The API Effect

In order for Apple to build the iPhone, it takes a myriad of manufacturers. Apple outsources the production of the display, the touch ID sensor, the batteries and every other item within the device. All the different pieces come together in a manufacturing plant, before winding up in stores. Yet, from that gadget, application developers have created new businesses and services offered to owners of the phone.

Apple serves as the marketing arm of the iPhone and the platform for the mobile industry. And by bringing all of this together, Apple has stamped its name as a leader in personal technology. Banks are now moving to become a similar platform for financial technology firms, otherwise known as fintech.

It’s the API effect. The tool (the acronym stands for application programming interface) allows a third party to link to a bank’s software or system, while controlling the type of data shared between the two organizations. Banks are using APIs to offer more services provided by fintech companies and startups. And while the tools have been around for years, banks’ willingness to use open APIs-publicly available versions of the technology-to offer new solutions has changed what a financial institution could look like and how it could function in the future. And it may resemble an iPhone more so than a traditional bank.

Decisions by JPMorgan Chase & Co. and Wells Fargo & Co. to offer services through APIs have accelerated this notion. Both independently decided earlier this year to partner with Intuit, offering customers the ability to access Intuit’s products, including Mint, Quicken and TurboTax, from a bank account.

Previously, if you logged into these services, Intuit would use a method called screen scraping to pull in the bank data using third parties. While Intuit used APIs to do so, the interface was controlled by the service, and the bank didn’t worry about the user experience. Any changes to the banks’ infrastructure would cause a malfunction in the communication. The tech companies themselves have sometimes complained that banks interrupt the flow of data on purpose, and bank executives expressed concern that the process exposes their customers to cybersecurity theft. There was “a lot of interruption with that model,” says Brett Pitts, executive vice president and head of digital efforts for San Francisco-based Wells Fargo.

Wells Fargo now uses an API that also provides token authentication. That means when you request access through Wells’ website, Intuit or a third party doesn’t get your login information. Instead, they’re confirmed through a code passed through the token. It allows customers “to authenticate” with Wells, says Pitts, while Intuit focuses on providing the service.

But using the bank as the platform in which to access the service offers opportunities that banks never had the resources or the economic incentive to explore. Say a bank’s customers want student loan advice that’s not currently offered-the organization can use a fintech company focused on student loans to provide it, and it could appear to come from the bank or the third-party service, depending on the integration’s design. Or on mortgage loans, banks can offer services focused on ensuring the loans are paid in a more timely fashion. APIs could also protect banks from lost revenue. Consulting firm Accenture estimates that U.K. banks, for example, could lose 43 percent of payment revenues by 2020 to nonbank payment providers due to a rule the European Union passed that requires banks to provide third parties with access to customer data when the customer requests it. The rule goes into effect in 2018, assuming Brexit doesn’t derail it. In a recent survey of large financial institutions by the consulting firm PwC, 80 percent of respondents thought a portion of their business is at risk from fintech companies, up from 69 percent who thought so in last year’s survey. An API solution to connect with a new, third-party payment provider, like a Stripe or Braintree, could buffer the banks from the new trend. Braintree, for example, allows businesses to process payments via mobile or other devices. Partnering with Braintree allows banks to share in the benefits Braintree provides, as opposed to losing the business altogether.

“[APIs] open up a host of additional revenue streams,” says Jost Hoppermann, an application development and delivery analyst for Forrester Research.

The $45 billion asset Silicon Valley Bank (SVB), which is based in tech-savvy Santa Clara, California, for example, developed APIs so clients could create virtual card numbers in their business applications to ease payments processes with suppliers and contractors.

Previously, the bank had offered commercial clients a virtual card, but it wasn’t popular because it took months to onboard and cost the client tens of thousands of dollars in the process, according to Daniel Kimerling, director of API banking at SVB. Now, it takes a customer less than a day to get up-and-running, while costing just a few dollars.
But there are still a number of hurdles before APIs fully transform financial firms. First, not everyone uses the same standards, which can create headaches while developing, says Hoppermann. Banking and fintech organizations are trying to develop and agree on industry-wide banking API specifications, but getting different institutions to agree on one, simple standard will take time.

“What we have today, [the API] fits into the power outlet, but you can’t expect it to have the right voltage,” says Hoppermann. “There’s not any kind of accepted standard or specification for the larger part of the banking industry to allow us to assume the voltage is the correct one.”

Another technical issue: banks’ infrastructures. Pitts says one reason it took a couple years for the new Intuit deal to come together was because Wells Fargo also needed to upgrade its internal infrastructure to allow for more robust API use. “There was a lot of work we had to do on our infrastructure internally to have the ability to securely expose it to external calls,” says Pitts.

The biggest hurdle, though, comes from the mindsets of bankers. Can they see the bank as a platform to provide access to other services-as opposed to the service provider? This would make the bank look more like the head of an octopus, and each arm is another fintech firm offering a service that either will help the customer or ease internal processes. In order to make the switch, banks will need to see it as profitable, something experts don’t expect to be difficult. “Anytime money is being distributed between large organizations,” says Kevin Kohut, head of consulting firm Accenture’s API enablement practice, “there are many ways to make money.”

But it could also step on the toes of current services that banks offer. If the fintech can provide a service with minimal costs while the bank provides the data and support, then it’s something financial firms will have to consider. And it allows banks to benefit from the “wave of innovation,” adds Jacob Jegher, senior vice president of banking at the research firm Javelin Strategy & Research.

While this wave could take time, it’s something that will become passé soon enough. Five years from now, not using APIs to allow partners or customers to connect would be the equivalent of a bank that “doesn’t have mobile banking today,” says Kimerling.