Application programming interfaces (APIs) allow for a seamless flow of information so that a new feature or app can be built off another interface or application. They aren’t new, but there is renewed interest in the opportunities they present in the financial services sector following the implementation of the European Union’s revised Payment Services Directive (PSD2), coupled with the UK’s focus on open banking.
As digital financial services become more relevant in satisfying customer demand or reaching underserved consumers, many banking executives appear to have shifted from an earlier stance (which suggested that banks and fintechs were competitors) and are increasingly open to collaboration.
We’ve rounded up a few online articles for those with limited knowledge of APIs but an interest in uncovering the answers to some of the questions that have resulted from an exploration of API-related opportunities.
What is an API and how does it work? Upwork has published a simple introduction to APIs; and, predictably, there are numerous explainers on YouTube. It is important to note that not all APIs are automatically opened to third-party developers – some are only opened to select partners or kept private.
Why is the open banking initiative in Europe relevant for financial service providers in emerging markets? Banks in Europe are being compelled to open some of their services. The regulator-led initiative is creating interesting “lab conditions” for banks in Africa to observe, particularly those looking to foster partnerships based on data-driven innovations. In an article in Wired magazine, the head of open banking in the UK explains, “I wouldn't be surprised if we see new kind of business models. Things like data custodians”. Watching how these banks and developers negotiate some of the pitfalls of open APIs may allow for smoother adoption by banks in other markets.
What role can APIs play in extending financial inclusion? According to a McKinsey article, the sharing of information on “thin file” customers and the incorporation of additional people within the formal financial system (both of which can be enabled through APIs) mean that banks are more likely to meet financial inclusion goals and to enhance their future ability to provide profitable services. The authors argue that irrespective of location, banks should “develop a perspective on APIs and their benefit to the bank’s service model, both in leveraging mandated third-party access and potentially extending access beyond statutory requirements.”
How will API-related financial-sector initiatives benefit customers? Jim Marous of The Financial Brand suggests, “The foundation of these partnerships will be the data that can be collected and cultivated for the benefit of the customer, the bank and the fintech firms. If applied diligently, the improvement in customer experience could be the differentiator that retains the overall banking (and non-banking) relationship”.
Consumers stand to benefit from a range of other app-based services that aren’t expressly financial services but that are built using APIs provided by MNOs, for example. This article lists some African start-ups that have been able to deliver innovations to local consumers in this way.
Chinese tech companies such as Tencent have been very successful at moving financial services to the background and offering consumers a seamless online experience that allows them to “do life” without having to worry about the back-end financial transactions that support their choices.
Do all APIs essentially work the same way? There is no single standard for APIs, but the regulatory push for open banking in Europe has resulted in initiatives to harmonise them. One group of banks and payments service providers (known colloquially as the Berlin Group) has defined a common API standard. Here is a basic comparison of the Berlin Group and Open Banking UK standards:
How prevalent are open APIs in the financial sector in Africa? According to the Banking APIS: State of the Market 2016 report, “In Africa, APIs are already an accepted approach amongst a banking industry that recognises the mobile-first nature of many citizens”. While some South African banks have open APIs and East African banks like Equity Bank have made an API available, it has been difficult to pinpoint a comprehensive list of banks in Africa that have open APIs. Open Banking APIs only lists one African bank API thus far. ProgrammableWeb's API directory provides a starting point, but this is a crowdsourced list of African APIs rather than a list of African banks with open APIs.
It’s important to understand that it is not only banks that are developing APIs for use by other service providers, nor is it only fintechs or other financial service providers that would benefit from an API. Numerous mobile network operators (MNOs) have allowed third-party developers to make use of their APIs (not all of which are fully open). Orange, Safaricom, Airtel, MTN and Vodafone have all made APIs available to developers in specific African countries, with several MNOs opening APIs to companies in Asia as well.
The GSMA suggests in its 2016 (but still relevant) report titled APIS: A bridge between mobile operators and start-ups in emerging markets that “the most useful local operator APIs are messaging (SMS, USSD), billing (direct operator billing), mobile money and location APIs”.
There are also intermediaries that provide for access to multiple banks or mobile money wallets, one example being Transflow in Ghana.
Why open APIs might not be the answer in every case. Although APIs potentially allow for seamless interaction of data and applications, the process of integrating with specific APIs has not been entirely painless for developers. FSPs interested in creating APIs for public access and developers that are interested in innovating by plugging into an API would do well to review the challenges that others have mentioned.
A blogger laments the fact that mobile money providers don’t always maintain the core wallet system.
There are also some significant challenges relating to an open banking approach, not all of which relate to APIs. See this article for some examples.
What resources are available to companies that want to open an API? Several online resources are available. As a starting point, CGAP gives some advice in its API Maturity Model and more detail on “how providers can unlock innovation in digital financial services ecosystems through open APIs” in a working paper titled Digital Rails.
The GSMA offers harmonised mobile money APIs and associated advice.
Spanish bank BBVA is a leader in the field of banking APIs, and it has made a series of e-books available, some of which relate to APIs.
Please note that sharing links to publications that are not authored by i2i does not constitute official endorsement of or agreement with the content contained in those links.