Open banking application programming interface (API) trends are reshaping the financial landscape. Initially adopted to comply with regulations like the revised Payment Services Directive (PSD2), focus then shifted to cost savings before moving toward innovation. And now, sights are set on monetization.
The continuing API evolution was discussed at our 2023 Summit with Lalit Tyagi, Chief Technical Officer at SBS; Nicolas de Genot de Nieukerken, Open Banking Partnerships Manager and Lead Product Manager at SBS; and Laurent M., Vice-President of Strategic Growth Partnerships at Axway. We continue the discussion below.
Rise of APIs
Open banking is a major API use case for financial institutions (FIs). The concept has roots in the 80s, when screen text was introduced by the West German Post Office and Verbraucherbank. And then, in 1998, FinTS (Financial Transaction Services), formerly known as HBCI (Home Banking Computer Interface), went live with screen scraping as a common use case.
The process was subsequently used by various FIs – Bankinter in Spain and Egg in the UK in 2002, and Sofort in Germany in 2005. However, it came with challenges around security, user experience, efficiency, standardization, and control. To remedy those issues, APIs came into play, spurred by PSD2.
By 2017, the term open banking was made popular: The UK’s Competition and Markets Authority (CMA) mandated the country’s nine largest banks to “create and pay for an Open Banking Implementation Entity (OBIE) to agree, consult upon, implement, maintain and make widely available without charge, open and common banking standards”.
APIs are an integral part of open banking, making core functionalities like accounts, payments, and transactions available inside and outside financial institutions. Its popularity is growing: According to Statista, there were 27.4 million active open banking users worldwide in 2020; in 2024, that number is expected to reach 132.2 million.
Meanwhile, additional regulations continue to draw banks into the API economy – PSD3, the Payment Services Regulation (PSR), and the Financial Data Access (FIDA) framework.
The impetus also comes from the market – business-oriented use cases from banks and other players, and the fintech ecosystem expansion. And with open banking transforming into open finance, platformification, and beyond, the landscape is rapidly evolving. On top of that, API standardization initiatives by The Berlin Group help ensure they’re more streamlined and accessible, fueling progress.
Whether regulation- or market-driven (or a combination), APIs foster collaboration and innovation, enhancing the customer experience (CX) and enabling increasingly sophisticated and tailored financial services.
Shifts in banks’ strategic focus
According to surveys by McKinsey, the primary focus of financial institutions around APIs has changed over just a few years. In 2020, efficiency was key, including leveraging internal APIs to reduce complexity, speed up time to market, respond quicker to change, and optimize integration costs. At that point, innovation was fifth in terms of priorities.
Come 2022 – following the pandemic and the acceleration of digital transformation – attention diverted to CX and hyper-personalization, with data, real-time analytics, and collaboration between an API ecosystem of trusted partners becoming increasingly important. As a result, innovation leapfrogged to the top priority.
Since 2023, monetization of APIs has moved to the forefront, and an API-first mindset is more prevalent than ever – from market force and regulatory perspectives.
Driving API revenue
The management consulting firm Oliver Wyman estimates each bank could add $50-75 million a year to their revenues by monetizing their APIs. Achieving that can take several forms, depending on the open banking business model the FI uses.
Banking-as-a-Service
With this strategy, financial institutions (FIs) utilize APIs to distribute financial products and services through third-party channels, allowing these channels to offer them under their own brand, relinquishing control of the customer journey from the bank. When the third party accesses the bank’s APIs, they’re charged – options include subscription-based, tiered, and freemium.
Banking-as-a-Platform
Here, the financial institution combines its traditional products and services with additional ones from an ecosystem of third parties, offering them via its own channels – the bank owns the customer journey. With this model, revenue-sharing between the bank and the service provider is a monetization option.
Depending on the route taken, according to Accenture, banks can “bundle or unbundle offerings and services and generate direct or indirect value. The quantum of value will depend on the overall market proposition, customer ownership model, partner value-adds, risk/liability share, and other related factors”.
The future of APIs within banks
Creating an effective and value-generating API ecosystem requires a multi-layered approach, says Lalit Tyagi, comprising system, processing, and partner APIs – a complex landscape. To manage that, API management software comes into play – a thriving market, expected to grow from $5.42 billion in 2024 to $34.17 billion by 2032. Indeed, SBS partners with leading provider Axway on a technical and business-oriented basis.
Alongside that, technology is evolving in terms of API architecture, with many solutions now micro-service-based rather than monolithic. A major benefit is that individual services can be deployed, updated, or scaled without impacting the rest of the system.
But Laurent M. also points out several challenges, including API sprawl – a situation caused by the huge number of new services and APIs created internally by banks, their partners, and across the global ecosystem.
As a result, banks need to ensure they’re leveraging services effectively, despite the complexity of the environment, and they aren’t duplicating resources. Additionally, the APIs must be secure. Universal API management is a solution that “offers visibility and control over APIs wherever they are, and whatever form they may take.”
There’s also the need to bring speed to the innovation process. That’s why Laurent M. believes it’s important to introduce a low-code/no-code integration platform that developers and non-technical employees can use to accelerate the composition of new services.
Additionally, Laurent M. mentions the need to monetize APIs, highlighting the value of a marketplace – a strategy allowing banks to package and promote API products to other business units, trusted partners, and third-party app developers.
The focus is on external users, transforming the bank’s APIs from a technical standpoint to a product one by “offering discovery, subscription, security, and monetization options to drive revenue – directly or indirectly – from their usage”.
In that sense, there needs to be a mindset shift, says Laurent M., where APIs are treated as a product and developers are the customers.
Transforming banking with APIs
To become a successful banking ecosystem, Nicolas de Genot de Nieukerken says, “APIs are key.” Banks need a versatile, modular, and open platform that’s compliant and grows with customer demands, encouraging the adoption of APIs that go beyond regulations. By doing that, they shift from API production to consumption and monetization.
Watch the “API evolution: revolutionizing banking ecosystems” session here.
Sopra Banking Software and Axway partner to help banks approach APIs as a product and bring developers to the customer side. More information here.
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