More than 20% of venture capital dollars went into fintech startups last year, according to CB Insights. In contrast, one-third of all unicorns (startups valued at more than $1 billion) were fintech companies. With so much innovation and disruption in the fintech space, it has never been more critical for financial services firms to have an API strategy.
Jacob Morgan, a Principal Analyst at Forrester, recently discussed the role of APIs in financial services, how API standards ensure quality, and how to build an API strategy to accelerate digital transformation.
Let's look at some of these insights and how you can apply them using cutting-edge API development tools.
APIs have taken center stage in financial services as the pace of innovation continues to accelerate.
The Role of APIs in Financial Services
APIs enable financial service providers to quickly share data across different teams and better collaborate with their partners. Morgan thinks of these APIs as Lego bricks that enable quick reuse and development in a composable way. As a result, it's easier for companies to move faster without the risk of breaking things.
He also breaks APIs into three distinct categories:
- Internal APIs - Internal APIs extract technology behind a consistent interface, enabling developers to quickly build solutions and decouple changes between the front and back office. The result is more velocity and higher quality.
- Partner APIs - Partner APIs provide a consistent interface to connect and share data with partners. It gives them a repeatable, predefined format that their developers understand, enabling rapid onboarding and more efficient workflows.
- Open APIs - Open APIs turn your business into a platform for innovators and third parties to build value on top of your capabilities. These APIs sit behind emerging concepts, like Open Banking and Open Finance.
How API Standards Ensure Quality
API standards are essential to increase adoption and ensure quality. Again, going back to the Lego analogy, Morgan points out that Legos only work together because they have a uniform and standardized way of connecting. The same is true for API components – they aren't beneficial if they don't adhere to uniform standards.
There are several reasons to adopt API standards:
- Industry Growth – Early Open Banking showed that growth and innovation slow when organizations build to their own specifications without adhering to an industry standard.
- Internal Velocity – As organizations grow with multiple teams, they increasingly rely on standards and consistent processes for developers to knit together their services.
- Quality Assurance – API standards help speed up quality assurance with universal tests and test data, enabling developers to increase velocity without compromising quality.
- Recruitment – It's easier to source talent and get developers up and running quickly with consistent, standardized APIs.
Poor quality reduces architectural agility and could lead to downtime or interoperability issues with partners. Morgan says that even modest performance issues could lead to massive problems when multiplied by 10,000 users. On the other hand, banks that have well-designed, high-quality, and reliable APIs are more likely to attract innovators.
What leads to these poor-quality APIs?
While there are many mistakes that financial services firms make when developing APIs, Morgan sees the developer experience as one of the most common. Many financial services businesses replicate the product's structure in the API, forcing developers to know what's under the hood and increasing their cognitive load.
Building an API Strategy
Morgan says that it's essential for financial services businesses to have an API strategy because they're the building blocks of modern companies. In addition to enabling customers to connect accounts, they're critical to next-generation, collaborative business models that will help unlock long-term value and durable competitive advantages.
When building a strategy, he believes you must view APIs as standalone products where developers are the customers. Similarly, connectivity should be an early conversation rather than an afterthought when building a new financial product or service.
Some advantages of having an API strategy include:
- Workflows – Agile development teams rely on APIs to quickly build products by connecting "Lego bricks." With a standardized language, developers don't have to work in one product silo and can be helpful throughout the organization.
- Infrastructure – APIs help enable microservices and event-driven architecture. As a result, companies can break down complex applications into scalable components and identify ways to reduce their cloud costs.
APIs are also key enablers of business model expansion. For instance, Morgan points out that Commerce Bank embedded its loan products into third-party solutions, enabling a new source of origination. Similarly, Deutsche Bank made its financial platforms embeddable into Enterprise Resource Planning (ERP) tools.
In addition to the business model expansion, Morgan sees APIs as enablers of fintech innovation. For example, he points to Capital One's Developer Exchange as a unique digital community, enabling the company to promote the inclusion of its financial services in third-party products while also opening the door to recruitment opportunities.
Accelerating Digital Transformation
There's increasing urgency for digital transformation in the financial services industry. According to Morgan, COVID-19 was a wake-up call, exposing banks that didn't have end-to-end digital services or rapid development capabilities. These banks left customers in a lurch without introducing remote banking capabilities, like digital applications.
Open Banking and Open Finance are also driving digital transformation across the sector. Morgan sees many organizations viewing these programs as a compliance issue that eventually moves into technology. As momentum builds, business teams begin to see growth, and business opportunities emerge, leading to tighter integrations.
That said, there are some critical differences between geographies. For instance, Morgan notes that the UK's highly standardized rollout enabled banks to move quickly. In contrast, Europe's flexibility meant that its financial institutions needed more time to meet different requirements across different regions.
The Bottom Line
APIs are quickly becoming the cornerstone of financial services businesses. As collaboration plays an increasingly crucial role in success, high-quality standardized APIs can become a significant differentiator. And by keeping Jacob Morgan's tips in mind, you can increase your odds of a successful rollout.
SmartBear tools can help you streamline your API development and quality assurance. For example, SwaggerHub provides a single source of truth to help financial services teams build highly standardized APIs. At the same time, Pactflow maximizes quality by catching integration issues before you commit, preventing them from reaching production customers.