Placing programs and data in the “cloud,” instead of fencing them off in the glass house on bank-owned mainframes, is not the conventional way banks manage programs and data. But Gartner’s 2010 CIO survey identified cloud computing as the No. 2 strategic technology investment for CIOs globally. Now the same top companies that are leveraging the cloud are thinking about application programming interfaces (APIs) and open platforms as the best way to stay competitive in technology-based businesses. And many of those companies are in financial services.
An API is a set of programming instructions, protocols and code that exposes network and service functions to third-party developers, enabling them to build compelling new products on your core services. Google Maps is one of the best known examples; its freely available code has been used to embed map services in thousands of applications.
Once the darling of Google, Amazon, Netflix, eBay, Facebook and Flickr, APIs and open platforms are gaining legitimacy in financial services generally and closing in on banking. When PayPal released its X API two years ago, it became the first global payment service open to third-party developers. A startup called Payvment immediately marketed a free virtual cart that let online shoppers buy products at a series of web sites, including Facebook, and then pay for everything during a single checkout. Since then, MasterCard and Visa both have moved to make their payments platforms accessible to third-party developers.
Most of the companies offering APIs have been small, young and nimble. Blogger Matt Daniels, who identified himself as a former American Express employee, wrote that he would not expect to see APIs from a bank, where the biggest hurdle would be culture. But he noted that banks have information on millions of transactions and customers that could be leveraged in mobile, social and other apps. Analyst Aaron McPherson of IDC Financial Insights has been quoted as saying there’s no reason banks could not create their own APIs for better integration with non-bank apps or for direct use by customers such as corporations and small businesses. Fifth Third Processing Solutions has partnered with IP Commerce to build a portal that gives developers free access to credit, debit, ACH and fraud-management services.
Blogger Daniels said the real question is how chief information officers in a handful of big companies persuaded their CEOs to open the company to third party developers via APIs and open platforms. Financial institutions (FIs) don’t need to take a cut on transactions to achieve an ROI on an API. Many APIs have been justified on the basis of innovation, partnering, extending the brand and gaining marketing exposure, he said. Daniels points out that Twitter CEO Biz Stone has said Twitter’s API may be the most important thing the company has done. It allowed the company to keep the service simple, while enabling third parties to build on its infrastructure to produce apps that created enormous demand among users.
Google (Checkout) and payment companies of all types offer outside developers secure plug-and-play payment solutions that can be embedded in whatever they’re creating. A technology innovation executive at Capital One told me that APIs offer an unprecedented opportunity to expand a company’s relationships with customers because they make it easy to deploy content and services in new, ultra-relevant contexts. “Those can include a bank’s own branded apps, integrations with strategic partners and co-branded apps built by external developers,” the executive said. “But launching an API means opening new channels of digital distribution. And like offline distributors, you’ll be expected to deliver the goods quickly and reliably.”
Lack of knowledge and resources to create APIs internally could slow FIs from announcing APIs. A senior enterprise payments executive at a $50 billion plus bank says that since the recession, many FIs have opted to stick to their knitting and eschew more creative or innovative positions. One result, he said, has been that innovation is no longer bound to a finite, internal R&D team. Another is that attracting outside developers may soon be a highly competitive activity for companies that want to expand through e-commerce.
Harshul Sanghi, vice president of Enterprise Growth at American Express, has discussed his company’s plans to release an API for its digital wallet program, Serve, in terms of furthering Serve’s presence via connection with developers. But he notes that American Express can bring the knowledge of money movement, fraud management, compliance and other core competencies to startups that want to play in financial services.
Meanwhile, banks and other big companies don’t have to go it alone on APIs. Companies have grown up to help with management of multiple APIs and potentially hundreds of developers. San Francisco-based Mashery Inc., the company that manages APIs for The New York Times, will discuss APIs and banks at the BAI Payments Connect conference in March. Mashery manages API documentation, development and testing tools and solutions for security and other issues of special importance to financial services companies.
Rapid developments in mobile and social financial services are forcing FIs to adapt to a longer value chain that includes sometime competitors who bring special capabilities needed to keep up with consumer and business demand. In successful banks of the future, back office processes and practices are going to have to be transformed as completely as those in the branch.
Mr. Swift is director, content development, at BAI. He can be reached at firstname.lastname@example.org.
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