De-Hyping APIs

I don’t need to tell you that API (Application Programming Interface) is the new buzzword in the Fintech world. Such interfaces already play a key part in internet-age business models – since they make it easier for different players to connect – although, similarly to the digitalisation process, their arrival in the finance world had taken place with a little bit of a delay, pretty much until the rise of Fintech firms over the last few years.

However, although I appreciate the importance and implications of these new forms of interaction made possible by APIs, I think much of this hype is being fostered by companies seeking to strategically position themselves at the forefront of digital transformation, in the process hiding how outdated their business models and products are. Unfortunately, although APIs may be a prerequisite for many of the changes that these firms need, they’re just a small piece of the big picture. The massive media coverage they are getting is "surprising" when – with the exception of B2B firms – they do not add any direct value to the end-client, whose main interest revolves around how great the product they are consuming is, and not so much around the plumbing behind it.

But before going any further, let's recap the basics. An API is a piece of code that allows one piece of software to interact with another. Or to put it differently, it is a programme designed by a company that allows third-party developers to interact with their software beyond the regular web or app interface – i.e. by writing some lines of code. These third parties may also be clients looking to automate processes, better known as STP (Straight-Through-Processing) in the financial industry.

Let’s take the example of Twitter. You can access the API of the 140-character social network and easily implement – again, with a few lines of code – some basic actions like posting a tweet or searching for a hashtag directly from your terminal. But why would anyone want to interact with Twitter in such a way when you can use the much more user-friendly Twitter website or app interface?

Well, the whole point of connecting through the API is that it provides the developer with a wide range of – sometimes endless – possibilities that go far beyond the basic actions that you can manually perform through traditional web or app interfaces. For instance, through Twitter’s API you could create a bot that tells Twitter that every time Donald Trump tweets something, your account should automatically post a message saying "We are doomed". Or you can automate tweets and schedule them, so you don’t need to actually tweet them in real time, saving plenty of time.

These are some basic examples, and as you can imagine, developers may even create their own apps on top of the Twitter platform. Another example is the possibility of using such an API for retrieving data. So, you can ask Twitter to search for a specific query, and then store all the results that it has sent you back in a meaningful and structured way, so they can be analysed later on.

As you can infer from the example above, there is great potential for this new type of interactions to bring huge advantages both to companies and indirectly to their customers. But that being said, we should not gloss over the fact that the API is "only" the door allowing such interaction to take place. And here I’d like to make three important points:

Firstly, that all these new possibilities brought by APIs can crystallise in many different ways depending on the company and how the API is designed. Although the creativity of the developers will play a key role, in the end they will be constrained either by the specificities of each business – obviously enough, what you can do with a Twitter API is pretty different to what you can do with a payments firm’s API – and by how many functions and how much data the provider is willing to share (or in other words, how open the API is). That’s why saying "we have an API" means pretty much nothing if we don’t go into the details.

For example, much attention has been paid to the impact of the new PSD2 on the whole finance ecosystem since it will oblige banks to open their data up to third-party developers through their APIs. However, many people are sceptical about traditional banks' willingness to actually respect the goal of the directive and open their data up to the world. Indeed, it would not be surprising if they were to limit such API interaction to the minimum possible while complying with the legal terms established within the directive. At least, this is what I have been personally told by many bankers.

But beyond the features of every specific API, the mere creation of this new door for your business – although it will become more and more indispensable in today’s digital world – does not change what is behind it, i.e. the quality of the product, service or solution the firm is offering.

And this is the second point I wanted to raise. I have the perception that many of the financial world’s firms are talking about and adopting APIs only as a superficial tactic, in order to hide their real problems in terms of outdated business models and outdated business cultures – which ultimately result in outdated products. As you can imagine, the mere creation of APIs won’t change this fact. For example, if a bank wants to evolve towards a platform or ecosystem business model, it will definitely need APIs for integrating with third-party partners. However, this will neither address the main problems and concerns associated with such models – in terms of risk, data, customer and revenue sharing, etc., which will ultimately determine how successful the project is – nor improve the current products they have built in-house.

And following this marketing-oriented positioning, here comes my last point: despite all of this hype, APIs are to a great extent irrelevant to end-clients. Again, what is hugely valuable is delivering the best services, products or solutions possible and not so much the plumbing behind it. The end-customer only wants to buy something that gives them added value, and doesn't care whether this has been made possible – among many other things – thanks to APIs.

Perhaps we could say that B2B firms providing their services through APIs are in some senses an exception to this last sentence. Of course, what matters to these B2B end-clients is the quality of the service. However, this service can be provided to them directly through the API, which in many circumstances makes B2B customers' life much easier.

Since we, Kantox, are a B2B company, I could also speak about my own experience with our API. Our clients use it, for example, with our Dynamic Hedging solution, which allows them to automate their FX exposure management. Again, what they really appreciate is the value added by the features of the product. But it’s also true that since we are talking about big companies making thousands of transactions per year, using the API avoids many of the inefficiencies that would arise if they had to perform such transactions manually through the standard web platform.

We have been through the big data hype, the bitcoin hype, the blockchain hype, and now we have the API hype along with AI. At the end of the day, though, this isn't what matters: no consumer cares if you are powered by Amazon Web Services or your own servers – customers care about the value you bring them.

* * * * * * * * * * * * * * *

I would like to know your opinions on this topic, so please leave a comment below!

For additional Fintech-related content, you can also check my twitter account and the Kantox Blog.