In the open data era, it is essential to understand how your organization can exchange information via APIs, and what it can achieve by doing so
In recent years, information sharing has come to the forefront of business, with an array of government and market initiatives related to open data. In the financial sector, players have been quick to understand the value that data offers for expanding services and ensuring happy customers.
To see the potential offered by open architectures, it’s important to understand the core that makes this trend possible in an increasingly interconnected world: APIs.
Application Programming Interfaces (APIs) are a standardized way for two institutions’ technology platforms to exchange information, securely.
APIs open access to third party technology, without knowing the source code or complexity of the other party's system. In other words, they simply create a connection from one platform to another, without providing details about the other side.
A major trend in financial services today is for digital platforms to add products and features from other companies to their apps and, similarly, to provide their own solutions through third parties. By adding new features to their digital channels, banks, retailers, or transport companies can make themselves more relevant to their customers.
APIs can be used in many ways – and we encounter them every day, without even knowing it.
One example is the weather apps on our phone. It is not that Google or Apple have installed weather sensors all over the world, it’s that their apps use APIs to tap into forecasts from a third party, such as The Weather Channel.
APIs are also a particularly useful tool for developers, especially within the financial industry, as they can be used as a blanket to hide the complexity of a system.
Developers of digital banking channels don't have to worry about setting up a WiFi connection from scratch for each operating system on a different computer or phone, for example. APIs lighten the burdens, while also adding functionality – such as communicating with GPS sensors and other tools to interpret spending locations.
Simply put, APIs enable developers, and therefore companies, to be more efficient in creating solutions.
Let's take a look at a digital payment platform such as PayPal. An online store can connect to its API, and very easily, generate a payment menu where customers will find multiple ways to make a purchase, without exposing their personal information.
It works like this: once the payment button is pressed, the application sends an "order" request to the PayPal API specifying the amount to be paid along with other transaction data. Then, a pop-up window authenticates the user and confirms the purchase. Finally, the API sends the payment confirmation to the portal that is making the sale.
In Europe, and increasingly in Latin America, open banking regulations require financial institutions to use APIs to share their customers' information - with their permission and in a secure manner. This creates an environment for services, payments and products to be tailored to everyone, built in collaborative spaces.
However, their purpose goes far beyond a regulatory obligation. APIs also represent a unique business opportunity because they expand the ways your company can connect with potential partners, while monetizing the use of the data.
One example is institutions that offer Bank as a Service (BaaS) and White Label Banking to other companies, such as retail giants that partner with financial services companies to enable transactions in their apps.
Another advantage comes from using APIs to understand your own customers better. Analyzing the data obtained through these connections allows your institution to offer more personalized products and services to your clients.
APIs are a tool to create new business models, so it is important to set out a solid commercial strategy from the start.
The main fee structures for APIs can be grouped into two models: pricing for each use, or on a monthly basis.
In the first model, third parties will pay only for what they use and their revenues will be more closely related to their costs. To set a price for access, the data provider should first establish a process to monitor usage and understand how third parties would use it.
In terms of monetary value, this should be directly related to how the data will be used.
Defining the commercial strategy is increasingly relevant. The global API market stood at US$1.1 billion in 2018. It is projected to grow at a compound annual growth rate (CAGR) of more than 22% during 2019-2024, to reach US$ 3.6 billion in 2024, according to a projection made by the firm Research and Markets.
Data transfer via APIs is rapidly becoming a major business.
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