Becoming proficient with APIs is a top objective for most banks as they continue to invest in API programmess, write LUKAS EVERDING, MALIN FIEDLER, HARALD KUBE, TIMO MAUERHOEFER, NILS MOTSCH, and HENNING SOLLER.
For banks and financial institutions, APIs are here to stay—and will only grow. Over the past decade, companies had often been hesitant to use APIs due to a lack of clarity on the value they could generate. Now, financial-sector executives are more confident about the benefits of APIs for business automation, scalability, and acceleration.
Our recent global survey on APIs in banking revealed that 88 percent of respondents believe APIs have become more important over the past two years (see sidebar, “About the research”). Moreover, 81 per cent think APIs are a priority for business and IT functions. Large banks are launching API programmes and allocating about 14 percent of their IT budget to APIs on average.
The appeal is clear: APIs are easy, fast, and secure ways for customers to access banking products and services. They are also versatile. Banks and financial institutions are increasingly looking to deploy APIs for all areas, from traditional business to the emerging playing fields of banking as a service, platform as a service, and embedded finance. APIs are vital for any technological architecture of the future, but financial-sector executives must ensure their organizations have a clear strategy for maximizing the potential of APIs.
API coverage and maturity are constantly growing
Our survey found that banks are gaining confidence and steadily improving their API maturity along key strategic, technological, and people dimensions (Exhibit 1). APIs are growing in strategic importance within banks, which have increased efforts to prioritize and build API road maps.
Exhibit 1
APIs in banking continue to improve along key dimensions, particularly regarding strategy and people.
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Across the industry, the business side of banking broadly acknowledges the strategic importance of APIs, but we observe an opportunity to improve the operating model: IT leaders still point to an absence of effective business-driven prioritization and strong governance as the primary roadblocks to widespread adoption. Since the last survey, governance and business and IT collaboration in API programmes have not improved and remain a critical pain point. One IT head noted, “Some organizations continue to not understand what APIs are and how the business can benefit from them.”
As one indicator of these roadblocks, funding for APIs has declined compared with previous years. Potential reasons include APIs not being as embedded in the business case life cycle, and a reduced focus on regulatory programmes that require APIs. Companies must reassess whether the current structure for API programs can deliver on their timelines.
Meanwhile, survey respondents report increased technological maturity. The industry has benefited from the proliferation of API developer portals for fast and efficient publishing and usage. Further, the establishment of more standards and guidelines, as well as the introduction of an API taxonomy, facilitate development and reuse.
Some leading companies have achieved a technological maturity that outpaces the business side’s understanding. At one large European bank, the IT function was technologically ready to provide an appealing loan offering through APIs to a niche group, but it took the business more than six months to deliver its part and go to market with the product. Banks must evolve their business processes to make full use of the new power of APIs.
The people dimension also continues to improve. The prevalence of an API-first culture within banks has jumped significantly, indicating that APIs are playing a more important role in decision making. This trend is also reflected in the growing number of training and awareness programmes at banks to develop internal talent. As in other industries, financial institutions have found it challenging to attract the necessary talent to develop and lead API initiatives.
The goal of deploying APIs has changed from cost savings to monetization
In addition to growing maturity, the survey revealed a shift in the objectives of API efforts. Initially, banks started their API journey to comply with regulations such as PSD2 (a European regulation on electronic payments systems). The focus has shifted to capturing cost savings—for example, by reducing IT complexity (18 % of respondents) and enabling agility (18 %). APIs help to decouple systems and expose functions.
With API functionality and microservices, systems can become more independent and be delivered faster. For example, Emirates NBD started a program in 2017 that put APIs at the core of its IT architecture. With this approach, the institution was able to develop a flexible architecture that significantly boosted the speed and efficiency of new product delivery, in part through a decrease in integration efforts. Repetitive development work fell significantly through the modularization and reuse of functionalities.
The shift in objectives for API programmes has been striking. Innovation was ranked fifth in 2020 but became the leading reason for API deployment just two years later. One catalyst was that banks modernized their legacy systems, which had been obstacles to innovating in the digital space. With these new systems in place, banks can focus on new products and services that increase revenues.
Top objective of API efforts:
2020—Reduce IT complexity
2022—Drive innovation
While almost half of respondents (44 percent) expect to decrease costs by more than 10 per cent through their API efforts, a third of respondents (31%) expect to increase revenues by more than 10 per cent (Exhibit 2).
Exhibit 2
Companies have different expectations for the impact of API programmes on revenue and costs.
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The most common use case has become payments: banks are planning to increase the monetization of open banking in the coming years. However, most banks currently lack a strategy for how to monetize their APIs, making it the next step in capturing the benefits of a technology-driven business model.
Another emerging change is that banks are opening up APIs to the surrounding ecosystem. Three-quarters of today’s APIs are still internal (that is, they are targeted at developers or customers within an organization), while only one-quarter are available to partners or the public. Internal APIs continue to be important and should not be overlooked; they enable efficiency and speed, and they significantly reduce integration costs. Banks are planning on increasing the share of APIs available for partners and the public to almost 50 per cent over the next three years, laying the technical foundation for wider ecosystems. In recent years, traditional banks in the EMEA region have been spending tens of millions of dollars to set up their own digital native banks as they prepare to shift to an open finance ecosystem.
When executing API programmes, IT leaders cite collaboration with the business as their top challenge, particularly in the alignment of priorities. While the business has started to grasp the tremendous value of APIs, IT leaders believe APIs could move higher on the overall business agenda. To accelerate progress, IT leaders could strengthen the dialogue with their business counterparts by highlighting the direct and tangible benefits APIs can create for the bank. For example, they enable the launch of entirely new business models in a matter of months. APIs also give partners access to banking services (such as loans or accounts) to develop complementary products, which increases the bank’s reach and effectively opens up a new distribution channel.
APIs have also given rise to a whole new group of fintechs: banking-as-a-service players. Their business models rely entirely on providing banking products and services via APIs, so they do not need to worry about the front end.
Because the competitive landscape keeps evolving, financial institutions that fail to capture APIs’ benefits may find themselves lagging behind the competition.
How companies can unlock the full potential of APIs
Our survey analysis suggests the banking industry is on its way to harnessing the innovation potential of APIs. Today, 50 per cent of interfaces in banks are APIs (compared with other options such as enterprise service buses), although they are mostly internal. We expect external APIs to gain more traction in the coming years, but strategic planning will be critical. Executives should answer three essential questions:
Which APIs should be implemented and in what order?
How can external APIs be monetized?
How can the operating model maintain alignment between business and IT on API prioritization and governance?
Several IT leaders have reported difficulty in establishing an API governance model due to limited knowledge of best practices. We encourage IT leaders to prioritize building API capabilities to reinforce the importance of APIs in pursuing business opportunities and accelerating implementation. They also need to encourage the business to take ownership of API programmes. In the long run, this approach will help set up effective governance, elevate APIs on the organization’s road map, and provide IT leaders with the mandates they need to achieve a tech-driven future business model.
For the programme’s implementation, leaders also need to answer people-related questions: What skills, capabilities, and talent are required for a successful programme? How can I source or internally develop the missing skills? A range of technical questions must also be addressed around the design of the API architecture and deployment of the API management platform. To achieve the API vision, all four dimensions—strategy, operating model, technology, and people—need to be considered.
Three things to get right for successful API monetization
In addition to setting up an API programme, leading companies already have a successful API monetization strategy in place. They also get three tangible factors right:
They prioritize APIs up front but also continuously track performance. By creating transparency about API usage and monetization effectiveness, they can reevaluate their focus on a regular basis.
They actively scan the market for new trends and developments and explore new ways of monetization with a “fail-fast” attitude. This cadence gives leaders a constant stream of fast feedback, allowing them to incrementally improve their offerings on short time scales.
They select key partners in adjacent and complementary offerings. Leaders collaborate with these partners to roll out and evolve API monetization approaches for their mutual benefit.
The business models of the future are technology-driven, and APIs are the foundation. We encourage technology leaders in banking and financial services to reap their full potential.
Lukas Everding is a consultant in McKinsey’s Munich office, where Nils Motsch is an associate partner; and Malin Fiedler is a consultant in the Frankfurt office, where Harald Kube, Timo Mauerhoefer, and Henning Soller are partners.
