Does the future of banking depend on API?
Mehdi Medjaoui, Lead API Economist, API Academy - CA Technologies in an interview with BW Businessworld shares his experience working with European Banking community on Open Banking API and PSD2. While India welcomes digitization, APIs are gaining attraction in the banking industry. The future of banking certainly seems to be open while market as India slowly unfolds the potential of API in the economy.
APIs are benefiting fintechs in many ways especially with more integrations. Fintechs can integrate existing assets from banks and financial institutions to build on top of existing infrastructure to increase the pace of the process. If companies build your own API structure internally, they will be able to deliver products and services much more faster and efficiently on multiple channels like mobile phones, IoT, applications etc and at the sme time open it for other partners. Hence, APIs can integrate others to go faster by building on existing infrastructures, they can be built internally to operate on multiple channels and it can enable third parties to build on top of existing infrastructure.
In order to build an internal API infrastructure, it is important to know API First with all the applications combined in a silo. The next step is to share the components and assemble these components to build the same applications but then they will be erasable. With the help of micro services and APIs on top we can deliver the same application values. One must begin with API then build the platform to build the implementation if services and micro services that can enable the user to provide the same features to all other channels. This is known as API First infrastructure that can comprise all the applications under the same body in order to provide multiple features across various platforms.
The banks earlier had systems that were never meant to be open but with new regulations and market constraints, all of it has changed. Banks have a lot of assets like licenses, infrastructure and data but they cannot address to the main markets. They can however approach the niche markets within a specific area probably known as wealth management. There are huge corporates present in a market worth around $1 Billion. Hence, for all the other million dollar markets that the banks cannot address to directly if opened to smaller actors like startups or fintechs can create the banking infrastructure for other markets. The banks can create a huge ecosystem around their organizations identifying new business models. Banks and financial institutions are said to go a long way and are expected to revolutionize and provide services digitally with the help of APIs
In Europe, let’s say because of regulations like Payments Service Directive 2 and also because of GDPR, financial institutions and large organizations are forced to innovate and we see the same thing in the USA. I did not see any market where collaboration was really open but I did see the acceptance of APIs in Singapore for B2B players in investment banking and trading. Banks are indulging a lot with fintechs and co creating products as API is the way forward.
The API Academy is a team of technical and business researchers within distributed systems part of CA Technologies, APIs and micro services. When we talk independently we deliver more content in order to help large organizations. We at the API academy focus on the software, organization, people and finding a common ground to generate seamless workflow. We also work with MSMEs around the globe shedding light on building the software and design for the short and the long term. Some people see as a source of inspiration when they build a software. Even if it is not to institutionalize APIs, we aim to deliver values and drive the vision of encouraging the technology and that is why we are here.
With a landscape of 1500 companies laid out there following various trends but for me the first wave is when fintechs wanted to be banks. They have now started disrupting the financial market through digital platforms with less resources I see fintechs wanting to replace banks. The second wave according to me is fintechs also focusing on providing complimentary services for underserved markets. A lot of SMEs could not afford wealth management services for their companies but now many players are finding opportunities in the micro economic markets along with crypto currency. APIs enable the technology to focus on the businesses & assets in a B2B sharing economy and fintech is the world where everything needs to be fast, reliable and scalable along with changing business modules and customer expectations. By investing in assets of others and delivering your assets via API with automated program all the way, you are able to uplift your process to the expectations of fintechs. Consider API as the better fluid or oil in a car engine providing a better performance of the vehicle. It takes time and money to integrate two systems and now it is a lot easier that liberates new energy that can be utilized for more businesses.
I advise the banks that it is really important for the business and IT to communicate over the project that is sponsored by the executive of the company. If it is just IT, they would probably create one architecture for another and if it is just business then it consists of only conversations. Which is why I feel that both these sections of any organization must talk to one another and understand the process of inculcating technology that attracts the business. They could even work on small projects at the beginning then they could increase the lifecycle of the software followed by the API lifecycle. This is how they will be able to expand with business and IT leading the growth of the organization. The key strategy for banks in order to adopt API is when the two sections communicate and work together.
Bill Gates had once quoted: “We need banking but we don’t need banks.” I think we are in the system now where values are changing, there is more transparency with more innovations which makes it really hard to stay with big institutions and live in the past with old assets. Since banks are highly regulated and have technical debts, they spend a lot of money to maintain past systems. They need to be open to survive because any closed system or too open system in the long run won’t last which is why there needs to be a common ground. ‘Open Banking’ in the future would not be too open to delude the values but is the way forward.
So far, it’s true Europe and UK, USA, Canada, Singapore, Japan are pushing API and Open Banking really hard for the future and India is soon to release a new regulation pushing financial institutions to encourage API. I’ve seen in India that banking comprises of 70% of the economy and this shows that the market for API and Open Banking is waiting to be disrupted. Open Banking in this country can leverage a lot of energy and resources for other businesses, entrepreneurs and startups with new innovations and also will gave to providing features and tools that banks cannot alone deliver. If 70% of the economy liberates, that will lead to positive growth and evolution of banking in India. The startups have worked really hard to make a name for themselves in the market along with gaining official contracts with reputed financial institutes. Now within no time there will be platforms where more than 1 bank can be integrated into applications allowing fintechs to focus on authentication and verification.
Most of the regulation softwares do not specify on the need of using APIs but it can be used as one of the preferred methods. They don’t put to many constraints in the regulation but everybody understands that API is the most preferred ways of going forward. GDPR is also encourages the use of APIs because it can manage the data more efficiently and distribution because the technology has a secured end point system in place. API is not tied to the technology but just the interface that is here to stay. It is the technical contract and with open banking it will be known as a business and legal contract between two companies and the people. Regulations push banks to be more open and have a sustainable run in the market. People want more freedom in the digital world and regulators make sure the banks and businesses are more open for the good of the consumers.
