Of all the industries on the path of digital transformation, financial institutions – like payment processors, credit unions, and traditional banks – are at the top of the list of those that can benefit the most.
In fact, digital transformation in banking goes beyond “nice to have” and has entered the realm of “do-or-die”. From every angle, banks are being pushed to be more agile, innovate faster, and offer better and more customer friendly products.
Siloed data, owned by a single gatekeeper or department, is no longer conducive to profitability. Neither is shielding your systems completely from 3rd party providers (TPPs) in the hopes of maintaining control of customer data and, by extension, customer loyalty.
Digital is a key component to the future of banking. Banks now have as many developers as some software firms. And many of these organizations are adopting Application Programming Interfaces (APIs) as part of their transformation.
But it isn’t enough to simply use the technology. APIs are for so much more than ad hoc digitization of current functions. Instead, they provide banks with the opportunity to build an extensible and flexible banking platform that improves offerings, increases profits, and smooths regulatory compliance.
The Benefits of Open APIs for Banks
As mentioned, banks have already started to adopt API technology. But open APIs might be a newer concept for financial institutions.
APIs can be created to speed backend connections and functionality within an organization, and even provide access to functions and data for customer-facing features.
Open APIs are a shift from this insular view. With open APIs, businesses make certain functions and data available to both internal users and the outside world in a safe and secure manner. Partners and 3rd parties participate in adding value for the bank’s customers and their own through the use of these APIs.
While there are many, we’ve pulled together five of the top reasons banks should consider open APIs.
While not a concern in the US at this time, financial institutions in the EU are facing the regulatory requirements of the PSD2. The European Banking Authority’s Payments Services Directive (PSD2) requires that financial institutions and those that receive electronic payments open customer information up to third-party providers.
Many of these TPPs are fintech developers creating disruptive applications and services that customers want and banks don’t yet provide or don’t provide well.
To adhere to the regulations, banks will need to find a way to provide customer data to the outside world while at the same time keeping that same data secure. Open APIs become the ideal solution.
Meeting Consumer Demand
The modern consumer is technologically savvy, and it isn’t just Millennials. According to Statista, 71.8% of Generation X customers were digital banking users, with the rate expected to increase to nearly 75% by 2019.
With high expectations of their online experiences, customers want innovative banking products delivered as quickly as possible. But if a financial institution is developing one-off APIs for each new function, or trying to create every new product in-house, they will rapidly fall behind. With open APIs, banks can leverage functionality and products created by third parties or allow these same fintech TPP to fill gaps in their offerings, much like Capital One, Wells Fargo, U.S. Bank, and others did with mobile platform Zelle.
Better Customer Experiences
Along with a demand for more and better banking products, customers also expect great customer experiences. With consumers spending as many as 5 hours a day on their devices, just having a mobile-friendly presence isn’t enough.
Customers know what a useful mobile experience looks like and can rapidly identify which digital experiences make their lives easier. They expect seamless integration between their computer, their phone, and their IoT devices. And they expect a single window pane into all of their banking products.
With open APIs, banks gain the ability to create an omnichannel experience, pulling on internal and external resources to create world-class experiences.
The digital world changes fast. That’s not just true of creating new offerings, but in maintaining business continuity. Keeping up with partners as they adapt and modernize their systems is only part of the equation. Proactively addressing regulatory changes and mitigating risks is another.
With an open API strategy, banks can quickly pivot to meet a partner or TPPs changes. They can also seize emerging opportunities more quickly with flexible interfaces to the outside world. This also opens banks up to finding the best and most cost-effective providers without disrupting a customer’s experience.
Focus on What You Do Best
Banks aren’t software companies. They know what their customers want and need from their financial institution, and they provide the products and services to meet those needs.
But there are software companies out there that focus their innovations on the financial space. By providing a means to work with these providers through APIs, banks can create new product lines to meet the needs of a wider range of customers while at the same time opening themselves up to new markets. With a platform built on a flexible API-led strategy, new value chains can be created where each link focuses on what they do best.
ModusBox’s inclusive banking and digital transformation teams have the experience you need to assist you with your financial institution’s adoption of an API-led architecture, and to steer you through every stage of an effective transformation. Contact us for more information on how we can help.