How APIs can transform global banking

With com­pa­nies expand­ing into new regions and doing more trade with the rest of the world than ever before, glob­al trans­ac­tion bank­ing has become crit­i­cal to their suc­cess.

Tra­di­tion­al­ly, major banks have pro­vid­ed these essen­tial ser­vices, cov­er­ing every­thing from trans­fers, pay­ments, and cash and asset man­age­ment to financ­ing and glob­al trade.

It’s a mon­ey spin­ner that gen­er­ates almost $1 tril­lion in glob­al annu­al rev­enues and is expect­ed to grow to $7.2 tril­lion in ten years, accord­ing to indus­try esti­mates.

Pre­vi­ous­ly, banks had relied on lega­cy sys­tems and tech­nolo­gies such as host-to-host file trans­fer to inte­grate their ser­vices with clients’ sys­tems. How­ev­er, while work­ing well for sin­gle-step trans­ac­tions, they strug­gle with more com­pli­cat­ed real-time func­tion­al­i­ties such as rec­on­cil­i­a­tion, trade ser­vices, col­lec­tions and sup­ply chain finance.

In the face of increas­ing com­pe­ti­tion from more nim­ble rivals, notably fin­techs and dig­i­tal banks, bank­ing insti­tu­tions have had to up their game. Enter busi­ness-to-busi­ness (B2B) appli­ca­tion pro­gram­ming inter­faces (APIs), which enable banks to sim­pli­fy trans­ac­tions and pro­vide clients with a seam­less ser­vice.

Why use APIs in global banking?

But what are the key chal­lenges involved in migrat­ing to this new tech­nol­o­gy and how can banks over­come them? What has been the effect of reg­u­la­tion? And how can they cap­i­talise on the biggest growth areas? 

APIs work in closed net­works that inte­grate banks’ ser­vices with their clients’ enter­prise sys­tems and work­flows. They allow banks to scale com­plex oper­a­tions and elim­i­nate the need for bro­kers or ser­vice bureaus.

Banks includ­ing Gold­man Sachs, J.P. Mor­gan and the Bank of Amer­i­ca have already tak­en the lead. Yet, as a tech­nol­o­gy, it’s still in its rel­a­tive infan­cy, with a lack of clear­ly defined indus­try stan­dards, and is restrict­ed by clunky infra­struc­ture and gov­er­nance pro­to­cols.

What are the drawbacks of APIs?

The biggest chal­lenge is in devel­op­ing a plat­form that is both user friend­ly and com­pat­i­ble with clients’ sys­tems. Too many APIs, how­ev­er, are let down by poor or over­com­pli­cat­ed designs, due to lack of devel­op­ment exper­tise.

“API bank­ing is a prod­uct with unique design con­straints and chal­lenges in the same way mobile or web bank­ing are,” says David Jarvis, co-founder and chief exec­u­tive of Grif­fin, a bank­ing-as-a-ser­vice provider. “You need to build out that exper­tise inter­nal­ly and none of the banks have invest­ed in this to date.”

They also need to be ful­ly secure, well doc­u­ment­ed and meet ever-evolv­ing reg­u­la­to­ry changes. Then there is the con­sid­er­able cost involved too, as well as over­haul of exist­ing sys­tems and process­es.

To over­come these issues, banks must embrace tech­nol­o­gy and change, with a ded­i­cat­ed team focused on devel­op­ing a strat­e­gy and rig­or­ous­ly test­ing their APIs. They should also col­lab­o­rate with clients and part­ners, includ­ing fin­techs, thus spread­ing the cost of inno­va­tion and reduc­ing time to mar­ket.

How to implement APIs properly

As an absolute basic first step, banks need to invest in a dig­i­tal bank­ing plat­form that links their gate­way and prod­uct proces­sors and func­tions to enable their APIs. That plat­form informs all the mod­i­fi­ca­tion, authen­ti­ca­tion, autho­ri­sa­tion and con­sent-man­age­ment capa­bil­i­ties, as well as con­nect­ing mul­ti­ple infor­ma­tion sources.

Société Générale has achieved this by build­ing its B2B SG Mar­kets plat­form. It pro­vides every­thing from cash man­age­ment, financ­ing and secu­ri­ty ser­vices to glob­al mar­kets and pri­vate bank­ing. 

“By imple­ment­ing machine learn­ing and com­bin­ing our cash man­age­ment and FX [for­eign exchange] with­in our plat­form, we have cre­at­ed a one-stop shop,” says Société Générale’s head of exe­cu­tion plat­forms and UK chief dig­i­tal offi­cer Sohail Raja. “It enables clients to do every­thing from man­ag­ing their trans­ac­tions to tak­ing cash posi­tions on dif­fer­ent cur­ren­cies.”

Citi, mean­while, has part­nered with trea­sury soft­ware providers includ­ing FIS, Kyri­ba, Ora­cle and SAP to embed its API func­tion­al­i­ties into their core prod­ucts. This month, its Citi­Con­nect plat­form reached one bil­lion calls from cor­po­rate clients since its launch in 2017, while API vol­ume grew 60 per cent in 2020.

“APIs are great for real-time trea­sury ser­vices to enable our clients to have the most opti­mal dig­i­tal bank­ing expe­ri­ence,” says Mayank Mishra, man­ag­ing direc­tor and glob­al head of dig­i­tal chan­nels at Citi trea­sury and trade solu­tions. “Open bank­ing is an exten­sion of this, but one that helps enable an entire mar­ket or indus­try ver­ti­cal.”

Uni­Cred­it has also teamed up with Fin­D­y­nam­ic to build its plat­form, which allows clients to auto­mat­i­cal­ly view invoic­es through a web-based or mobile plat­form and approve invoic­es for pay­ment. In Sep­tem­ber 2020, it launched the first open bank­ing API with an IBAN check to enable clients to ver­i­fy their cus­tomers’ account details.

Open banking innovation

The move to APIs is being fuelled by open bank­ing reg­u­la­tions, such as the Euro­pean Union’s Revised Pay­ment Ser­vices Direc­tive (PSD2), and the intro­duc­tion of the Unit­ed Pay­ments Inter­face in India. PSD2 has required banks to release their data in a secure, stan­dard­ised form, so it can be read­i­ly shared between autho­rised par­ties online. 

“Indus­try needs, like smart per­son­al­i­sa­tion and cor­po­rate bank­ing, are dri­ving the con­ver­sa­tion beyond bank­ing direc­tives now,” says Vikram Gup­ta, glob­al vice pres­i­dent at Ora­cle Finan­cial Ser­vices. “These capa­bil­i­ties need access to pre­mi­um infor­ma­tion beyond reg­u­la­to­ry man­dates that give banks an oppor­tu­ni­ty to tap into new rev­enue streams and pro­vide bet­ter ser­vices to their cus­tomers as well main­tain cus­tomer stick­i­ness.”

How new tech is supporting global transaction banking

Simul­ta­ne­ous­ly, arti­fi­cial intel­li­gence (AI) and automa­tion have vast­ly improved risk and liq­uid­i­ty ana­lyt­ics and fore­cast­ing with­in trea­sury man­age­ment sys­tems. Blockchain and dis­trib­uted ledger tech­nolo­gies have also dri­ven the dig­i­tal­i­sa­tion of trade and sup­ply chain finance. 

“Banks need to accept that the future of finance is decen­tralised and inte­grate blockchain and AI into their over­all dig­i­tal trans­for­ma­tion strat­e­gy,” says Inpay’s head of finan­cial insti­tu­tions Stan Cole. “They can remain a cen­tral part of soci­ety by cap­i­tal­is­ing on the tremen­dous oppor­tu­ni­ties tech­nol­o­gy brings in terms of an incom­pa­ra­bly high­er speed and low­er cost.” 

The biggest growth areas over the next three years will be cash man­age­ment and trade finance. More than 85 per cent of respon­dents to a McK­in­sey sur­vey plan to invest in cash man­age­ment APIs in the next three years and almost 50 per cent want to expand their trade finance APIs.

Banks can sup­port this by upgrad­ing their API capa­bil­i­ties to allow clients to ini­ti­ate self-ser­vice trans­ac­tions direct­ly. They can also cater to clients in dif­fer­ent time zones with real-time pay­ment pro­cess­ing, liq­uid­i­ty, risk and fraud man­age­ment, cash-flow fore­cast­ing, report­ing and pric­ing.