As businesses expand into new regions and trade with the rest of the world more than ever before, global banking transactions have become critical to their success.
Traditionally, big banks have provided these essential services, covering everything from transfers, payments and cash and asset management to finance and global trade.
It’s a silver pipeline that generates nearly $ 1 trillion in annual global revenue and is expected to grow to $ 7.2 trillion in ten years, according to industry estimates.
Previously, banks relied on legacy systems and technologies such as host-to-host file transfer to integrate their services with customer systems. However, while working well for one-step transactions, they struggle with more complex real-time features like reconciliation, business services, collections, and supply chain finance.
Faced with growing competition from more agile competitors, especially fintechs and digital banks, banking institutions have had to improve their game. Enter B2B (business-to-business) application programming interfaces (APIs), which allow banks to simplify transactions and provide customers with transparent service.
Why use APIs in the banking world?
But what are the main challenges of migrating to this new technology and how can banks overcome them? What has been the effect of the regulations? And how to capitalize on the biggest growth areas?
APIs operate in closed networks that integrate the services of banks with business systems and the workflows of their customers. They allow banks to scale complex operations and eliminate the need for brokers or service desks.
Banks like Goldman Sachs, JP Morgan and Bank of America have already taken the lead. Yet as a technology it is still in its infancy, with a lack of clearly defined industry standards, and is constrained by awkward governance infrastructure and protocols.
What are the disadvantages of APIs?
The biggest challenge is to develop a platform that is both user-friendly and compatible with customer systems. However, too many APIs are let down by poor or overly complicated designs, due to a lack of development expertise.
“API banking is a product with unique constraints and design challenges just like mobile or web banking,” said David Jarvis, co-founder and CEO of Griffin, a banking as a service provider. “You need to develop this expertise internally and no bank has invested in this area to date.”
They also need to be fully secure, well documented, and respond to ever-evolving regulatory changes. There is also the considerable cost involved, as well as the overhaul of existing systems and processes.
To overcome these challenges, banks must embrace technology and change, with a dedicated team focused on strategy development and rigorous testing of their APIs. They should also collaborate with customers and partners, including fintechs, thus spreading the cost of innovation and reducing time to market.
How to properly implement APIs
As an absolute first step, banks should invest in a digital banking platform that connects their gateway and the product processors and functions to enable their APIs. This platform informs all the capacities of modification, authentication, authorization and management of consent, as well as the connection of several sources of information.
Societe Generale 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 currencies [foreign exchange] within our platform we have created a one-stop-shop, ”says Sohail Raja, Head of Execution Platforms at Societe Generale and UK Digital Director. “This allows clients to do everything from managing their transactions to taking cash positions in different currencies.”
Citi, meanwhile, has partnered with treasury software vendors such as FIS, Kyriba, Oracle and SAP to integrate its API functionality into their core products. This month, its CitiConnect platform has reached one billion business customer calls since its launch in 2017, while API volume has grown by 60% in 2020.
“APIs are ideal 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 which makes possible a market or a vertical industry as a whole.”
UniCredit has also partnered with FinDynamic to create its platform, which allows customers to automatically view invoices through a web or mobile platform and approve invoices for payment. In September 2020, it launched the first open banking API with an IBAN check to allow customers to verify their customers’ account details.
Open banking innovation
The move to APIs is being fueled 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 required banks to publish their data in a secure and standardized form, so that it can be easily shared between authorized parties online.
“Industry needs like smart personalization and business banking services are now driving the conversation beyond banking guidelines,” said Vikram Gupta, global vice president of Oracle Financial Services. “These capabilities require access to high-quality information beyond regulatory mandates, giving banks the ability to tap new sources of revenue and provide better services to their customers while maintaining customer loyalty.” .
How New Technologies Are Supporting Global Transactional Banking Services
Simultaneously, artificial intelligence (AI) and automation have dramatically improved risk and liquidity analysis and forecasting in cash management systems. Blockchain and distributed ledger technologies have also driven the digitalization of trade finance and supply chain.
“Banks must accept that the future of finance is decentralized and integrate blockchain and AI into their overall digital transformation strategy,” said Stan Cole, director of financial institutions at Inpay. “They can remain a central part of society by capitalizing on the tremendous opportunities offered by technology in terms of incomparably higher speed and lower cost.”
The most important areas of growth over the next three years will be cash management and trade finance. Over 85% of McKinsey survey respondents plan to invest in cash management APIs over the next three years and nearly 50% want to expand their trade finance APIs.
Banks can support this by upgrading their API capabilities to allow customers to directly initiate self-service transactions. They can also meet the needs of customers in different time zones with real-time payment processing, liquidity, risk and fraud management, cash flow forecasting, reporting and pricing.