Gone are those days when traditional financial institutions like banks could monopolize the financial industry. The millennials and Gen Z has now taken center stage in driving the economy. In fact, their spending power has crossed $3 trillion. As a digital-native generation, millennials and Gen Z prefer payment flexibility. They do not hesitate to disengage with brands that do not offer them flexible payment options. This has led to the steady growth of fintech companies that find innovative ways to acquire and retain customers. Banks have started facing stiff competition from fintech companies. To stay competitive, thrive in this hyper-competitive space, and meet the evolving demands of next-gen customers, banks have also begun undergoing digital transformation and innovating too. One such change that they have made is adopting the API-first approach.
Banks realize that we live in an API-driven economy. Hence, they have started to use API to build next-gen payment platforms. API protocols are replacing several legacy technologies, such as terminal device protocols.
Let’s look at other benefits of adopting an API-first approach in payment.
Benefits Of API-First Approach Payment
- Improves payment experience: Payment experience is the main reason why banks are taking an API-first approach. Customers want a solution that can help them to make transactions, make purchases, pay monthly bills, and check their balance with ease. They also seek options that allow them to purchase products on credit, defer their payments, or pay for products in installments. APIs enable banks to provide such flexibility. Banks can either collaborate with fintech or build their own API-based architecture. They can connect their core systems to provide a seamless payment experience, personalize their payment journeys, and launch new products and services quickly.
- Fosters innovation:Perhaps banks and innovation may seem like an unlikely combination. However, innovations have become the need of the hour for banks to survive. Considering how the market landscape, customer needs, and technology changes rapidly, banks have to develop innovative products to keep pace and meet expectations. Unlike the legacy platforms that are built on monolithic architecture, API-based platforms are built on microservices architecture. This enables the developers to create new products quickly or add new features to existing products within days. The agile framework of the API allows banks to respond to market situations and customer demands quickly. APIs can be easily configured, so developers can save time on adding or experimenting with new features.
- Offers competitive advantage :Banks understand that their greatest competitors right now are fintech companies. Customers prefer using fintech apps for the payment flexibility they offer. The only way banks can gain a competitive advantage is by adopting open banking. Open banking helps the banks to provide value to customers through fast-paced innovations and personalized solutions. Open banking leverages API architecture. So, it’s easy for banks to respond to customer needs quickly and customize and build innovative products. They are able to create and operate like leaner fintech companies. API-driven open banking is not a good-to-have value-add anymore. Banks will have to seriously consider implementing it to stay relevant and reduce customer churns. According to Accenture’s study, banks that were not open to embracing open banking risked losing their revenues by 30%. Those that adopted it could potentially earn 20% more revenue. It’s clear that banks have to pivot and use APIs to stay in the competition. API also allows them to integrate with fintech, which can help them stay a step ahead of the curve.
- Opens new revenue streams :Banks are witnessing slower growth in recent times. They need to look for new revenue streams and think of new business models. APIs can help banks to open these new revenue streams. Banks can use APIs to exchange data within and outside the ecosystem to build data-driven, custom products. They can also collaborate with fintech companies to leverage new channels and build a new revenue stream. Banks can experiment with different pricing models such as pay-as-you-go or tiered pricing. They can also use APIs to develop products with value-adds to generate revenue in new ways. The objective is to stay relevant and find new ways to generate revenue to grow business.
- Enables the transition from products to a platform :Companies like Uber, Airbnb, and Amazon have already built their platforms. Platform banking is relatively still new. However, banks can consider it to build a sustainable, future-proof business. Banks can build a complete ecosystem of products and services and act as a single touchpoint to enable customers to make payments, pay bills easily.
Take UK-based Starling’s example. It started its operations in 2017. Apart from its core banking platform, it has partnered with different service providers such as TransferWise and Apple Pay to create an ecosystem. So, apart from the usual banking services, customers can use the platform to make cross-border remittances, etc. Open APIs can integrate new products and services to offer value-add services and flexible payment options to customers.
Although banks realize the importance of the API-first approach, they take a more reactive stand to it. They prefer to use legacy systems with monolithic architecture to continue with their business. This could be due to various reasons – lack of strategy, no buy-in from the management, and hesitance to transition to cost-intensive IT systems. API-first approach might also need an overhaul in existing processes and training employees and vendors to use it. There is also a challenge of fragmented implementation as many processes or geographies may not be prepared or mature for API implementation. Banks can overcome these challenges by designing a clearly defined strategy and partnering with the right expert who can help them with the end-to-end implementation, including the change management process.
The API-first economy is here to stay, and it will continue to grow as customer needs increase. It’s time that financial institutions take cognizance of this shift and embrace API-based strategies to grow business.