Over the last few years, the financial industry has undergone a digital transformation. But how can traditional financial institutions keep up with the updated regulatory standards and consumer preferences of the new digital era? Audrey Hall, chief product officer at Brightwell, puts forth the case for APIs and all they bring to the table.
The sun is setting on the traditional banking model. Over the past decade, the world’s largest banks successfully weathered the financial crisis during the Great Recession. However, to ensure a similar situation does not happen again, regulators now require banks to comply with additional compliance standards to avoid legal penalties and fees. For example, the 2010 Dodd-Frank Act put new guardrails in place for financial institutions, requiring some of the country’s biggest banks to undergo periodic stress tests to ensure they can overcome another crisis. While these obligations evolve over time, they require constant attention and product adaptation.Â
As the financial industry goes through a digital transformation, traditional financial institutions (FIs) must apply the same regulatory standards to their digital banking practices and services. However, meeting compliance standards in a digital financial environment is no small lift.Â
Outdated legacy systems make implementing new systems challenging for existing IT architecture. Many of these systems were constructed more than 50 years ago for electronic funds transfers and card services and are either abandoned by fintechs or supported by patchwork infrastructure additions that further complicate new updates. While this transformation is arduous, traditional financial institutions cannot afford to digitize their business model. According to a recent report, 90% of consumers in the US and Canada use online and mobile financial applications to manage their moneyOpens a new window . Further, 59% of consumers use digital apps, products, or services to send money to friends, family and businesses locally and abroad.
With so many services available, putting consumers at the center of business decisions is critical to success in fintech. Not only do banking executives and fintech leaders need to keep pace with new trends, but they need to problem-solve ever-changing customer pain points continuously. Now more than ever, financial leaders are questioning how to create a digital architecture that will not only meet their customers’ needs and increase their bottom line but also meet the ever-evolving regulatory standards in the industry. Can APIs be a part of the solution?
What are APIs?
APIs, also known as application programming interfaces, are lines of code that serve as communications tools that take requests, translate them and return responses. This revolutionary tool enables data sharing in today’s interconnected world. As online commerce boomed from 2000 to 2002, digital giants like Salesforce, eBay and Amazon developed APIs to allow developers to access commerce data for a wide range of uses. Fast forward to today, APIs have opened the door to interoperability, enabling disparate financial systems to communicate with each other easily.Â
Yet, the financial industry is still trying to understand the benefits of APIs. In fact, McKinsey estimated that most banks are still in the development phase in terms of understanding how data-driven businesses fueled by APIs Opens a new window will work. In fact, banks are taking small steps towards implementing APIs and are seeing positive returns from their progress. It’s been proven to increase customer satisfaction and business expansion by creating new revenue streams and a more tailored customer experience, as well as cutting costs and boosting efficiency internally.
APIs have the ability to empower fintechs to integrate new offerings to create a more personalized experience for end users that further attract and retain customers. Currently, fintechs, banks and other payment services often utilize open banking APIs to connect to a user’s bank and retrieve their balance while also providing a separation between these entities, ensuring a safe data exchange for its users. For example, in 2018, BBVA launched its BaaS platform, Open Platform, in the US. Open Platform utilizes APIs that allow third parties to offer customers financial products after passing strict compliance and security checks without needing to provide a full suite of banking services.Â
The service also enables companies to connect into a core digital banking platform, where they can access their APIs. Further, banks are using APIs to develop mobile apps to allow customers to access their account balance on the go, quickly locate ATM locations or utilize a virtual debit card for a contactless shopping experience.
For cross-border payment transfers, slower payment methods like SWIFT, international wire transfers and paper checks have paved the way for APIs. Specifically, APIs can help fintechs meet the growing demand for quick, convenient, secure money transfers. In addition, APIs can be used to easily integrate the remittance infrastructure into existing applications that don’t currently offer it. While they have been around for many years, APIs are now proving to be indispensable to organizations. Using a thoughtful approach, APIs can transform your company by speeding go-to-market plans and allowing users to pivot quickly as customer expectations and industry trends shift constantly.Â
In today’s fast-growing and highly regulated market, APIs can help fintechs meet ever-changing compliance standards that differ by region with speed, provide access to the countries that consumers want to send money to, enable fintechs to launch new services into the market quickly easily, and most importantly, make the process of moving funds to and from disparate platform easier and faster.
Adapting to Consumer Needs Better
In today’s digital world, consumers are demanding more transparency, security and speed from their remittance services. Requiring minimal coding to implement, offering secure methods of payment transactions and speeding up a go-to-market strategy, APIs can be beneficial to fintechs, businesses, banking institutions and startups alike.
APIs benefit not only the company that implements them but also the overall customer experience they provide. They have been proven to reduce response times for data uploads and help to simplify automated processes within applications. By powering mobile & web applications and Internet of Things (IoT) devices, APIs are used as a simplified way to transfer of business-critical information. They play a key role in digital and customer experience initiatives for businesses of all sizes.
APIs can be the building blocks for digitally transforming a business, but to do so, these organizations must define which API-enabled capabilities they need and the infrastructure required for their team. Additionally, it will be important to measure the results of these efforts to optimize your organization’s API program and to continue developing your solution.
As customer preferences and the global standards for transactions continue to evolve, API integrations are the answer for banks to meet their customers’ needs.