The banking industry is currently overwhelmed by technological disruptions and heightened customer expectations, with non-traditional players such as Facebook, PayPal, Google, and others quickly usurping roles previously played by banks. Non-traditional players have access to cutting-edge technology, which results in excellent user experience (UX) and innovative financial solutions. Customer expectations cannot be met by traditional banks which restrict themselves to digital solutions such as mobile apps or 24/7 customer service.

However, banks can choose to be savvy and make the right choice of opening up their APIs to these third-party products and applications. According to one survey, 55% of financial institutions believe that API integration is critical to business strategy. Banks need to collaborate with newer and non-traditional players and open up their APIs in order to remain competitive and witness growth.

API integration is an urgent need

Behavioral changes and customer preferences have vastly changed over the years, with millennials and Generation Z expecting more from their banks than older users. Providing excellent customer service and a great mobile application are simply not enough anymore, because of the innovative disruptions initiated by non-traditional players.

According to a report published by Intelligent Finance, Baby Boomers (or those born between 1946 and 1964) considered poor face-to-face customer service as a major determinant to exit a bank, while millennials revealed they would exit a bank not only if they disliked its smartphone app but also if it suffered from security breaches. Younger customers are also likely to quit a bank if they are unable to use their bank accounts on third-party applications and products. This is a gap that non-traditional players have capitalized on, and is an existential threat to traditional banks.

People aged between 18 and 34 are two times likelier than older customers to use mobile payments and P2P lending products. In addition, the same demographic group prefers to receive constant updates via preferred channels such as text message, app notifications, etc. As Millennials grow older and more affluent, and as Generation Z takes the place of the millennials, the importance of digital banks providing a holistic financial ecosystem consisting of third party products and services used by customers become more apparent.

Here are some successful examples of API integration:

  • People with financial difficulties in the USA have started to use P2P lending tools such as Earnin and PayActive. It is now possible to consolidate debt too, thanks to debt aggregators. Marcus from Goldman Sachs and SoFi are often cited as examples for non-traditional lenders. Often, these tools are integrated with e-commerce sites or food delivery apps so that people can purchase what they need on credit, bypassing banking lending rules.
  • Credit unions are a non-traditional alternative to bank loans. Walmart MoneyCenters are extremely popular today because they offer a borrowing alternative to people with poor credit histories. If banks integrate their data with these products, customers can continue to make payments for P2P loans without canceling their accounts.
  • One of the best examples of API integration is when PayPal decided to integrate its API with Siri. iPhone users can send and receive money via PayPal by speaking to Siri.
  • Wave is an invoicing and accounting software used by businesses and individuals. Wave uses banking APIs to help users control all their business finances in a single place. It collects as much data as possible from various sources and even markets loans provided by OnDeck on its platform to eligible users.
  • Larger banks have started to offer data aggregation services to their customers. For instance, HSBC recently launched its Connected Money app, on which customers can view their account details in 21 other banks without ever leaving HSBC’s application.
  • Facebook Messenger payments allow Facebook users to transfer money to their friends without ever having to leave the network. Facebook currently has integrated the APIs of PayPal, Stripe, Visa, MasterCard, American Express and others.

If traditional banks do not understand the metamorphosis that has already taken place, they stand to lose more of their existing and future customers to non-traditional players.

Specific reasons for API integration

  • In order to survive technological disruption, banks need to engage in business model reinvention, which includes open banking and partnering with the newer third-party apps and products.
  • While the producer market consists of banks and other financial enterprises that create products and services, customers can access these products and services on third-party applications, websites and or use voice control. Capitalizing on these distribution channels by opening up APIs is very important for banks survival.
  • E-commerce and on-demand services such as Uber and Airbnb have spurred a customer-centric demand for always-on banking
  • Internet of Things (IoT) enabled devices have led to a growing need for smart solutions and banking services available on intelligent devices
  • Omni-channel banking experience requires data exchange between apps, and customers take this facility for granted now

What kind of apps need integration?

New services and applications that need API integrations with banking applications include:

  • Payments, clearing and settlement services
  • Mobile and web-based payment applications
  • Digital currencies (DCs), Blockchain and Distributed Ledgers
  • Deposits, lending, and capital raising services
  • Crowdfunding
  • Market provisioning services such as smart contracts and e-aggregators
  • Emerging technologies such as Big Data, cloud computing, Artificial Intelligence (AI) and robotics (Robo-advice)
  • Electronic trading and insurance

API Integration can prove to be challenging

If you thought your in-house developers can release an API along with the application, you will be disappointed to learn that in 2019, it is a very complex situation.

  • Developing an integration workflow consumes the most amount of time during API Integration, and requires special skills.
  • Event Driven Integration is far more complex than simple API integration, as it needs to provide real-time status updates to customers. Real-time status updates are crucial in today’s financial market.
  • APIs are not always uniform and there are no industry standards at the moment. 70% of the developers work with REST APIs, which makes it a wise choice for API Integration. However, REST APIs will not work for all kinds of applications and products. APIs may also vary depending on the jurisdiction.

Here are a few other APIs commonly used by digital banks:

APIs Jurisdiction
Barclays APIs India, France, the US, UK, China, Brazil
Bank of Cyprus APIs UK, Russia, Cyprus, Greece, etc.
Banco Bilbao Vizcaya Argentaria (BBVA) European Union, USA, Argentina
Deutsche Bank APIs USA, European Union
Citi APIs Mexico, USA, UK, China

Consequently, you will need the assistance of a technology partner who can help you make the right API platform choice. Here are some of the important checkboxes that your API Integration vendor must fulfill:

  • Vendor’s technical architecture is open and can easily integrate with core-banking systems
  • The vendor should have the capability to help you with end-to-end digital transformation
  • The vendor has experience in creating frictionless and omnichannel user experience (UX)
  • Has a strong counter-fraud strategy and security measures in place
  • The vendor can provide IT and digital adoption consultancy services
  • Vendor understands and helps you comply with various regulatory requirements across jurisdictions

At the end of the day, digital banking cannot rely upon API integrations alone. Banks should look forward to creating sustainable financial ecosystems with their technological partners, in order to remain profitable in the years to come and to surpass customer expectations. The assistance of experienced partners who can provide end-to-end digital transformation solutions that include API integrations is invaluable.

This article was originally published at https://www.indusnet.co.in/why-api-integration-is-a-must-for-digital-banking-growth-in-2019/