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Banks & fintechs: embracing an API-first strategy with a middleware technology

APIs offer blue-sky potential in the financial services sector. But to achieve success, banks need to completely reimagine their tech rather than introduce APIs in a piecemeal fashion.

Photo via Douglas Lopes on Unsplash
Photo via Douglas Lopes on Unsplash

This article is Sponsored Content by Paul Shumsky for Velmie

APIs offer blue-sky potential in the financial services sector. But to achieve success, banks need to completely reimagine their tech rather than introduce APIs in a piecemeal fashion.

Companies like Revolut, Stripe and Robinhood have highlighted the blue-sky potential Application Programming Interfaces (APIs) offer businesses in the financial services sector. But the success of these FinTech’s also hinges on their API-first business strategies and other companies looking to unlock the full potential of this powerful bridging technology will need to completely reimagine their businesses rather than introducing APIs in a piecemeal fashion. 

Crucially, API-first companies also need to make astute choices about the kind of technology platform underpinning their business because there are different options and their decisions will determine the cost, control, and flexibility they have over their API ecosystem.

APIs are not new. They’ve been around for decades but it is only since regulations paved the way for open banking in 2019 that they have become mainstream tools. The technology enables Fintechs and, more recently, established businesses to connect different software systems and services with one another internally or externally.

But increasingly it’s become clear that API-first companies will have the advantage in the years ahead. So, what’s the difference between an API-first company and a company that uses APIs in their business? An API-first company develops a business strategy that envisages a new future in which the business offers a cohesive and comprehensive customer offering by putting together a compelling ecosystem of products and services that are the best industry can offer. It then develops and puts together the APIs needed to drive this ecosystem of best-of-breed products and services delivered by the company or third parties that specialise in different lines of business.

Benefits include the ability to combine disparate services into a cohesive and extended customer offering in which specialist providers offer the products and services they do best rather than one company trying to do it all. They also offer far more flexibility than the monolithic legacy systems that operate off a cumbersome core technology system, which would need to be overhauled in its entirety to incorporate new products and services. Instead, companies can plug in a new service to meet changing customer demands or internal business needs as and when needed.

APIs also facilitate the seamless transfer of data in an era when personalised experiences that are informed by customer behaviour have become the ticket to enhancing customer satisfaction and, in so doing, setting a company apart from their competitors. 

Gartner Vice President Kristin Moyer explains: “The API economy is an enabler for turning a business or organization into a platform. Platforms multiply value creation because they enable business ecosystems inside and outside of the enterprise to consummate matches among users and facilitate the creation and/or exchange of goods, services and social currency so that all participants are able to capture value.”

In contrast, companies that introduce APIs on an ad hoc basis into their business don’t gain from the deep and extensive strategic insights into what the end-result will look like and how compelling it will be for its existing and future customer base. 

BaaS and API orchestration

To maximise the benefits an API-first business strategy has to offer, companies need to make informed choices about how to establish the technology backbone of the business. This choice will determine how easily the business can adapt to future circumstances cost-effectively and with agility.

Companies operating in the API economy don’t always get this right, choosing to build their ecosystem on top of a single software as a service (SaaS) platform, which compromises the whole idea of building an API-first customer offering served off a platform that orchestrates multiple APIs.

Banking SaaS (BaaS) platforms have become popular because they are more cost-effective than the traditional alternatives to building systems from scratch. They also vastly accelerated the time-to-market, which is critical in the disruptive and highly competitive fintech market, and they offer businesses access to many features. 

These benefits appear highly attractive initially, but companies often struggle with some of the disadvantages of building a platform on a single SaaS infrastructure. In a survey conducted by Velmie, respondents identified the following as the biggest drawbacks to relying on BaaS when setting up an API-first business: regulatory requirements make it difficult to use these systems, they are inflexible and the software cannot be customised to meet their ongoing needs. 

Almost 20% felt that another challenge of working with BaaS vendors was there were missing features and different product road maps. Another concern was that a BaaS-based platform was not sustainable in the long run due to license and transaction mark-up fees. 

Thus, while BaaS platforms look attractive at the outset, companies often find themselves hooked into an API service that no longer meets their demands and doesn’t sustain their business and product strategy. 

In contrast, clients who opt for API-first system development strategies avoid having to overcome any of these challenges because it is less expensive in the long-term, gives the company far more flexibility to customise their product and service offerings over time. The company also has more control over the development of the APIs because it owns the software. 

Velmie CTO Sasha Kukareko says: “The backbone of the Velmie banking software is the API ecosystem, which facilities integrations with different financial services and technologies and reduces time to market for our clients. To provide a seamless, error-free customer experience we use a dedicated orchestration layer that ensures all APIs in the ecosystem communicate with each other in the same language simultaneously. This layer automates workflows by coordinating activities in the data pipeline between different data sources.”

According to Gartner, 50% of new software capabilities will be incorporated as API-centric SaaS services in 2023. The decoupled nature of modern software, with the back-end no longer tied to the front-end systems, has accelerated the development of a composable application approach because back-end capabilities can be developed and even launched independently of the front end. 

Velmie helps organizations shift away from monolithic software applications that are tightly coupled and highly interdependent, making it difficult to make a change without affecting the entire architecture, toward the modular platforms built from several discrete capabilities that power API-first business ecosystems. 

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