The impact of an open API economy and microservices on the financial industry

Published: March 18, 2018

The advent of the open API economy has the potential to unleash a new wave of changes in the financial services industry. Bank regulators are looking to drive better deals for customers by generating more competition through innovating customer information sharing, transaction initiation, and payment mechanisms. Their efforts, along with changing customer sentiment, are creating both threats and opportunities as the open API economy emerges.

An open API economy will accelerate competition and innovation within the banking industry by creating new demands for banks business strategies that lay pressure on their future revenue streams and challenge their profitability. Leading future banks will have a clear focus on their end customers and markets and will collaborate with other organizations to accelerate their market position.

An open API economy will enable the delivery of new products and services through collaboration among the business units within a bank, across the industry, and between banks and other related sectors of the economy, particularly technology and data businesses.

Europe is leading in API banking space on the back of the Payment Services Directive(PSD2) regulation, which forces banks to open access to accounts and payment initiation for third-party payment providers. While PSD2 challenges banks by impacting their well-established revenue models by capping the interchange rate, it also opens up new business innovation possibilities for them.

Adoption of open API will accelerate customer-centricity and increase transparency while at the same time enabling banks to be nimbler to scale on demand. Banks with retail and SME customers will see accelerated fragmentation of their value chain from new competitors entering the market and potentially disintermediation from their customers.

The rise of the open API economy will see an unprecedented number of new entrants entering the financial services markets.

Challenger banks such as Fidor (Germany) and Atom & Starling in the UK are adopting "API first" strategies to define their business model, which enables their customers to have on-demand products and services.

FinTechs have disintermediated banks to a large extent where end consumers have started engaging with FinTechs for a variety of financial transactions, whether they are in lending or the deposit space.

Aggregators will take the PSD2 drive to leverage access to accounts and payment initiation to develop propositions like personal finance management (PFM) and provide better insights to customers by offering competitive deals.

Technology giants like Apple, Facebook, and Google are advancing their game in the financial services business. They are taking full advantage of these possibilities by entering the payments market and getting ready for further disruption.

Banks have acknowledged API banking and are gearing towards responding to it. They are adopting short- to long-term strategies (accelerating value delivery in parallel through FinTech partnerships).

Open API banking opens up a very interesting era of banking transformation. While there is a lot of excitement, there are several operational levers to be considered for its foreseen successful adoption. Banks would need to establish the right operating model to drive profitability, ensuring that security standards and approaches are revisited for changing the business model. They would need to refine their data strategy to ensure its maximum leverage while creating customer-centric propositions.

Microservices in Banking

Microservices architecture is an approach to application development in which a large application is built as a suite of modular services. Each module supports a specific business goal and uses a simple, well-defined interface to communicate with other sets of service.

It splits monolithic applications into a set of services that talk to each other via open APIs. Each service performs one thing extremely well; the service and its API are a product that is discoverable, well-defined, and carefully maintained.

These self-contained services are then assembled as required to deliver complex functionality, even if they are deployed independently of each other. Services can scale independently too, making the software adaptable at runtime. And if one service fails, it typically won't bring down the entire system because of the resilience built into microservice-based digital banking solutions.

Microservices architecture has emerged at a time when the industry is going through a massive business transformation, where old ways of building monolithic architectures are about to disappear and the focus will be on more agile and scalable solutions.

Many companies have initiated their journeys towards Agile delivery and DevOps, which are paramount to realizing the success of microservice-based solutions. The financial services industry, especially banks, is considering this as no less than a boon while they are struggling with legacy applications holding back digital acceleration and innovation.

A microservice approach will provide opportunities to deliver value at regular intervals rather than waiting for a massive technology transformation to happen. Open API banking combined with microservices-based architecture will define the success in banking space in the coming years, where banks would be well positioned to accelerate time to market in a real sense.

Microservices architecture has its own benefits, which include improved agility, better reliability, elasticity, and global scalability. In the current scenario, when challenger banks are being built to accelerate the digital value propositions at lightning speed, large banks are also actively rethinking the fastest way to accelerate this transformation, and microservices could be one approach.

While it has promise future, it would require banks to rethink their operational support, delivery methodology, and required skills. A need to consider an upgrade in people, process, and technology will arise. The industry needs to agree on open standards to maximize interoperability with lower development costs across its common ground. Individually, banks will look for opportunities to enhance their core offerings using services provided by other organizations.

In a nutshell, the banking industry would comprise highly designed Lego blocks, and those would be assembled to meet on-demand services and product needs of future customers. Design thinking combined wit domain-driven design would be paramount to realize this vision.

The article was originally published on Dataquest and is re-posted here by permission.

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