by: Ben Goldin is chief technology officer at Mambu
APIs are the rocket fuel for financial services innovation and value creation, being a cost-effective way to create nimble ecosystems in which – ultimately – fintech and banks will be equal partners, writes Ben Goldin
It’s almost exactly 20 years since Salesforce launched at the IDG Demo 2000 conference. What’s this got to do with fintech and banking? APIs.
While APIs have been around for almost as long as computers, it was arguably Salesforce that first appreciated how critical they were to building value. Salesforce worked out that by giving easy access to its technology, innovation would be stimulated, with the subsequent rewards benefiting all those involved. Its move was quickly followed by many in the tech industry, including eBay, Facebook and Amazon.
From Wall Street to Silicon Valley
Fast forward to 2020 and we’re seeing a similar epiphany in banking – one that will have consequences which are just as far reaching. It pivots financial services away from its home on Wall Street towards Silicon Valley, as banks increasingly use APIs to access enabling technology to truly transform the experience they can give customers and the rewards they can share with investors.
Banks have traditionally spent a fortune on armies of in-house developers to write bespoke software to solve the same problems as do their rivals, including meeting changing customer demands and complying with new regulations – duplicating efforts and wasting time and money. This has left them sometimes struggling to compete with nimble challenger banks and the platform companies that are increasingly encroaching on their space.
But the regulators who have pushed for open banking, and the customers whose fast-changing demands are being fuelled by the possibilities of our digital age, have between them forced traditional banks to innovate faster and collaborate with third parties. The banks’ embrace of APIs has given them access to the new technology offered by fintechs – such as artificial intelligence in fraud mitigation or credit card decision making technology that helps create value – all on a software-as-a-service (SaaS) basis. You might ask what has taken them so long.
Fears over security and banks being locked into their legacy IT systems are partly to blame. No one wants to change the engine while the plane is flying. But the unwieldy nature of old APIs was also a problem. Today’s APIs are different: secure, lightweight and easy to understand. Developers don’t need special training or lengthy instructions to access and implement them; portals allow them to conduct road tests and start working quickly. And the vast majority comply with the 3:30:3 rule: 3 seconds to understand what the API does; 30 seconds to identify the entry point and how it is used; and less than 3 minutes to create an account on the portal, gain access and start using the API.
Fintech rocket fuel
The rise of APIs that match this rule has helped the fintech industry to grow quickly and allowed challenger banks such as BUNQ, N26, Monzo and OakNorth to create business models and customer experiences light years away from those previously offered by incumbent banks.
Rather than working alone to provide a one-stop-shop for financial services, these challengers collaborate with a carefully selected group of dynamic fintechs that provide best-in-class operations so the bank itself can provide best-in-class services. Using APIs to connect the technology that delivers functionality such as reconciliation, credit checking and cyber security at the back and account opening, robo-advisers and regular savings at the front, these banks compose exactly the type of bank they want to be.
Incumbent banks can see how nimble APIs make their new competitors. They know they can no longer be monolithic financial-service providers because that business model is broken. What is more, it’s been proven that bolt-on technology doesn’t compromise customer security and fidelity. Traditional banks understand that APIs make it possible for them to leverage all their advantages – trust, security, customers, data, sector knowledge and brand – and work with fintechs to build effective and efficient ecosystems that cover customer onboarding, treasury, compliance, straight-through processing and offer bolt-on products such as insurance, forex, investor advice, just as the challengers do.
And APIs mean they can gradually replace their old technology and pursue an evolutionary rather than revolutionary digital transformation. The icing on the cake is that the SaaS approach is much cheaper – providing far superior returns on investment. Citi and Barclays see a return on equity of 13 per cent and 9 per cent respectively, while a challenger such as OneSavings Bank enjoys ROE of 25 per cent.
The democratising force within fintech and banking
A trend towards specialisation seems likely to gather pace. This means that rather than being all things to their customers, many banks – new and old – will increasingly focus on a handful of technologies that allow them to do fewer things, but each one well. That might be providing services such as cashflow analysis and short-term instant loans to SMEs or life insurance and robo-advice to high earners, or small loans for consumer purchases. The fintechs with which they work will be partners and each bank will eventually become just one of the participants within an ecosystem of payments, insurance, biometric identity checking, credit-score providers and more. As the banks work with many fintechs, so the fintechs will work with many banks. Ultimately, APIs will be the democratising force within fintech and banking.
Before the decade is out, ecosystems of partners will be the norm and banks will no longer be the lynchpin, just one part of the set-up. The result will be lifestyle banking where financial services are embedded into customers’ lives exactly where they are needed – such as point-of-sale loans or instant overdrafts. Banks will essentially have become technology companies. A bank that offers SME services, for example, could be embedded into the customer’s accounting system – more like a widget than a bank – so it can analyse exactly what is needed when.
But perhaps more importantly, these ecosystems will be nimble and ready for change. By 2030, banks with their ecosystem partners will be able to adapt in minutes or hours – think Facebook or Amazon. They will address the new efficiently and effectively. And it’s all thanks to the API.
