The API Economy

APIs, or Application Programming Interfaces, is a very commonly used word in FinTech, banking and many other fields. This is not surprising at all since this technology (if we may call it like that) has already had a firmly positive effect on the financial services (FS) sector, and in the very near future, it will completely change the way we pay, spend money, interact with banks, FS providers etc. Let us briefly review the benefits and features of the API Economy.

But first, what is API?

In essence, APIs are lines of code used by developers for building software and applications. APIs thus allow a software platform or application to communicate and connect to an external app or software, and exchange data upon the request.

APIs are the key enablers of the new form of banking.

APIs are hence the KEY enablers of the new form of banking – open & interconnected. They are the mechanism that allows banks or other FS providers to exchange customer data with other parties in a simple and secure way, and hence completely redefine the value chain.

Let us take a look at 3 use cases where APIs will add the most value.

APIs in Practice

Open banking for all. Here I basically refer to the revised Payment Services Directive (PSD2), coming into effect in January 2018, which will establish the legal foundation for full openness of customer and product data across all providers of the financial services in the European Union. Since the ownership of customer data will be taken from the monopoly of banks, this will most definitely increase the competition, reduce prices and add more value and better customer experience for the individual user.

New sources of value. As I have discussed this in my earlier piece, digitization is changing the old business models, and this is highly acute for the banking industry. In order to stay relevant, incumbents must adapt, and APIs can serve this purpose perfectly. Using the data from other parties, incumbents can become Demand Aggregators – providing exclusive edge experience designed around their customer needs. For instance, a Bank could be acting as a demand aggregator when serving a home-buyer with a seamless combination of its own products with externally sourced home insurance (from another bank, insurance company etc.). An illustrative graph on this below from Oliver Wyman.

Aggregating data. Using publicly available APIs, companies can create valuable products that serve the nowadays customers needs. As discussed by IBM (image below), companies can build very precise individual financial profiles that could later be used to secure a loan, get a financial advice, or other specifically-tailored products. In addition, this would also enable individuals to complete their tax return via an accounting platform in couple of minutes.

Bringing it all together

The future belongs to open & interconnected banking. The reviewed instances are only several out of many possible applications of APIs. The status quo has changed, and we now have the best opportunities to create better products and services for all.