Speeding up the API journey is imperative for banks success

There has been tremendous growth of API use by companies in ecommerce, cloud computing, mobile and social media industry for the last 20 years I have been involved in IT development. Google, Amazon, Facebook, are all the results of their well-orchestrated API strategies. According to the Harvard Business Review, Expedia makes 90% of their revenue through APIs, while Salesforce around 50%, which is USD 9,1 bln and USD 4,2 bln respectively in 2017. These facts made me question what strategic plans have banks elaborated when it comes to the use of APIs and what ROI do they expect to get from their implementation. Interestingly, despite 4 years have passed since after PSD2 was released, the published terabytes of articles punishing bankers for reluctance to change, and thousands of white papers offering the canvas for strategy implementation, have revealed too much talk and too little action. 

The true situation with banking APIs

Though in Europe there are more than 6000 credit institutions , banks, financial companies, and more, top payment consultancy INNOPAY has listed only 32 top banks that work with open APIs. We have used those 32 institutions in our research, and the first thing we did was to study their APIs developers’ portals. We found out that only 2 out of 32 comply with a certain standard. By the standard we imply that developers, who are the end-users of APIs, can build the products they need in a fast and hassle-free manner.

The key characteristics of a good API are:

rich core banking API functionality;

fast and easy onboarding processes;

good documentation and working source code examples for major programming language;

a marketplace or an application constructor.

If we go below the standard, and sacrifice the marketplace availability, we will come up with 8 banks, which means 25% of the top listed banks. So what is going on with the rest? Seems like they are in the early stages of their API journey. They don’t go far beyond history transactions, P2P transfers, meaning “check-the-compliance box” approach. What they also have in common is the basic and simple format of API calls. But these basic features are accompanied by some drawbacks; we name the most common:

basic 404 and similar error pages, which means the absence of basic testing procedures;

API documentation in bad formatted PDF files;

lack of account activation or no developers’ API keys;

registration form requested needs to be filled up and send by e-mail not from registration form;

documentation provided only in local language (French, Finish, Spanish);

lack of working examples;

lack of community support/poor communication;

long response time for support request.

None of the banks reveals the performance (transactions/minute) that one can only obtain via direct communication. We have measured the response time via email and it ranges from 20 minutes up to 6 hours with the majority of banks; others were either very slow to respond or have not responded by far.

Obviously, since only 25% of banks in our sample are compliant with Open Banking requirements, with the rest having a shallow understanding of the initiative, change happens slowly.

However, by now, there are banks ready to step into the API economy, such as BBVA and Starling. And obviously the majority of banks are not incentivised to pursue any changes, indicating that the bankers do not grasp the essence of the API concept.

API use cases in banking

If used internally, APIs can reduce operational or technology costs by simplifying and accelerating development. For instance, as shown by McKinsey, the use of APIs internally by a bank reduced traditional product-development IT costs by 41% and led to a 12-fold increase in new releases. What if the traditional way of customer acquisition which is CPC (cost-per-click business model) can be replaced by CPA (cost-per-action) as used by Expedia?

One can get clients by “selling” banking products from any third party website. Isn’t it a way to slash costs? Another case is when a bank needs to deal with foreign clients and check their history, then go through the verification and onboarding process. Those costs can be slashed if simply done via API. Yet, why are not they incentivised?

Leaving aside the popular features provided by challenger banks like multicurrency accounts, predictive analytics etc., which could potentially boost the customers’ loyalty even more, banks can also benefit by offering loans to customers of other industries such as automotive for car loans, education for student loans and real estate apps for mortgages. Retirement planning, vacation planning, college planning, and other high-cost life events can drive opportunities for bank services. On a broader scale, it would be of great benefit to the whole economy. According to McKinsey’s research, the estimated total economic profit globally from API use can reach an astounding USD 1 trillion.

Time to become vertebrate

Bankers may not be good at understanding the technical part of APIs, but they can use their core strength – quantitative evaluation of API implementation. If a bank can calculate the optimal deposit/ loan rate, or optimal branch location, it can easily grasp the benefits of developing API:

anticipated number of users for the API;

the number of application developers involved and their hourly cost;

how much the service would be worth;

what new revenue streams would the API open;

the competitors the API will face.

So why would the majority choose to preserve the status quo?

One things is sure: banks will only survive if they calibrate their business model and stay in tune with the changing environment.

This editorial was first published in our Open Banking Report 2018. The Open Banking Report 2018 focuses on topics such as building trust, gaining consent and improving customer experience in Open Banking.

About Pavlo Sidelov

Pavlo Sidelov is a ?TO of a core payment platform SDK.finance based in the Czech Republic. He is an author, speaker with a 10+ year experience in digital payments.

About SDK.finance

SDK.finance is the Fully-fledged Payment Platform wrapped into 340+ APIs. It enables PSPs, EMIs & banks to launch payment or loyalty products saving time 10x, and decreasing 90% of CAPEX. SDK.finance allows to build Payment Services, E-wallet, P2P Money Transfer, Currency Exchange, and much more.