Gartner - The Business Value of Banking APIs

G00270958

The Business Value of Banking APIs Published: 14 January 2015

Analyst(s): Kristin R. Moyer

APIs can be used to address top CEO priorities, but few board members, senior executives or business leaders understand how. CIOs can accelerate digital banking transformation by clearly articulating API business value to key bank decision makers.

Impacts ■

Banking APIs enable CIOs to improve net profits by increasing addressable market share, creating new business models, and reducing time and cost to market.

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Banking APIs allow CIOs to improve internal and external user experience by enabling mobility, creating new ecosystems, crowdsourcing new ideas, and attracting modern development talent.

Recommendations Banking CIOs should: ■

Communicate the business value of APIs based on top CEO and business executive priorities: revenue, cost, user experience and talent management.

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Expand addressable market share by providing APIs for data the bank already makes publicly available (for example, foreign exchange rates, interest rates, and branch and ATM locations).

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Use APIs and hackathons as a way to tap into new internal and external ecosystems, and to attract mobile development talent.

Analysis An API is an interface to an application capability that can be used programmatically (see "Choosing an API and SOA Governance Architecture"). A single component or service can expose many interfaces to support different interaction models or protocols. APIs have been used for a long time by bank IT, but, during the past 10 years, the Web incarnation of APIs has emerged and enabled e-commerce, social media, mobile and cloud services.

APIs are now being used both internally and externally to help connect the physical and digital worlds by making it easier to: ■

Integrate and connect people, places, systems, things, etc.

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Create new user interfaces (such as mobile, Web, social and other apps).

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Share data and information.

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Authenticate people, places, things, etc. (through standards like OAuth).

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Enable transactions (such as payment acquiring).

Many boards and CEOs in the banking industry are concerned about using APIs (especially externally) due to security and regulatory compliance concerns. Those concerns are valid and reasonable, but can be addressed by proper API usage policies and application infrastructure investments. APIs can help CEOs and senior business executives achieve many of their top strategic priorities (see Table 1). This is reason enough to use banking APIs, but regulators may ultimately force the issue. Regulators in some geographies are poised to require open banking — potentially through APIs, as may be the case for PSD2, the legal foundation for the creation of a single market for payments in the European Union. Table 1. The Ability of APIs to Address CEO and Senior Executive Priorities Business Value of APIs

Business Priorities (Rank)

Growth Constraints (Rank)

Net Profits Revenue/growth

No. 1

Cost

No. 3

User Experience External (Customer Experience)

No. 2

Internal (Talent Management)

No. 8

No. 3

Source: Gartner (January 2015)

Banking CIOs will have the most persuasive and compelling influence on CEOs and senior business executives by articulating the business value of APIs in terms of net profits and user experience (see Figure 1).

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Figure 1. The Business Value of Banking APIs

Net Profits Revenue

User Experience Cost

• Product accessibility • New business models

External

• Efficiency • Time to market

• Mobility • New ecosystems • Partner integration

Internal • Mobility • New talent

Source: Gartner (January 2015)

Figure 2 covers the impacts and top recommendations for banking CIOs who use APIs to accelerate digital banking transformation. Figure 2. Impacts and Top Recommendations for Banking CIOs Impacts

Top Recommendations

Banking APIs enable CIOs to improve net profits by increasing addressable market share, creating new business models, and reducing time and cost to market.

• Use hackathons and APIs to generate new

Banking APIs allow CIOs to improve internal and external user experience by enabling mobility, creating new ecosystems, crowdsourcing new ideas, and attracting modern development talent.

• Enhance mobility by providing APIs for data

ideas and bring winning solutions to production to reduce time and cost to market with new business capabilities.

the bank already makes publicly available (for example, foreign exchange rates, interest rates, and branch and ATM locations).

Source: Gartner (January 2015)

Impacts and Recommendations Banking APIs enable CIOs to improve net profits by increasing addressable market share, creating new business models, and reducing time and cost to market Revenue APIs can expand addressable market share by making product, pricing and other data available for comparison and consumption through social media sites, online stores and other digital media.

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Some examples of banks using APIs to make product, pricing and other data more accessible include: ■

Capital One is using APIs to enable merchants to offer personalized deals and enable customers to pay with rewards points.

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Citibank used an API to enable developers to access Citi Beneficios (where customers can view marketing offers) as part of its Citi Mobile Challenge LatAm 2014.

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ASB launched an API of publicly available data like foreign exchange rates, interest rates, and branch locations and ATM locations.

APIs also enable banks to create new business models that may or may not involve traditional banking services. Some examples of banks using APIs to create new business models include: ■

The E*Trade Developer Platform enables partners to create investment applications that leverage its market data offerings, order-routing capabilities and other services.

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Fidor created a layer of standardized APIs (fidorOS) for payments, accounts and communities that sits on top of a standard core banking system (Bancos). It enables partners to use fidorOS to build their own banking services, build apps for Fidor customers, integrate solutions into Fidor and resell fidorOS. Fidor is essentially monetizing its fidorOS technology, in addition to its traditional banking services.

Cost The traditional IT approach to bringing new capabilities to market for most banks is driven by a business idea that gets documented, shared with IT and goes through a prioritization process. If the idea is selected, it goes to functional specifications that take months and extensive documentation to complete. Many of the requirements have already changed by the time the idea gets to coding. The line of business often proposes extensive changes by the time the new capability goes to user acceptance testing in order to catch up to changing business conditions. A loop of fixing and revisions then makes it take even longer to get the capability to market. The whole cycle often takes 18 to 24 months. Business ideas that are enabled by packaged vendor solutions suffer from some of the same problems. APIs can enable CIOs to reduce costs through faster time to market, lower delivery costs and easier partner integration. For example: ■

BBVA substantially reduced internal development costs as part of its Innova Challenge.

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One large U.S. bank is bringing 15 new apps (from a recent hackathon) to market within a 6month to 9-month period, and for a fraction of the time and cost to do so internally.

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MasterCard, Visa and American Express are using APIs to reduce partner integration complexity.

Recommendations:

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Use internal and/or external crowdsourcing to identify a differentiated bank capability. Then, build an API that can make the differentiated bank capability more accessible to customers and partners. For example, Capital One has a differentiated capability with card payments and rewards and launched some APIs in that area.

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Use APIs to create new business models. For example, if underwriting for low-value transactions is a differentiated capability, explore the potential to provide this capability via APIs to other financial institutions, digital firms and others as a platform on which they can build new services.

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Use hackathons and APIs to generate new ideas and bring winning solutions to production in order to reduce time and cost to market with new business capabilities.

Banking APIs allow CIOs to improve internal and external user experience by enabling mobility, creating new ecosystems, crowdsourcing new ideas, and attracting modern development talent Mobility One of the ways nonbanks and "fintechs" are excelling is by meeting specific customer needs with focused mobile apps (see "Anyone Can Build a Bank"). This is putting pressure on banking CIOs to keep pace with disruptive innovation. CIOs are increasingly being tasked with improving mobility for internal employees as well. Some examples of banks using APIs to improve customer and employee mobility include: ■

Commonwealth Bank of Australia launched its Pi solution, which includes an SDK and an app store. Pi enables developers to build customer-facing apps and needs-based solutions by category (business analytics, business tools, point of sale, etc.), industry (charity, hospitality, entertainment, etc.), and device (Albert, Leo, Emmy).

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BBVA focused on enabling mobility and innovation by starting with internal API use (for apps), and progressing to partner APIs for collaboration through two hackathons: the Innova Challenge (external mobility) and InnovaApps+ (internal mobility).

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Credit Agricole provides an SDK and app store to enable developers to build customer-facing mobile apps and interact with ideas users post to the store.

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Citibank used an API to enable developers to create innovative consumer and business mobile apps as part of its Citi Mobile Challenge LatAm 2014.

New Digital Banking Ecosystems Banking CEOs identify talent management as one of their biggest growth constraints (see "The 2014 Gartner CEO and Senior Executive Survey: A Financial Services Industry Perspective"). Yet, a large degree of talent inside a bank is relatively untapped due to organizational structures and geographic restrictions that serve as barriers to innovation and prevent ideas from being shared.

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APIs can be used to engage new digital banking ecosystems of developers and partners. Hackathons and APIs together are one way for CIOs to tap into new internal and external ecosystems. This is a way of crowdsourcing new ideas that an individual business unit may never have thought of. Many banks begin by experimenting with APIs and hackathons internally, and identify best practices and lessons learned before going external. Just a few examples of the many banks that are using APIs and external hackathons together to tap into new developer and partner ecosystems include: ■

Bank Leumi ran the Leumi Hackathon, with a focus on improving user experience, online payments, social media, promoting small and midsize businesses, gamification, and the Internet of Things (IoT).

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ING ran a hackathon focused on the next-generation bank.

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Banco Sabadell ran Instant Banking Hack Day, with a focus on new Web and mobile applications for payments, the IoT, and contextual and predictive customer service.

Talent Management Mobile/tablet content design/delivery and mobile app development are two of the top three areas of knowledge, competence and skills that will have the greatest impact on digital business (see "The Forces Reshaping IT Skills, Talent and Leadership"). APIs can help CIOs improve talent management because: ■

They can give a bank an innovative, tech-savvy and customer-focused image.

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Internal APIs enable CIOs to attract modern developers and digital talent, who prefer working with APIs (particularly REST) for mobile app development.

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Internal APIs and hackathons enable CIOs to reach more broadly across talent within the enterprise, and to capture innovative ideas that otherwise may not be realized or even identified.

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External APIs and hackathons enable CIOs to reach beyond traditional partners to third-party developers and fintechs, who prefer using APIs for things like mobile app development and service delivery (see "Anyone Can Build a Bank").

Recommendations: ■

Enhance mobility by providing APIs for data the bank already makes publicly available. For example, ASB provides APIs for foreign exchange rates, interest rates, and branch and ATM locations.

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Run an internal and/or external ideation campaign to identify ways to improve the customer experience.

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Deploy an API and run a hackathon that is focused on one or more of the top ideas identified in the ideation campaign.

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Deploy an API for commercial banking customers that lets them build their own solutions. For example, Fidor lets its commercial banking customers build their own solutions via an API layer (fidorOS) that sits on top of a standard core banking system.

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Create and nurture a third-party developer community to tap into talent outside the bank. Begin by enabling peer networking and providing educational opportunities. Over time, progress to hackathons or an API platform that is continuously available.

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Use external hackathons as a way to build relationships with promising talent and make employment offers as appropriate. Several large banks we know of have done this successfully.

Gartner Recommended Reading Some documents may not be available as part of your current Gartner subscription. "Reference Model for Open Banking APIs, Apps and App Stores" "API Deployment Models that Accelerate Digital Banking" "Digital Banking and the Role of APIs, Apps and App Stores" "Hype Cycle for Open Banking APIs, Apps and App Stores, 2014"

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