The ever-increasing use of APIs in the banking industry: beyond compliance & monetization

In one of McKinsey’s latest blog posts, Malin Fiedler (Consultant), Timo Mauerhoefer (Associate Partner), Nils Motsch (Consultant), and Henning Soller (Partner) take a deep and detailed look into banking API programs. According to them, “banks are taking a more sophisticated approach to their use of APIs to maximize the value they derive from these digital workhorses”.

The McKinsey experts first underlined the fact that APIs facilitate a growing range of internal and external bank strategies and activities, thanks to their ability to support interconnections among all manner of devices, applications, and data. They add: “It’s no wonder banking-technology executives, including CIOs, chief architects, and CTOs, are exponentially increasing their use of application programming interfaces”.

Integrating and leveraging APIs remains a key challenge for most banks, as they often still heavily rely on complex legacy systems. On the other hand, younger companies that were born in the digital age – including some recent banks – are embracing them. “Yet, banks increasingly view these multipurpose tools as true enablers of business value”, highlight the experts.

If most banks initially entered the API economy to comply with regulation – PSD2 in Europe, of course, and more recently an open-banking regulation in Brazil and a new Fintech law in Mexico -, they are increasingly relying on APIs internally to reduce costs and complexity associated with IT integration, freeing up change capacity by as much as 30%.

A McKinsey global survey on APIs in banking, conducted in 2020, backs those facts, as:

• 75% of banking APIs are used for internal purposes, and banks plan to double the number of internal APIs within five years (exhibit)
• Almost 20% of banking APIs are used externally to support integration with business partners, including suppliers. Banks also have plans to double the number of these APIs by 2025.
• 5% of banking APIs are used externally to generate revenue. Banks plan to triple the number of these “public APIs” by 2025. External APIs also support new business models, including orchestrating or participating in ecosystems.

More recent McKinsey research also found that 75% of the top 100 banks globally have made public APIs available: for instance, a financial-services multinational launched a global API hub where developers can share best practices, an investment bank is using APIs to help clients monitor customer sentiment and respond proactively based on the insights gathered, a bank has an open portal where developers can access and implement financial solutions for customers, etc.

The four dimensions of API leadership

As explained in the blog, “banking API leaders have shifted from an unstructured to a programmatic approach to APIs and have distinguished themselves along the four dimensions of strategy”:

• API strategy: APIs are no longer simple technical integration tools. And banking API leaders go beyond their monetization: APIs can enable entirely new businesses through third parties and collaborations. For instance, a bank could easily enter into an agreement with an insurer to offer an insurance product for small and medium-size businesses.
• Operating mode: Leading operating models consist in a cohesive rather than siloed approach, and often in a clear ownership of each API along the entire life cycle. As explained in the blog post, “an all-digital commercial and retail bank attributes its success with APIs in part to a fully dedicated product team that is driving development of a new API platform”.
• Technology: After starting small with a limited number of internal APIs, several successful banks are consolidating access in a single internal developer portal, with clear standards to ensure reusability and scalability.
• People: Building new capabilities internally and creating an API-first culture is a key challenge for banks. Using gamification techniques can lead to great results: a UK-based bank rewards the team that builds the most-used API with badges or even monetary incentives and has seen usage of the API portal increase significantly.

The versatility of banking APIs suggests that they offer still-untapped sources of value and will be part and parcel of banks’ strategies to grow and expand their value pools

McKinsey Open Banking experts

Source: McKinsey