs provide opportunities to generate new ways to reach customers, generate revenue, and build partnerships.

Most present-day flagship projects, such as having a 360-degree view of the customer, developing truly personalized services through the digital channels, integrating AI-based front-office systems with traditional back-office, and even getting full interoperability with third-parties, are technically possible with an adequate API ecosystem. Implementing an API economy in your organization creates new ways of working, such as the administration of the API endpoints and the cost manipulation around the host platforms of the assets. 

Despite the fact that the Open banking data provides access to certain customer information, under the customer’s acceptance to their financial information being shared with third parties, it requires extensive knowledge in computer science to be able to access these databases, besides the fact that it is very time consuming to do it from scratch and often, it has some security loopholes. 

However, entities and companies can quickly provide such information and collaborate by using APIs, reducing time, and creating a new market structure in which APIs offer competitive advantages.

Through API Economy, financial companies can also monetize their APIs, selling some data or information to relevant companies to offer their services to those customers later on. Companies such as Salesforce, Mulesoft, and Experian leverage this strategy, and a large part of their profits come from APIs. 

Likewise, while not generating economic benefits, some APIs can provide a competitive advantage, for instance, by increasing traffic or conversions. Nevertheless, private APIs mean not all financial information can be shared, as these are only used internally within the entities to ensure customer security.

Benefits of API economy 

The appification of banks has led to many advantages. One of those advantages is the ability to do more for less by automating processes that previously took time and resources as they required a human chain. New ways to generate revenue and improve the user experience with continuous technological innovation and a more tailored commercial offer to users’ needs is another significant advantage. Finally, among the essential benefits, the API Economy increases the security of data protection and payments.

Risks and challenges of API economy

The API economy involves some risks in terms of cybersecurity. During the exchange of information across APIs, security vulnerabilities can be potentially exposed, requiring high levels of security.

On the supplier’s side, we could find misuse of users’ data or the limitations of certain functionalities to the companies they operate with, which is a considerable risk for companies whose economic model depends mainly on one or several APIs.

What does the future of the API economy look like?

API economy will continue to drive the next wave of innovations and collaboration in the financial services industry, ultimately delivering more personalized and efficient services to customers. The number of platforms based on APIs will continue to grow, encouraging developers to innovate and discover new use cases for APIs.

At the same time, the goal of the future of APIs in finance is focused on the clustering of applications, in other words, the possibility of being able to perform financial transactions from a single platform, regardless of the customer’s chosen financial institution. Currently, if you work with different banks, you need separate applications to operate with each of them. However, thanks to APIs, you will be able to carry out any transaction with any bank through a single app, saving resources and time.. This greatly enhances customer experience as it allows greater simplicity and speed and avoids the use of different applications built with different designs.

In conclusion, the emergence of the API economy has changed the way banks and fintechs operate in the financial services industry. Now they strive to operate as partners which is advantageous for both end customers and financial institutions. Working alongside fintech companies, banks have managed to modernize their processes and service offerings, creating better experiences and establishing more trust with their customer base.

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The Finance Studio provides in-depth expertise in the financial sector to help businesses reinvent themselves. We design customized transformational programs tailored to our client’s needs that boost new business models and strategies while enhancing their customers' experience.