Why APIs matter (in Banking)

Basics first: API stands for “Application Programming Interface” and is essentially a method for electronic systems to exchange information or trigger certain actions. The internet is full of that stuff and I bet every major digital industry you can think of is making extensive use of them. Well except the majority of the financial industry. That one is still largely stuck in the past where everything was based on paperwork and systems are gigantic monolithic monsters nobody dares to touch.

 

Now you might wonder why such a clearly technical topic should be of interest for you, so let me come straight to the point (or actually the two of them):

  1. It leads to antiquated and stale systems
    The lack of internal APIs is often equivalent to using centralized single services that grow into an unmaintainable mess. In the financial industry that’s mostly mainframes written back in the 70s using programming language most have long (and happily) moved on from. Breaking these down into more workable chunks is a huge undertaking and risks to the whole thing to come crashing down like a house of cards.

  2. It stands in the way of innovation
    Not providing APIs for external use (ideally similar to the internal ones) leads to closed off ecosystems. That effectively forces most innovation to come from the banks themselves, which are notoriously slow, amongst others due to the point above. That’s made even worse by the generally high barrier of entrance of most financial services.

 

Traditional banking has been continuously falling behind the curve and I believe the point will come where particularly younger generations won’t be accepting it any longer. Most things today are available everywhere and instantly, so why do I have to e.g. wait for bank transfers to go through? Or fill out an intimidating amount of paperwork physically? According to this report the majority of Millennials in the US would rather go to the dentist to get a cavity filling than move their bank accounts to another commercial bank. I can’t say I’m surprised.

 

Not all is grim though, fintech startups keep winning ground and many traditional banks have had their wakeup calls. PSD2 is a new European directive coming into effect in January 2018 requiring financial institutions to open up their service and providing at least some APIs for external use. Sadly there’s little actual specification on how these APIs should look like, so we’ll have to see what banks do with it, but I choose to be cautiously optimistic and can’t wait to get my hands on e.g. https://nordeaopenbanking.com.

 

There has been a lot of talk lately around Artificial Intelligence, the blockchain and how they will disrupt the financial industry. But while I’m an avid proponent of at least the former I believe the biggest problem and lowest hanging fruit is still another: the opening up of financial systems and cultivation of reliable APIs, both internally and for public use.

/Sven

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Sven Perkmann