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So, what’s driving API use in banking and finance?

Application programming interfaces are increasingly sophisticated, standing firmly at the heart of open banking and ushering in a host of innovations.
Michael Brink
By Michael Brink, Chief technology officer of CA Southern Africa
Johannesburg, 21 Aug 2020

Let’s kick off with some positive statistics. In just the past six years, 1.2 billion people worldwide have gained access to bank and mobile-money accounts. This revolution in financial inclusion has the potential to offer a pathway out of poverty for hundreds of millions of people, and to spur broad economic growth.

However, the downside of that is that approximately 1.7 billion people worldwide are excluded from formal financial services, such as savings, payments, insurance and credit. In developing economies, only 63% of adults are reported to have a bank account.

There also appears to be gender issues involved with women being reported to be excluded from these beneficial financial systems more often than men. Nearly one billion women are said to be still left out of the formal financial system, and there is a 9% persistent gender gap in financial inclusion in developing economies. Most poor households instead operate almost entirely through a cash economy.

These statistics come from the Bill and Melinda Gates Foundation’s Financial Services for the Poor programme, which aims to broaden the reach of low-cost digital financial services for the poor.

Initiatives such as this will certainly act as a catalyst for the use of application programming interfaces (APIs) in banking and finance. There are many factors that are − and will even more in the future − contribute to this trend. Moreover, getting the unbanked banked creates immense opportunity for the financial sector but obviously also some challenges.

Financial institutions have been forced to evolve under this new era of transparency.

Banks, wealth management firms, payment providers and other financial institutions face deep disruption in the form of evolving market demands and new regulatory pressures. These companies are having to rethink their established priorities, processes and products, so that they can lay the groundwork for future success.

Banking digital transformation

This is well under way in the financial sector with many banks now being said to have more developers than Microsoft. The challenge lies in creating innovative, high-quality customer experiences and services at the speed the market is moving, while remaining compliant with shifting market regulations. Software is the key.

Banking faces many challenges, not least of which are growing customer expectations, digital disruption and new competition – these last two go hand-in-hand and all combine to pressure banks to constantly innovate to deliver better services.

PwC sees three trends developing in the South African market that could impact the banking landscape as well as the profitability of banks:

  • The emergence of digital solutions with lower-cost models launched by adjacent financial services players, eg, Discovery.
  • The emergence of sector- and industry-specific banks, closely integrated with broader supply chains, launched by non-financial services players, eg, South African Post Office.
  • Ongoing transformation of the four universal banks to address changing customer, regulatory and technology needs.

Basically it comes down to banks having a choice – they can perpetuate the monolithic model with one-off APIs that meet a specific customer or regulatory requirement, or build a new banking platform that supports future compliance, scalability and flexibility to innovate.

Driving open banking

Financial institutions have been forced to evolve under this new era of transparency, with authorities taking unprecedented steps to ensure consumer protection is maintained in the face of business activity.

Among the most comprehensive transparency drives is open banking, which requires big banks to share their customer data with third-parties.

APIs lie at the heart of open banking. This new platform is opening up payment services and ushering in a host of innovations, including peer-to-peer payments and aggregated accounts. If payment apps can prove their security and ease of use, they are likely to replace cash and cheques.

Open banking or ‘open bank data’ is a banking practice that provides third-party financial service providers with open access to consumer banking, transaction and other financial data from banks and non-bank financial institutions through the use of APIs.

It facilitates the networking of accounts and data across institutions for use by consumers, financial establishments and third-party service providers. It is recognised to be a major source of innovation that is poised to reshape the face of banking.

Traditionally APIs would be referred to as technical interfaces for software programs; however, today they have become increasingly sophisticated, representing integral components of the Internet of things, whereby smart devices utilise APIs to deliver solutions to customers.

For example, a smartphone might be used to pay for an item in a shop, with the device then sending data via an API call to update the customer’s bank-account balance after payment. As such, APIs make communication between relevant parties more convenient and efficient, among their many advantages.

In the banking context, this interfacing enables a third-party application to access a bank’s common tools, services and valuable assets, such as financial information, customer accounts and product catalogues.

In doing so, APIs make it quick, convenient and cost-effective for the bank and the third-party to connect. By facilitating access to valuable shared customer data, clients can have a potentially better overall experience when conducting their financial affairs.

For example, an API can be used to analyse customer-transaction data and glean which available financial offerings are most suitable to which customer, such as a lower-interest credit card, specific loan product or higher-interest savings account – translating into the bank being empowered to offer a more personalised service.

In my next Industry Insight in this series of three, I will expand on the status of APIs in the banking sector.