G00270958

The Business Value of Banking APIsPublished: 14 January 2015

Analyst(s): Kristin R. Moyer

APIs can be used to address top CEO priorities, but few board members,senior executives or business leaders understand how. CIOs can acceleratedigital banking transformation by clearly articulating API business value tokey bank decision makers.

Impacts Banking APIs enable CIOs to improve net profits by increasing addressable market share,

creating new business models, and reducing time and cost to market.

Banking APIs allow CIOs to improve internal and external user experience by enabling mobility,creating new ecosystems, crowdsourcing new ideas, and attracting modern developmenttalent.

RecommendationsBanking CIOs should:

Communicate the business value of APIs based on top CEO and business executive priorities:revenue, cost, user experience and talent management.

Expand addressable market share by providing APIs for data the bank already makes publiclyavailable (for example, foreign exchange rates, interest rates, and branch and ATM locations).

Use APIs and hackathons as a way to tap into new internal and external ecosystems, and toattract mobile development talent.

AnalysisAn API is an interface to an application capability that can be used programmatically (see"Choosing an API and SOA Governance Architecture"). A single component or service can exposemany interfaces to support different interaction models or protocols. APIs have been used for a longtime by bank IT, but, during the past 10 years, the Web incarnation of APIs has emerged andenabled e-commerce, social media, mobile and cloud services.

APIs are now being used both internally and externally to help connect the physical and digitalworlds by making it easier to:

Integrate and connect people, places, systems, things, etc.

Create new user interfaces (such as mobile, Web, social and other apps).

Share data and information.

Authenticate people, places, things, etc. (through standards like OAuth).

Enable transactions (such as payment acquiring).

Many boards and CEOs in the banking industry are concerned about using APIs (especiallyexternally) due to security and regulatory compliance concerns. Those concerns are valid andreasonable, but can be addressed by proper API usage policies and application infrastructureinvestments. APIs can help CEOs and senior business executives achieve many of their topstrategic priorities (see Table 1). This is reason enough to use banking APIs, but regulators mayultimately force the issue. Regulators in some geographies are poised to require open banking potentially through APIs, as may be the case for PSD2, the legal foundation for the creation of asingle market for payments in the European Union.

Table 1. The Ability of APIs to Address CEO and Senior Executive Priorities

Business Value of APIs Business Priorities (Rank) Growth Constraints (Rank)

Net Profits

Revenue/growth No. 1

Cost No. 3

User Experience

External (Customer Experience) No. 2

Internal (Talent Management) No. 8 No. 3

Source: Gartner (January 2015)

Banking CIOs will have the most persuasive and compelling influence on CEOs and senior businessexecutives by articulating the business value of APIs in terms of net profits and user experience (seeFigure 1).

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Figure 1. The Business Value of Banking APIs

Net Profits User Experience

Revenue

Product accessibility

New business models

Cost

Efficiency

Time to market

External

Mobility

New ecosystems

Partner integration

Internal

Mobility

New talent

Source: Gartner (January 2015)

Figure 2 covers the impacts and top recommendations for banking CIOs who use APIs toaccelerate digital banking transformation.

Figure 2. Impacts and Top Recommendations for Banking CIOs

Impacts Top Recommendations

Banking APIs allow CIOs to improve internal and external user experience by enabling mobility, creating new ecosystems, crowdsourcing new ideas, and attracting modern development talent.

Enhance mobility by providing APIs for data the bank already makes publicly available (for example, foreign exchange rates, interest rates, and branch and ATM locations).

Banking APIs enable CIOs to improve net profits by increasing addressable market share, creating new business models, and reducing time and cost to market.

Use hackathons and APIs to generate new ideas and bring winning solutions to production to reduce time and cost to market with new business capabilities.

Source: Gartner (January 2015)

Impacts and Recommendations

Banking APIs enable CIOs to improve net profits by increasing addressable marketshare, creating new business models, and reducing time and cost to market

Revenue

APIs can expand addressable market share by making product, pricing and other data available forcomparison and consumption through social media sites, online stores and other digital media.

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Some examples of banks using APIs to make product, pricing and other data more accessibleinclude:

Capital One is using APIs to enable merchants to offer personalized deals and enablecustomers to pay with rewards points.

Citibank used an API to enable developers to access Citi Beneficios (where customers can viewmarketing offers) as part of its Citi Mobile Challenge LatAm 2014.

ASB launched an API of publicly available data like foreign exchange rates, interest rates, andbranch locations and ATM locations.

APIs also enable banks to create new business models that may or may not involve traditionalbanking services. Some examples of banks using APIs to create new business models include:

The E*Trade Developer Platform enables partners to create investment applications thatleverage its market data offerings, order-routing capabilities and other services.

Fidor created a layer of standardized APIs (fidorOS) for payments, accounts and communitiesthat sits on top of a standard core banking system (Bancos). It enables partners to use fidorOSto build their own banking services, build apps for Fidor customers, integrate solutions intoFidor and resell fidorOS. Fidor is essentially monetizing its fidorOS technology, in addition to itstraditional banking services.

Cost

The traditional IT approach to bringing new capabilities to market for most banks is driven by abusiness idea that gets documented, shared with IT and goes through a prioritization process. If theidea is selected, it goes to functional specifications that take months and extensive documentationto complete. Many of the requirements have already changed by the time the idea gets to coding.The line of business often proposes extensive changes by the time the new capability goes to useracceptance testing in order to catch up to changing business conditions. A loop of fixing andrevisions then makes it take even longer to get the capability to market. The whole cycle often takes18 to 24 months. Business ideas that are enabled by packaged vendor solutions suffer from someof the same problems.

APIs can enable CIOs to reduce costs through faster time to market, lower delivery costs and easierpartner integration. For example:

BBVA substantially reduced internal development costs as part of its Innova Challenge.

One large U.S. bank is bringing 15 new apps (from a recent hackathon) to market within a 6-month to 9-month period, and for a fraction of the time and cost to do so internally.

MasterCard, Visa and American Express are using APIs to reduce partner integrationcomplexity.

Recommendations:

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Use internal and/or external crowdsourcing to identify a differentiated bank capability. Then,build an API that can make the differentiated bank capability more accessible to customers andpartners. For example, Capital One has a differentiated capability with card payments andrewards and launched some APIs in that area.

Use APIs to create new business models. For example, if underwriting for low-valuetransactions is a differentiated capability, explore the potential to provide this capability via APIsto other financial institutions, digital firms and others as a platform on which they can build newservices.

Use hackathons and APIs to generate new ideas and bring winning solutions to production inorder to reduce time and cost to market with new business capabilities.

Banking APIs allow CIOs to improve internal and external user experience byenabling mobility, creating new ecosystems, crowdsourcing new ideas, andattracting modern development talent

Mobility

One of the ways nonbanks and "fintechs" are excelling is by meeting specific customer needs withfocused mobile apps (see "Anyone Can Build a Bank"). This is putting pressure on banking CIOs tokeep pace with disruptive innovation. CIOs are increasingly being tasked with improving mobility forinternal employees as well.

Some examples of banks using APIs to improve customer and employee mobility include:

Commonwealth Bank of Australia launched its Pi solution, which includes an SDK and an appstore. Pi enables developers to build customer-facing apps and needs-based solutions bycategory (business analytics, business tools, point of sale, etc.), industry (charity, hospitality,entertainment, etc.), and device (Albert, Leo, Emmy).

BBVA focused on enabling mobility and innovation by starting with internal API use (for apps),and progressing to partner APIs for collaboration through two hackathons: the Innova Challenge(external mobility) and InnovaApps+ (internal mobility).

Credit Agricole provides an SDK and app store to enable developers to build customer-facingmobile apps and interact with ideas users post to the store.

Citibank used an API to enable developers to create innovative consumer and business mobileapps as part of its Citi Mobile Challenge LatAm 2014.

New Digital Banking Ecosystems

Banking CEOs identify talent management as one of their biggest growth constraints (see "The2014 Gartner CEO and Senior Executive Survey: A Financial Services Industry Perspective"). Yet, alarge degree of talent inside a bank is relatively untapped due to organizational structures andgeographic restrictions that serve as barriers to innovation and prevent ideas from being shared.

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APIs can be used to engage new digital banking ecosystems of developers and partners.Hackathons and APIs together are one way for CIOs to tap into new internal and externalecosystems. This is a way of crowdsourcing new ideas that an individual business unit may neverhave thought of.

Many banks begin by experimenting with APIs and hackathons internally, and identify bestpractices and lessons learned before going external. Just a few examples of the many banks thatare using APIs and external hackathons together to tap into new developer and partner ecosystemsinclude:

Bank Leumi ran the Leumi Hackathon, with a focus on improving user experience, onlinepayments, social media, promoting small and midsize businesses, gamification, and the Internetof Things (IoT).

ING ran a hackathon focused on the next-generation bank.

Banco Sabadell ran Instant Banking Hack Day, with a focus on new Web and mobileapplications for payments, the IoT, and contextual and predictive customer service.

Talent Management

Mobile/tablet content design/delivery and mobile app development are two of the top three areas ofknowledge, competence and skills that will have the greatest impact on digital business (see "TheForces Reshaping IT Skills, Talent and Leadership"). APIs can help CIOs improve talentmanagement because:

They can give a bank an innovative, tech-savvy and customer-focused image.

Internal APIs enable CIOs to attract modern developers and digital talent, who prefer workingwith APIs (particularly REST) for mobile app development.

Internal APIs and hackathons enable CIOs to reach more broadly across talent within theenterprise, and to capture innovative ideas that otherwise may not be realized or evenidentified.

External APIs and hackathons enable CIOs to reach beyond traditional partners to third-partydevelopers and fintechs, who prefer using APIs for things like mobile app development andservice delivery (see "Anyone Can Build a Bank").

Recommendations:

Enhance mobility by providing APIs for data the bank already makes publicly available. Forexample, ASB provides APIs for foreign exchange rates, interest rates, and branch and ATMlocations.

Run an internal and/or external ideation campaign to identify ways to improve the customerexperience.

Deploy an API and run a hackathon that is focused on one or more of the top ideas identified inthe ideation campaign.

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Deploy an API for commercial banking customers that lets them build their own solutions. Forexample, Fidor lets its commercial banking customers build their own solutions via an API layer(fidorOS) that sits on top of a standard core banking system.

Create and nurture a third-party developer community to tap into talent outside the bank. Beginby enabling peer networking and providing educational opportunities. Over time, progress tohackathons or an API platform that is continuously available.

Use external hackathons as a way to build relationships with promising talent and makeemployment offers as appropriate. Several large banks we know of have done this successfully.

Gartner Recommended ReadingSome documents may not be available as part of your current Gartner subscription.

"Reference Model for Open Banking APIs, Apps and App Stores"

"API Deployment Models that Accelerate Digital Banking"

"Digital Banking and the Role of APIs, Apps and App Stores"

"Hype Cycle for Open Banking APIs, Apps and App Stores, 2014"

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AnalysisImpacts and RecommendationsBanking APIs enable CIOs to improve net profits by increasing addressable market share, creating new business models, and reducing time and cost to marketRevenueCost

Banking APIs allow CIOs to improve internal and external user experience by enabling mobility, creating new ecosystems, crowdsourcing new ideas, and attracting modern development talentMobilityNew Digital Banking EcosystemsTalent Management

Gartner Recommended ReadingList of TablesTable 1. The Ability of APIs to Address CEO and Senior Executive Priorities

List of FiguresFigure 1. The Business Value of Banking APIsFigure 2. Impacts and Top Recommendations for Banking CIOs