Are you ready to revolutionise the way you provide banking services? McKinsey’s 2022 survey on APIs in banking found that large banks are now allocating an average of around 14% of their IT budget to APIs.
From innovative fintech challengers to long-established banks that have been operating for decades – in some cases, centuries – financial institutions are embracing the potential of APIs. Those leading the field focus on API-first development to deliver scalable and robust products. Here’s how. And why.
What is API-first banking?
An API-first approach is all about adopting a product-centric mindset. This approach positions APIs as discrete, well-defined products, instead of integrations subsumed within other systems.
API-first banking is about harnessing the potential of APIs within the financial sector. Doing so supports creating modular, interoperable API products that deliver fast, efficient, reusable and secure ways for banks and fintechs to provide customer services.
As the number of API banking products and use cases increases, financial institutions think increasingly in platform terms, ensuring that banking APIs foster innovation across the sector.
Benefits of API-first in fintech
The benefits of taking an API-first approach in fintech can be found in:
- Greater speed and efficiency in product delivery.
- Reduced risk.
- Improved security.
- Upgraded customer experiences and enhanced data analytics.
The introduction of the Payment Services Directive 2 (PSD2) in Europe has done much to drive the adoption of APIs. Banks needing to ensure their electronic payment services deliver maximum security have turned to APIs to meet their compliance obligations. The legislation also drives a shift towards open banking, where APIs facilitate all customer account functions.
Increased speed and efficiency
While older banks are adopting APIs on top of legacy products, neobanks and other fintech newcomers are putting APIs front and centre when it comes to strategy and service development. This is embedding increased speed and efficiency at the heart of their operations, which can be a strong driver in enabling them to challenge more traditional banking models.
APIs aren’t only introducing speed and efficiency in terms of customer interactions but also supporting banks to reduce internal complexity and cost regarding IT integration. McKinsey reports that this banking API frees change capacity up to 30%.
Reduced risk and improved security
What is API in banking delivering aside from greater efficiency? Security is another key benefit. One of the benefits of Tyk is that it delivers outstanding API security right out of the box, enabling developers to implement security at the platform level. This allows for using repeatable security standards across a bank’s entire API portfolio while supporting individual APIs’ independent development. Developers can, therefore, focus on the goals and business logic of their APIs while enjoying the peace of mind that comes with knowing security will be baked in as standard.
Therefore, using an API banking platform can help banks and fintechs reduce the risk of a security breach, which has knock-on benefits for everything from customer confidence to avoidance of regulatory fines.
Improved customer experience
Financial services APIs are also driving improved customer experiences across the banking sector. Faster, slicker interactions for everything from account creation to making payments are being delivered thanks to API-first banking.
Enhanced data analytics
The versatility of banking APIs means they also support enhanced data analytics by introducing automation into the data collection process. This provides greater data analysis and reporting accuracy, enabling banks and fintechs to make data-driven decisions confidently.
Challenges of implementing the API-first approach
While there is plenty to be gained from taking an API-first banking approach, doing so is not without its challenges. Careful planning is required to ensure that regulatory obligations are met, that customer data is secure, and that newly introduced services don’t make breaking changes to older systems. This is the case with any new product or system that banks and fintechs introduce – the challenges aren’t solely related to API financial products.
In banking APIs, there are clear ways to overcome the challenges. We can see this by looking at a few specific examples.
Integration with legacy systems
As mentioned above, some banks have been operating for hundreds of years; The Washington Trust Company and Banque de France were founded in 1800, while Schroders in the UK dates back to 1804. Such institutions can come with a severe amount of legacy spaghetti. The journey from traditional siloed and monolithic services to APIs, microservice gateway, and access patterns can be challenging.
An API-first approach can overcome many legacy-related challenges, as creating modular, independent API products allows for the step-by-step addition of services as part of a well-planned, incremental growth strategy. API mocking also means that integration with existing services can be tested extensively before APIs go live, providing scope to iron out any glitches during the testing phase. Designing by the Open Banking Standard will also help ensure technical interoperability.
Data security and privacy concerns
We mentioned above the benefits of API first, meaning enhanced security. Conversely, though, data security and privacy can also be a concern. When a bank uses APIs, it opens up its data for consumption. If the APIs aren’t implemented securely to keep data protected at rest and in transit, the chance of a data breach can increase.
Even where a banking API is implemented securely, the subsequent approach to versioning and, ultimately, deprecation can open windows for bad actors to exploit. Old API versions that should be taken offline but aren’t (reasons for this range from personnel changes to simple forgetfulness) can lead to shadow, rogue and zombie APIs that fall behind in terms of patches and other security updates.
Opening APIs up to partner organisations can also be a point of concern for banks and fintechs. Third-party developers must comply with all of the bank’s required security practices, which means financial institutions need to put systems in place to ensure compliance is enforced.
This is why proper implementation and robust ongoing API management are crucial. In particular, API discovery can help to spot any APIs that have slipped through the net, helping to keep everything neat, tidy and secure. Security, meanwhile, must encompass industry-leading encryption, authentication and authorisation, as well as ongoing monitoring to ensure that everything is operating as it should be.
Banks exposing data through APIs also need to think long and hard about regulatory compliance. The nature of the information that banks hold means they must comply with data protection legislation in their area(s) of operation. The General Data Protection Regulation, the California Consumer Protection Act, the Lei Geral de Proteção de Dados Pessoais in Brazil and a wide range of other pieces of legislation all place compliance obligations on financial institutions. This is in addition to all the regulations around anti-money laundering and countering the financing of terrorism that banks must also adhere to.
The upshot of this is that banks must keep regulatory compliance firmly in mind when developing their API-first approach. Choosing the right open source API gateway and API management platform can make a big difference here – a security and compliance-focused provider can put you in a strong position to develop products securely within the relevant regulatory frameworks.
Best practices for API-first banking
API leaders in the banking industry have blazed a trail for API-first banking, delivering tips, tactics and best practices for others to follow. Certain key elements have come to light in developing a successful API banking approach. These include developing a comprehensive strategy, focusing on the user experience, ensuring robust security measures and adopting a flexible architecture.
Suppose your fintech business is planning to embrace the potential of APIs, from a single banking-as-a-service API to an entire ecosystem. In that case, following these best practices is crucial. Indeed, McKinsey observes that this “more sophisticated approach to their use of APIs” enables banks to maximise the value they derive from them.
Banks’ approach is also showing how important they consider APIs to be to their future. Some 88% of API leaders in banking who were surveyed in 2022 reported that APIs have become more important over the past two years, while 81% state that APIs are a priority for their business and IT functions.
Develop a comprehensive strategy
Prioritising APIs and implementing an API-first approach starts with developing a clear and comprehensive strategy. Tyk’s free API strategy success kit is a great place to start if this is where you’re currently on your API banking journey.
Your strategy should focus not just on the APIs, their purpose and value, but on creating organisational alignment, managing your API programme, supporting API adoption and accelerating your API ecosystem – all in the context of your wider business plans and priorities.
The strategy should also consider the versatile and widespread contribution that APIs can make, whether through deployment as part of an API platform for internal use or for the provision of new services, such as embedded finance or banking as a service API.
Focus on user experience
No matter which vertical you operate in, the message is loud and clear: poor user experiences will push your customers towards your competitors. With banking APIs, who your ‘users’ are can vary based on your particular role within the business. They could be internal developers, third-party consumers or end users. In practice, you need to keep all three happy if your API-first infrastructure is to be a true success.
This means focusing on your users’ experience – all types of users – from the design stage of your API products. You then create, test, monitor and optimise to ensure your APIs deliver an outstanding user experience.
For internal developers, that could mean taking a platform engineering approach to ensure that workflows, code, tooling and more are all shared in a reusable way that enables collaboration. For third-party developers, it could mean providing security, seamless authentication and authorisation, easy integration, clear documentation and more. For your end users, the customer experience needs to enable them to achieve what they need in terms of online banking and transactions in a way that is at once totally secure and as frictionless as possible.
Ensure robust security measures
Security, of course, must be watertight, from its implementation to continual monitoring. Using a robust and reputable API management platform is a solid approach to ensuring that security is always a priority.
API banking is here to stay. In fact, API-first banking is the way of the future for financial institutions of all shapes and sizes. Why not take the first step in mapping out what that future looks like for your bank or fintech business by talking to the Tyk team? From security to compliance, we’ll answer all your questions about API-first banking and where it could take you so you can start building a comprehensive strategy that fits your business and your customers.