One of the most compelling signs that traditional, mainstream banks are beginning to engage with new business realities has been their relatively late support of APIs for the purpose of enhancing banking applications around their brands.

An application program interface (API) is a set of routines, protocols, and tools for building software applications. The API specifies how software components should interact. In a banking context, it allows third party developers to develop powerful and attractive applications based on existing bank customer information.

APIs first arrived on the scene in 2000 when salesforce.com and eBay published APIs to enable third party developers to develop applications that could integrate with their core platforms. This ultimately led to the evolution of effective ecosystems around their offerings, thus greatly enhancing customer utility.

Banks have been slower to adopt APIs but are now doing so in earnest as they seek to harness financial innovation for their benefit and counter new competitive forces. Enabling legislation such as the Payments Services Directive (PSD) and the Second e-Money Directive  in Europe has seen a host of cherry-picking ‘Fintech’ start-ups, none of which have a banking licence but which are picking off formerly lucrative business lines (such as payments) where they can. Their offerings are characterised by extremely attractive and intuitive front-ends delivered through mobile applications – all of which serves to highlight shortcomings in the conventional banking sector.

The rise of new entrants is happening with the support of governments and regulators and the same bodies are also encouraging the development of APIs in finance. A lack of standards, however, is inhibiting progress in some cases, as noted by the UK Treasury this year.

“An open API standard would entail UK banks developing a single and common API, which is publicly available and can be used by any FinTech firm or app developer to design products or apps which work for all UK banks. This would help to create a better market for app development and a greater ecosystem for FinTech firms and developers to work within, as a single app could then connect with, and be used by customers from, any bank. This would help to ensure that the UK remains at the forefront of financial technology and innovation.”

Banks have traditionally guarded any access to their technological platforms with extraordinary zeal. In a world where the traditional perceived security of banks is one vital remaining competitive differentiator this seems sensible, but the demands of the new competitive marketplace has forces a review of past attitudes.

Banks have been forced to adopt and enhance digital channels but have implemented this by adding a host of their own new, front-end applications that improve the customer interface and provide a working fix but have done little or nothing to render the underlying systems architecture fit to consolidate customer information from all parts of the banks.

Banks, therefore, have been hampered in adopting APIs by the existence of these legacy systems, that has meant that APIs are forces to extract data from siloed databases, all of which integrate with the API independently.

In spite of these complications, however, there is much evidence that banks are increasingly willing to set aside cost issues in order to increase customer utility through third party innovation.
Earlier this year Barclays Bank admitted a further ten companies to their accelerator programme, giving each of the successful applicants $20,000 seed capital and access to their APIs and other resources. Ulster Bank organizes a two day hackathon in January – “a marathon of brainstorming and software building focused on new thinking for banks and bank customers.”

The rationale for these initiatives was expressed by a Barclays officer: “We recognise that to drive innovation within Barclays, we also need to look outside of the organisation and embrace the innovative start-up ecosystem... I’m looking forward to working with these start-ups as we shape and co-create future financial technology. Many of the teams enrolling today are exploring technologies that could particularly help transform the ways banks operate so I’m keen to see how their ideas develop.”

According to Currency Cloud, one of the dynamic new companies hoping to profit from the new API regime, banks’ main consideration regarding the use of APIs seems to revolve around solving the issue of customer aversion to cumbersome security measures. “Utilising APIs to build more convenient services that don’t compromise security will increase trust in banking services as users will no longer be required to hand over their log-in details and passwords, potentially compromising their online banking guarantees.”

It seems inevitable as more and more third party apps are endorsed and facilitated by the banks that the face of banking seems set to change markedly over the coming years.