In the UK the refinement and implementation of Application Programming Interface (API) technology is continually gaining support from the Government, major incumbent financial institutions, challenger banks, e-commerce and retailers as its potential becomes increasingly clear. As modern banking consumers expect quicker and more convenient access to their funds and financial resources, APIs are becoming the obvious and practical means to port the most promising innovations of FinTech start-ups over to the front end of both established high street banks as well as challenger banks.
Governmental Endorsement of APIs
At the beginning of 2015 the Government took greater interest in the state of major incumbent banks, noting that they weren’t innovating with the same speed and surety as the more agile challenger banks that have been quicker to implement the cutting edge innovations of FinTech start-ups. Subsequently, in February HM Treasury launched a ‘call for evidence’ on the benefits of greater data sharing and use of open data in banking, which resulted in a report highlighting how high street lenders are indeed utilising APIs but a lack of standardisation is hindering the effectiveness of their deployment.
This coincided with plans drawn up as part of a consultation announced in the Autumn Statement that encouraged the development of an open API standard to be adopted by all participating banks. Now, the Government has committed itself to crafting a detailed framework to achieve this goal by the end of 2015. It is their belief that a common API standard would have particular benefits for product comparisons, keeping the banked UK population more informed about their options for traditional banking services and subsequently encouraging greater competition among banks to offer better products and foster more lasting and personalised relationships with their customers.
A Treasury spokesperson said:
“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.”
The Big Banks’ API Approach
Although big banks are well aware of how agile and innovative their newcomer market competition is, their legacy IT systems often present serious and specific challenges to overcome when trying to adopt similar innovations themselves. APIs are a prime example of this. Many banks have an IT infrastructure that was developed before the introduction of modern data sharing techniques and then upgraded in a piecemeal fashion over the course of decades rather than years.
This makes API adoption problematic since retrieving new data from core banking systems running on mainframes becomes a lengthy, complicated process. For some banks, drawing together information from across multiple databases will also present major data sharing and compatibility challenges, with each siloed database required to connect to the API independently.
This raft of challenges adds to the overall cost of API adoption, which could quickly run into millions for some of the major banks as more experts in this very specific field will need to be hired to work out the tangles in their legacy IT systems.
However, despite the difficulty there is plenty of evidence that big banks are willing to rise to the challenge. Startup accelerators programmes give aspiring FinTech innovators the opportunity to demonstrate their potential and the most promising applicants secure themselves the chance to bring their designs to the market while utilising the host bank’s resources and support.
Last month Barclays admitted another ten companies to their accelerator programme, giving each of the successful applicants $20,000 seed capital and access to their APIs and other resources.
Derek White, Barclays chief design officer, said in a recent interview:
“We recognise that to drive innovation within Barclays, we also need to look outside of the organisation and embrace the innovative start-up ecosystem. As the second cohort kicks off in London, 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.”
Similarly, RBS has emphatically demonstrated its support of API sharing to utilise the innovations of smaller companies. James Lynn, head of e-channels, GTS at RBS said:
“FinTech start-ups are often agile, lean and nimble, there are obvious advantages for RBS to partner with some of these firms. That’s where the APIs come in. The concept is to enable the services provided by global transaction services to be accessed directly and securely by players in the market, such as fintechs, software firms or other service providers.”
RBS’s 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.
Earlier this year, RBS subsidiary Ulster Bank ran a two-day hackathon together with the Open Bank Project. The event allowed programmers, designers and coders to access the Open Bank Project API and build financial services solutions that were subsequently pitched to a jury of bank executives, entrepreneurs and venture capitalists. Winning teams secured cash prizes and invaluable exposure for their solutions.
API security is critical to success, and this fact has not been lost by UK banks and business investing in API technology and solutions. Jason Macy, the CTO of Forum Systems, recently said:
“The UK’s geographical location has contributed to its role as a central hub for millions of people to come and go from many different countries via several different methods of transportation. In order to keep track all of these people, the UK is constantly exposing APIs to integrate all of its borders and government agencies. And, because of the sensitive nature of the information being exchanged, the UK places the highest security around these integrations. In addition to the UK’s central location, the high population density further helps to foster more social collaboration and sharing of best practices on API security among IT security professionals. This social collaboration has led to increased adoption of what we call the “security-first mindset”.
Challenger Banks Adoption of API
The number of UK listed banking groups is expected to triple over the next two years and their market share is already growing. According to the figures published by the British Bankers’ Association (BBA) earlier this year, the challengers accounted for 28.8% of gross mortgage lending in 2013, up from 17.5% in 2011. By 2018, it could double again.
Unlike the major market incumbents, challenger banks and alternative finance providers entering the banking sector don’t have a cumbersome legacy IT system to circumnavigate. It comes as no surprise that they are more inclined to utilise API technology in order to design and export their products that can appeal to both the mainstream banking user as well as more underserved areas of the market.
The challengers’ willingness to adopt API technology doesn’t only stem from their leaner, more digitally agile nature, but also from the fact that they have sprung up in the wake of the distrust of big banks caused by the financial crisis of 2008. Falling consumer trust in the established lenders led to the creation of many of the challenger banks and as such they aim to represent the face of more open, transparent and secure banking.
An Open API Standard Set for Implementation by 2017
The importance of creating and utilising an open API standard is clearly not lost on any of the UK banking sector’s players or its government. Many of the big banks are carefully investing their time and resources to encourage API development through start-up accelerators and hackathons, ultimately with the hope of catching the most promising new innovators and building positive relationships with them.
Challenger banks have technological adoption woven into their culture as they appeal to the digital generation with products built around convenience and transparency. An open API standard helps them adopt the latest banking innovations that mark them out from their more established competitors and will no doubt help them make a greater impact as more challenger banks enter the market in the coming years.
With a governmental commitment to collaboration with all UK banks to develop an open API standard – an innovation that offers benefits to all concerned parties – it seems more than likely that the cost factors and challenges involved will be overcome in order to realise those benefits. The API project is estimated to take two years to develop and implement, though the actual timeframe will depend greatly on the commitment levels of all participating banks.