APIs are the building blocks of Open Banking. Technology has made is easy to develop and integrate APIs - but there is a risk of overdeveloping. This article explains how to mitigate the risks of doing too much by using sound API management principles. (Bind development to digital banking strategy, establish management plan that allows for discovery and discourages siloed API development, balance internal and external)
The transition to an open banking mindset is difficult. While banks with legacy systems of record often struggle to provide ease-of-use for developers and customers, there are dangers involved with trying to go too far in the other direction. Rushing headlong into an API strategy without a good foundation will result in failed projects and products, unsatisfied customers, and wasted resources.
Open Banking is part of the digital transformation. According to Gartner, his is a journey that 42% of companies are currently attempting, but also where 84% are expected to fail. Fortunately, the following API management practices have helped numerous banks and businesses modernize successfully – and when followed, they will make the odds of your own successful transformation that much more likely.
1. Bind Development to Digital Banking Strategy
The development of APIs needs to closely mimic your overarching business strategy as it pertains to digital transformation. In this day and age, every bank needs to have some form of APIs on the table, but different banks will need different kinds of APIs for different reasons.
In Europe, the advent of the Payment Services Directive 2 (PSD2) mandates API integration, as does the Open Bank Working Group in the UK. These regulations push European banks to use APIs in order to grant vendors regulated access to customer accounts and information. Banks affected by these guidelines will need to comply with them first and foremost, and their API strategy should reflect this.
APIs can be used in a variety of different ways, but they should always be viewed in this context – how they will bring value to the customer.
Many banks begin their API development by focusing on internal systems and updating their systems of record. The question: “Will these projects bring value to the customer by allowing faster or more convenient transactions?” should always be their guide. Starting with the customer and working backwards is a simple way to evolve a strategy that benefits both your clients and your organization.
2. Management Plans Must Allow for Discovery (and Discourage Siloed API Development)
The thing about a silo is that no one sets out to build them. They occur naturally and are the inevitable consequence of an organizational structure that divides groups of people with different sets of skills. Eventually, these different teams will lack the ability to communicate, will use different and non-standardized tools, and may have different understandings of overall organizational priorities.
A recent PwC report notes that more than half of companies still work in silos, and only 36% of companies are able to instill an overall sense of mission in their functional leaders and promote communication between departments. Even in the best-case scenario, silos can result in the accidental duplication of efforts. In the worst-case scenario, they can halt efforts to implement new technologies or processes.
When it comes to creating APIs for the purpose of modernizing your company, improving revenues, and delighting customers, development silos are an anathema. Breaking down IT silos may require a few different strategies:
- GE’s “Work-Out” strategy involves physically bringing together cross-departmental stakeholders for a series of two-day sessions. On the first day, the issues are defined. On the second day, different solutions are posed in a town-meeting style format, and an appointed decision-maker makes on-the spot approvals.
- PwC recommends creating small cross-functional teams and workflows, using guidance from the C-suite to steer towards overarching objectives. It may also be useful to assign personnel – with an executive mandate — whose sole function is to coordinate horizontal integration.
- As a discipline that specializes in creating cross-functional teams, DevOps may be a good choice for breaking down silos. By its nature, DevOps combines different teams in order to deliver new features on a continuous basis. In addition, the system can be adapted for use with systems of record.
3. Open Banking Requires balancing Internal and External API Connections
A successful open banking strategy will depend on where a bank begins development. Banks may rightly worry about allowing third-party vendors, some without any prior business relationship, to access data that leads back to their systems of record. To make this work, banks need to begin where they feel comfortable, such as by creating APIs that support their internal development.
- Most banks start their journey with Private APIs. As the name suggests, these are designed to let data flow between legacy applications that were previously isolated by age and incompatibility.
- Partner APIs and Open APIs open banks up to automated information exchange with third parties. The former only allows access to partners that have a pre-existing business relationship with the bank. The latter permits nearly any third-party to make a controlled data exchange.
- The danger with Partner and Open APIs is that companies can lose sight of the business model. Done incorrectly, Open APIs let banks give away valuable data and services, without getting any value back.
As time goes on, banks must remember to continue focusing on internal development while they foster external connections. They must also remember that as a business, they need to get as much as they give out of providing connectivity via external APIs. To this end, many banks have now taken the expedient of monetizing their API offerings, either by charging for every API transaction, charging per API call, or entering into a revenue sharing agreement.
Real-world financial institutions are already benefitting from successful API strategies to the tune of increased revenue and heightened customer satisfaction. Any new technology adoption program represents a risk, but the three methods above will set you on a forward moving path.
Learn more about how OpenLegacy can help accelerate the pace of open banking for your organization. Download our free eBook, “Art of the API” which provides a blueprint for digital banking transformation success.