Five years ago, we'd have been hard pressed to find someone in finance who knew what an Application Programming Interface (APIs) was. Today, most banks and other financial firms have implemented their own APIs. Their systems are ready to interface with partners and consumers in ways that provide customers with extra value and the institution itself with new ways to grow.
But what is the best way to get the biggest return on investment in APIs?
In this FAQ, we take a look at the ins and outs of API monetization.
A company can invest in the creation of APIs which solve specific challenges for it. API monetization allows other companies with the same or similar challenges to use the company's APIs, in return for a fee. Each monetized API instantly creates a new revenue stream. And by offering additional services related to an API for instance, integration consultancy, business advice and so on there is the potential to create many more additional revenue streams.
Besides offering other companies access to customers, APIs can also help companies to cut their time to market. Rather than re-invent the wheel when faced with problems, companies can use APIs a bit like Lego blocks, to simply slot into their platform and solve the problem for them. And, of course, they will pay for the service.
Organizations can monetize any API which is not part of a proprietary or sensitive process. Types of APIs to monetize include (ensuring compliance and customer consent in mind as appropriate):
For instance, a bank can develop APIs which resolve the challenges of providing account verification, FX conversion, fraud prevention services to address specific requirements by challenger banks / financial service providers.
There are relatively few risks to API monetization. Fears of technology theft can be addressed through proper copyrighting and a tightly written legal contract between a company and those that lease its APIs.
Working with the specialized external partner can help to address other potential risks: for instance, by taking steps to ensure that APIs are secure and cannot fall into the wrong hands. The same external partner should also be able to help with the wider technical and business aspects of monetizing APIs: for instance, designing a payment model that is robust enough to ensure maximum return on investment in a fast-moving digital environment.
By monetizing APIs, organizations can turn a sunk-cost investment into a new revenue stream. It also allows to turn departments which have been cost centers, for instance, tech support or internal developer teams, into revenue generators.
Banks often have centuries of brand equity and consumer trust as well as customer relationships stretching back decades. Entrants to the market, such as fintechs, have none of these things. They need a way to get in front of consumers and gain their trust. What better way, than being embedded in the experience of using the consumer's trusted bank app?
Beyond simply offering new services by integrating with partners, APIs can help make your organization more intelligent, allowing it to improve its customer experience. By integrating across value chains 'including owned and third-party touchpoints' and by enabling a much faster-pace of customer interaction, APIs allow to gather data on how customers prefer to interact and what products and services they like on the fullest possible range of channels and devices.
Some of the most lucrative markets in financial services are in rapidly developing middle-income countries, where there are still large pools of as-yet unbanked but increasingly prosperous consumers. Often these consumers don't have PCs, the normal way for them to access digital services is through mobile apps.
To reach these customers, financial services organizations need to be able to offer them a meaningful mobile experience in their local language. Ideally, products and services should be on offer via platforms people already know and trust.
Building such a platform that meets all these criteria would be prohibitively expensive. Using open APIs can accelerate the development, and cut the costs, on any owned platform for these markets. At the same time, it enables to easily and economically integrate with local partners, without language barriers.
There are several potential revenue models associated with API monetization in banking. The most common are:
There is also an opportunity to generate extra revenue by providing integration, technical and business support for companies licensing third-party APIs.
Download our new white paper, Open Banking Beyond Compliance to learn about why monetizing open banking APIs is vital for long-term success.
In this white paper, Virtusa surveys the current open banking landscape and puts forward recommendations for effective API monetization, including API pricing models, risk and quality control mechanisms, potential new business models, and strategies for open banking. Download here.
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Rapid transformation, coupled with innovative strategies, is shaping the banking industry. Banking needs today involve delivering immediate value in the fast-changing environment. Legacy systems often act as impediments to transformation initiatives; at the same time, they provide critical capabilities to run day-to-day operations.
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