Co-authored by Samta Bansal
More than two million British people use Open Banking-based products today, a number that, despite the disruption of COVID-19, is double that seen at the start of 2020. No wonder International Banker dubbed 2021 “The Year of Open Banking.”
As open banking spreads worldwide, its growth comes with the pressing need to drive standardization that bridges geographic boundaries and regulatory frameworks. The road to openness will be paved with the effective use of APIs, which requires both a technology layer and a strategic vision that allow financial institutions to fully embrace this new era of innovation and its promise of responsive, trauma-free compliance, governance and security.
To make headway in this new landscape, banks must reconsider their posture and become open to:
- Outsourcing and insourcing services that enhance their competitive differentiation.
- Sustainability efforts backed by clear evidence regarding everything from energy use to slave labor.
- Standards that make it easy to provide customized information about a customer’s or partner’s entire financial landscape.
Taking a Fresh Look at APIs
APIs are the technical means that will facilitate those transformations. While APIs are not new, they have become essential in a different way. The benefit provided by APIs has expanded from a focus on integration to also providing flexibility.
APIs already enable banks worldwide to power integration. Around the world, banks use APIs to open themselves to fellow institutions in some limited ways. APIs make it possible for financial product providers to securely access a comprehensive view of a client’s portfolios across institutions that include banking, investments, insurance and more. For example, an insurance provider might now look at a customer’s bank portfolio, enabling the insurer to present insurance products that more closely align with the client’s needs.
However, to expand on that type of flexibility with confidence, APIs need to be reexamined to assess their suitability in open banking scenarios. Institutions and their vendors must answer essential questions, including:
- How can a legacy IT infrastructure, built using inward-looking APIs, provide support in an open landscape that relies on connections to sensitive systems of records?
- How can organizations be simultaneously wide open and maximally secure?
Make progress by answering the tough questions.
Start by Understanding Open Banking Requirements
Even while financial institutions search for answers to these questions, they are using open banking principles to compete, creating, for example, evermore sophisticated mobile banking capabilities to improve the customer experience. The sudden, rapid global expansion of open banking is the perfect forcing function as it further raises customer expectations.
Requirement 1: Developing a New Perspective on the API Landscape
To ensure a larger vision aligns all efforts, Hitachi Vantara recommends strategic rethinking to better understand what resources will be open, closed and internal, for now, and external. An effective API strategy defines a switchboard that allows collaboration and integration to take place without prior restraints. This approach also builds security, governance and compliance functions that work as automatically as possible.
Such a strategy also drives down costs for maintenance and development. API layers create an adaptable toolkit of building blocks that can be quickly assembled and reassembled as needed to address changing needs. Think of APIs as microservices, each a small bundle or module of specific functionality.
Requirement 2: Putting API Strategy Into Action
A large European bank worked with Hitachi Vantara to develop a suite of API layers that includes:
- Core APIs that access fundamental information systems.
- Journey APIs that connect to various bank services and products.
- Experience APIs that provide consistent user interactions for customers as they move among banking services.
Core APIs are fairly complex APIs that provide access to systems of record. These are different from the lightweight and highly responsive journey and experience APIs used by mobile app and web developers who demand APIs that excel at one or two functions at most.
Together, these API layers support strategic assumptions about what will change and where innovation will take place. As requirements change, the implementation of individual APIs can change without requiring alteration to the systems that use the APIs.
Requirement 3: Embracing New Partners and Services
This open approach to API strategy provides financial institutions with attractive new opportunities for outsourcing and insourcing services with minimum trauma. Most institutions are rightfully proud of specific functions and services they offer that each considers best in class. But being the best at one’s core business does not by default mean one is the best at providing the technologies and platforms needed to service the customer.
A well-implemented API strategy creates the possibility of working with third parties that may have commodity technology products for rent or purchase. So, for example, an institution may couple its award-winning investment tools with an effective third-party customer onboarding API to create a complete customer experience.
The Promise of Open Banking
The burden of monolithic technology gets in the way of the flexibility today’s financial institutions need to meet new customer expectations and governance requirements set by open banking. Embracing an API strategy that breaks down those massive legacy constructs into malleable microservices is the way to become far nimbler. APIs provide a level of abstraction from the complexity that enables organizations to change quickly, update and adapt to a shifting marketplace.
Suranjan Som is Vice President, Head of Financial Services Consulting, and Client Engagement Partner, EMEA, at Hitachi Vantara.
Samta Bansal is Global Consulting Strategy and Marketing Leader at Hitachi Vantara.