Open Banking APIs are Not Created Equally

There’s been a lot of discussion in the banking industry about open APIs that can enable different software technologies to work together with the promise of spurring innovation and shortening time to market for new services. It’s the right conversation to be having, but it tends to overlook the inherent challenges in banking software.

If we take an example from another industry, put yourself in the shoes of a hotel operator. If a potential guest wants access to the pool and your hotel doesn’t have a pool, there’s no room or package that will get them what they want. Adding a pool would be extremely costly and time consuming, if it’s even possible at all.

For most banks, adding a new feature or service often requires a large amount of time and money. Instead of the physical constraints of a hotel, banks have to deal with the technical limitations of their legacy systems, and far too often, some things can never be accomplished.

The promise of an open API is that it makes adding new services more modular and flexible. It’s like a key that could open every door at the hotel, providing access to the spa, the business center or the restaurant. Yet if there’s no pool, there’s no door to unlock. For banks, an open API still relies on the infrastructure that is already in place and the limited amount of data and functionality that is available from those systems. So even if a bank is utilizing an open API today, chances are they are still unable to achieve their business objectives.

For true building block modularity, banks need to find systems that offer granular API access across the entire schema as well as a trove of useable services. Then, they can more easily accommodate customer demand for the latest amenities, differentiating themselves from the competition and staving off the challenge posed by new entrants in the financial services space.

Banks are looking for this technology because they have been tied to a set of legacy core systems that are reluctant to open their systems at the component or data level and have architectural constraints based on a monolithic design.  With such constraints, core system vendors have been slow to innovate their product, and often charge prohibitive costs for banks to even access their own data.  In turn, this has eroded banks competitive position in the markets they traditionally have served. Now, consumers are finding payment, lending, saving and investing services though new fintech challengers and services, eroding the utility of a traditional bank in an always-on, all-digital world.

To keep pace, banks should examine how other industries have evolved in the past decade. Retail, social and fintech industry titans have been turning to systems that are built in the cloud using open standards that provide a fast onramp for third-party and homegrown components which provide immediate value and differentiation. Instead of wondering what advancements in artificial intelligence, databases, or IoT can do for their business, they can rapidly and seamlessly connect them into the heart of their operations. They can scale out with a cloud provider or on their own commodity hardware, leaving behind the days of million dollar servers and putting a focus on innovation over infrastructure.

For banking executives looking at the quantum leaps other industries are making, the path to innovation also includes the core. They need to push their vendors to provide the real-time access to data and function that their non-banking peers enjoy. Some vendors will be able to deliver, and some vendors will not – it’s up to banks to decide how they proceed in the face of competition and commoditization. With an API providing only a narrow window or scope, banks are left differentiating on the look of their mobile app or the location of their branches. However, a broad and deep API that goes down to the core unlocks new ideas in banking, and enables new levels of flexibility and innovation for banks.

There’s no reason why banks have to be on the outside looking in when it comes to the latest trends, such as eliminating friction for customers, or creating novel mobile services that intelligently transacts real-time in multi-currencies based on geo-locations.  Even fundamental banking operations like fee and interest calculations can be tweaked if systems allow for something elemental like the ability to define a period shorter than a day. Ultra-personalized offerings can be delivered, managed and automated, giving customers a whole new experience that can go beyond the ho-hum options of fees, rates and balances. More open APIs can deliver that, but core vendors will have to be pushed to unlock those doors. It’s time for banks to start knocking.

Frank Sanchez, CEO and Founder of Finxact has been at the forefront of core banking for 35+ years with the earliest real-time systems for Internet banks and now the industry’s first cloud-based core banking platform as a service. Find Finxact on Twitter and LinkedIn.