How FIs Compete In The ‘API Economy’

APIs are more than an easy way for developers to access web services — they are the connective tissue that brings banks and FinTechs together. In the December PYMNTS B2B API Tracker™, a FI.SPAN collaboration, Tom Eck, IBM’s chief technology officer, discusses the growth of the “API economy” and how it’s changing the nature of banking services. Find that, plus the latest B2B API headlines and a provider directory with 40 of the top players in the space, all inside the latest Tracker.

Banks and FinTechs may have had frosty relations in the past, but new open API ecosystems are now enabling former competitors to collaborate and grow their respective businesses.

While collaboration is often seen as the more appealing approach, an open banking ecosystem invites its own challenges for traditional banks. Specifically, these financial institutions (FIs) must learn how to collaborate and innovate at a considerably faster pace. That can be a tall order for those that still rely on older legacy systems, though.

That’s where open banking platforms are coming into service. As Tom Eck, chief technology officer at IBM, explained, these platforms are intended to help traditional banks navigate away from their legacy systems to a more collaborative API-first ecosystem. Eck manages IBM’s Industry Platforms initiative, and he recently spoke with PYMNTS about a platform-first approach toward guiding traditional FIs into participation in the API economy — the status that IBM says has emerged from open API ecosystems.

API economics 101

An open API ecosystem is a marketplace in which banks and FinTechs congregate to facilitate an “exchange of value” to serve customers and clients, Eck said.

The emergence of these ecosystems has led to the development of the “API economy,” a series of marketplaces allowing financial services players to buy or sell APIs and collaborate or exchange innovations to find fresh ways of conducting business to better address client needs.

“It’s an ecosystem of entities, and the connective tissue is APIs,” Eck said.

Both traditional banks and FinTechs have their own motivations for participating in the API economy.

As more API ecosystems emerge to exchange value and develop new solutions based on shared knowledge and data, traditional banks are turning to companies like IBM to help them transition from older legacy systems into more modern could-based architectures, Eck explained. There, those firms can more actively participate in the API economy and collaborate with additional FinTech players. Meanwhile, FinTechs can more easily connect with established banks to help bring their innovations to scale.

The recent success of companies in the FinTech space is driving more FIs to seek out FinTech partners and third-party vendors for collaboration opportunities, he added. Some banks — such as Silicon Valley Bank of Santa Clara, California, for example — are actively working to help traditional banks and FinTechs collaborate by helping both sides develop a common language around APIs.

Additionally, the emergence of open API ecosystems is helping traditional FIs strategize their approach to integrating API-based solutions into their operations.

“The enablement of APIs in an institution is really to be able to have some type of plan or map on how they prioritize what aspects of the bank that [they] want to digitize first,” Eck said.

Platforms make perfect

It is imperative for traditional banks to establish a sandbox environment in which developers can collaborate on financial innovations — and through which new marketplaces can emerge — if they want to thrive in an API economy. It’s a strategy that has so far served FinTechs well and one that banks should consider emulating, Eck said.

“A huge reason why FinTechs are popular is because lots of them are looking at [innovation] from a platform point of view,” he said.

What makes a platform valuable for API innovation is the network of developers and third-party contributors that emerges to engage with it and help the platform evolve further, thus encouraging the production of new solutions.

For inspiration on platform development, Eck recommends FIs take a bite out of the Apple playbook. When Apple released its iPhone, the company also made software development kits (SDKs) publicly available, making it easier for developers to build apps specifically for the smartphone platform. This decision to invite development encouraged communities of developers to invest in new tools to enhance the Apple iPhone experience.

“The platform approach is the one that leads to exponential growth,” Eck said. “What makes a platform valuable is the network. The [greater the] number of participants in a platform exponentially increases the value of the platform.”

If a platform is opened to developers and third-party contributors, it will lead to more innovations and more value, he added. This, in turn, could lead to more business for banks.

“You get this self-reinforcing feedback loop,” Eck said. “That’s when the platform explodes.”

To have a successful platform, it should be easy to both consume its functionality and also contribute to that functionality, he noted. In the end, a successful open banking API ecosystem reinforces itself.

Holding APIs to higher standards

While the open banking movement continues to move forward, Eck said the development of a unified framework for banks is an issue that still needs to be addressed, and efforts to promote standardization among various banks should be a top priority of the financial services sector.

Based on his experience, standards can sometimes be implemented without consistency, which can lead to problems. Without a standard framework, Eck said innovations that were produced by Bank A might not be easily implemented at Bank B.

“I should be able to plug an iPhone adapter into a wall socket and it will work,” he said. “But, imagine if you went to different places and they had slightly different sockets. That’s the impact on a developer when there’s a lack of a consistent standard.”

But, for a framework to be effective, Eck explained that the standards that are pushed should be more “prescriptive” than “descriptive.” In other words, the rules framework should be mandated so such innovations can be compatible across multiple institutions.

For instance, the PSD2 payment directive issued by the European Union was initially descriptive in nature, but was eventually updated to be “prescriptive” — thus providing the EU’s participating FIs with a unified guiding framework.

As IBM approaches its own open banking API strategy, Eck said the company will abide by the newer PSD2 payment directive.

“PSD2 aligns on multiple axes that are in our sweet spot for what our clients are demanding,” he said.

As the rules of the API economy continue to evolve, a guiding set of standards could help participating banks and FinTechs overcome issues with incompatibility.

As such, a once-chilly relationship between banks and FinTechs could potentially thaw, further enabling additional collaborations — and, from this thaw, several API marketplaces and innovations could emerge in its place.

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About the Tracker

The PYMNTS.com B2B API Tracker™, a FI.SPAN collaboration, serves as a monthly framework for the space, providing coverage of the most recent news and trends, along with a provider directory highlighting the key players contributing across the segments that comprise the B2B API ecosystem.



The pressure on banks to modernize their payments capabilities to support initiatives such as ISO 20022 and instant/real time payments has been exacerbated by the emergence of COVID-19 and the compelling need to quickly scale operations due to the rapid growth of contactless payments, and subsequent increase in digitization. Given this new normal, the need for agility and optimization across the payments processing value chain is imperative.