Banking and financial institutions are experiencing some drastic changes with the introduction of API in the Fintech ecosystem. So much so, that the APIs are termed as key enablers to create new value chains and empowering owners of financial data.
While this has accentuated the opportunities for delivering more customer-centric services, regulations and directives are disrupting the understanding and decisions. Let’s understand if it is the right time for retail and corporate banks to opt for API centric ecosystem?
Rising Trends in the Banking Industry
The open API economy is accelerating competition and innovation within the banking industry by creating new demands for banks’ business strategies. It is creating a wave for leading future banks to focus on their end customers and deliver new products and services through collaboration with business units within or outside a bank, across the industry to accelerate their market position.
Europe has taken the lead in API banking space with the Payment Services Directive(PSD2), directed to regulate payment services in the European Union and European Economic Area. It aims to increase pan-European competition and non-banks participation in the payments industry for increased consumer protection for online payments with strong customer authentication. PSD2 has been implemented to prohibit the use of non-transparent pricing methods for international payments to make the customer aware of the real costs involved.
The new regulation will, therefore, help to make international payments as straightforward and secure and will be more competitive offering greater choice for consumers. Its purpose of building a clear and comprehensive set of rules to existing and new providers of payment services will ensure greater efficiency, choice and transparency in a harmonised payment market.
This digital market trend of open APIs will reduce costs of operation through higher competition, and bring about a new host of products and services through innovation leading to improved customer experience, increased transparency, modernize legacy technology, meet regulatory requirements, and generate new revenue. Banks will witness fragmentation with new competitors entering the market and potentially disintermediation from their customers.
Market disruption, client evolution and regulatory changes in open banking revolution are clear signs in banking and corporate world that customers are being presented with the high-end competition, innovation, and payment mechanisms.
The Modern Era of Open APIs and Microservices
With the emergence of open API economy, there is a gigantic increase in the number of new entrants entering the financial services markets. Banks are opting for API-first strategies to define their business model, by facilitating their customers to have on-demand products and services.
Financial Technologies (or simply referred as FinTechs) have disintermediated banks where end-consumers are confident in engaging with a variety of financial transactions, lending or depositing. Bigger technology giants too are advancing their game in the financial services business and exploring the possibilities by entering the payments market and preparing for further disruption.
Open API banking has lead to an interesting era of banking transformation. Now, banks are adopting short- to long-term strategies to accelerate value delivery through FinTech partnerships.
However, for its foreseen successful adoption, banks would need to establish the right operating model to drive profitability, ensuring that security standards are conformed with changing business model. As non-banks start accounting for most chunk of customer interaction, banks may find it difficult to differentiate themselves from them and convince customers to buy their services. Hence they would need to refine their data strategy to ensure its maximum leverage.
The banks are adopting microservices-based architecture for application development. It is an approach to which a large application is built as a group of modular services (with a specific business goal) which communicate with each other through open APIs using a well-defined interface. They have the ability to assemble as required to deliver complex functionality, and can scale independently.
The benefit of building microservice-based digital banking solutions is that the entire system won’t be down if one service fails.
Microservices has brought down monolithic-based applications, focussing more on building agile and scalable solutions. Companies have started shifting towards agile delivery and devops as they would want to move from struggling with legacy applications holding back digital acceleration and innovation.
This is the time when open API banking combined with microservices-based architecture will define success for banks.
Microservices based web applications are more agile, resilient and scalable. In the current scenario, when banks are seeking to accelerate the digital value propositions at lightning speed for flawless customer experience, opting for microservices approach is the fastest way to accelerate this transformation.
However, banks would need to strategize and will have to rethink their operational support, delivery methodology, and required skills to upgrade its people, process, and technology to enhance their core offerings.
The rising open API economy represents a great opportunity to gain a competitive edge in an increasingly complex and customer-centric marketplace. Despite the strategic and operational challenges, leading corporate and retail banks should realize that the time to act is now.