In the last few years, application programming interfaces (APIs) have evolved from mainly in-house tools to critical elements that link banks and credit unions to their fintech providers, enable new applications and improve systems. Often, however, many community and mid-size financial institutions operate without an API strategy nor a way to assess the interface’s structural integrity, interoperability and security.Financial technology executives are increasing their use of APIs, which allow financial institutions to swap information internally and externally to support products, and open communication channels more efficiently. Some banking areas benefitting from the availability of APIs include payment processing, peer-to-peer programs, investment management, compliance/regulations and payment transactions.
Other examples of fintech-enabled APIs include supplying credit history for loan applications, providing a real-time assessment of spending habits and payment card use, authorization and enablement of transactions, access to checking account information, or the channel to make online purchases.
API Bank Objectives
About 75% of APIs involve internal use, according to a 2020 McKinsey survey on APIs in banking. Financial institutions propose to grow that number two-fold by 2025. McKinsey also found about 20% of banking APIs externally used to support integration with business partners. Financial institutions plan to double the number of these APIs by 2025. The remaining banking APIs are public (5%), used by external developers for open banking purposes, including revenue generation and participation in other ecosystems, and supporting new business models.
While customers want tools, products and services that engage and simplify their financial lives only the largest banks have the resources, competence and resources to devote to extensive development, technical API integration, testing and compliance capabilities required to integrate apps on its own.
A report from Cornerstone Advisors found that API strategies in mid-size financial institutions vary widely. Currently, about 40% of banks do not have an API strategy (with half of that group in the process of evaluating API solutions).
In addition, Cornerstone found many financial institutions turning to third-party providers because they lack confidence in their core vendor’s approach to APIs for integration. Just 23% of bank and credit union executives are “very confident” in their core vendor’s approach to APIs, and a little more than 40% are “somewhat confident”—not a particularly strong endorsement.
Cornerstone pointed out it many financial institutions are fooling themselves about either digital transformation or its close tech ally, APIs. In Cornerstone Advisors’ 2022 “What’s Going on in Banking” study, the consultancy asked financial institutions how far along they thought they were with their digital transformation efforts. Fifty-four percent said they were half-way or more through their transformation efforts. Of these institutions, 37% have yet to develop or deploy APIs.
Banking on API Strategy
Many banking leaders using an API method shifted from an unstructured to a meticulous approach and now differentiate themselves through a connecting strategy, operating model, technology, and people, according to McKinsey.
- API strategy. Evolving financial institutions objectives cover monetization and enablement of new businesses through third parties and collaborations. In this approach, IT and the financial institution work collaboratively to create a well-defined API strategy built around the organization’s priorities, and development of a wide-ranging road map for internal and external APIs.
- Operating model. This reflects a unified rather than a siloed method to deliver its strategy while also maintaining ownership of each API along the entire life cycle. Moreover, funding and governance promote API usage in line with an all-encompassing business strategy.
- Technology. McKinsey noted several financial institutions succeeded by starting small with a few internal APIs and then scaling from there. “Now they are consolidating access in a single internal — and, with added layers of security, external — developer portal, with clear standards to ensure reusability and scalability.”
- People. Generating new proficiencies is a continuing challenge for most financial institutions. McKinsey noted a UK bank uses gamification to increase adoption of APIs and develop technical capabilities. This approach enabled the bank to rapidly scale API usage, which nurtures an API-first culture.
Cornerstone Advisors suggested developing an API strategy requires financial institutions to have: 1) A business plan that clearly defines the differentiated experiences and products the firm offers, and 2) An ongoing focus on the APIs that enable them to connect to their ecosystems to deliver on their differentiated experiences and products.
Setting Up Banking APIs
At an “APIs in Banking” roundtable hosted by McKinsey, participants from more than a dozen leading global banks and smaller regional institutions exchanged updates on their plans for using APIs and their progress to date.
The forum found most financial institutions still relying heavily on complex legacy systems. Consequently, leveraging APIs to tap into the functionality and data embedded in them can be demanding at best. Especially compared with fintechs and some financial institutions that take advantage of digital transformation to connect with users.
Nevertheless, financial institutions increasingly view APIs as adaptable tools that can enable business value. That is why the API usage increased for fintechs with the upsurge of open banking, whereby financial institutions allow third-party developers to access data stored by financial institutions to deliver enhanced services and functionality.
Financial institutions today have customers’ consent to provide third-party providers access to personal financial information, allowing for the development of apps and programs that make consumers’ financial lives more efficient. By establishing a standard set of rules for swapping info, APIs make it easier for two-way interaction with banking customers on multiple channels.
NXTsoft’s OmniConnect Platform, which utilizes cutting-edge cloud technology to securely connect fintech solutions to financial institutions, ensures that its clients have safe and reliable integration, and is an open banking marketplace for all API needs. NXTsoft has connectors built for as many as 40 different banking core accounting systems including systems from Fiserv, Jack Henry and FIS, with many of them requiring connectivity to multi-core versions.
NXTsoft delivers connectivity to over 700 financial institutions with 2,000 connections in place. The company provides pre-built connectivity to numerous Fintech partners found in its API Marketplace using its open API platform.