Impact of Open API Economy and Micro Services on Financial Industry

By: Anil Awasthi, Global Head – Retail Banking, Virtusa Corp

The advent of open API economy has potential to unleash a new wave of changes in the financial services industry. Bank Regulators are looking to drive better deals for the customers by generating more competition by 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 which lay pressure on their future revenue streams and challenges 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 PSD2 (Payment Services Directive) 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 model by capping interchange rate, it also opens-up new business innovation possibilities for them.

Adoption of open API will accelerate the customer centricity and bring the transparency, 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), Atom & Starling in the UK are adopting “API first” strategy to define their business model, which enables their customers to have “on-demand” product and services. Fintech(s) have disintermediated banks to large extents where end consumer has started engaging with Fintech for a variety of financial transactions whether it is in lending or deposits space. Aggregators will take the PSD2 drive to leverage access to accounts & payment initiation to develop propositions like PFM (Personal Finance Mgmt.) and provide better insights to customers by offering competitive deals. Technology giants like Apple, Facebook, Google are advancing their game in the financial services business by taking full advantage of these possibilities by entering 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 strategy (in parallel accelerating value delivery 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 a right operating model to drive profitability, ensuring that security standards/approaches are revisited for changing the business model. Refining data strategy to ensure there is maximum leverage of it while creating customer centric propositions.

Micro services in Banking

Micro services 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.

Micro-services architecture has emerged at a right time when the industry is going through a massive business transformation, where old ways of building monolithic architectures are about to disappear and focus would be towards more agile and scalable solutions. It is witnessed that many companies have initiated their journeys towards Agile Delivery, and DevOps, which is paramount for realizing the success of micro service based solutions. Financial services industry especially banks are considering this as no less than a boon, where they are struggling with legacy applications holding digital acceleration and innovation. Micro-Service approach will provide opportunities to deliver value at regular intervals and not wait for a massive technology transformation to happen. Open API banking combined with micro services 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 the real sense.

Micro services architecture has its own benefits which include improved agility, better reliability, elasticity and global scalability. In 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 micro services could be one of the well-adopted approaches.

While it holds promising 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 on lower development costs across their common ground. Individually they’ll look for opportunities to enhance their core offerings, using services provided by other organizations.

In nutshell, the banking industry would hold high design Lego blocks, and those would be assembled to meet on demand services and product need of future customers. Design thinking combined with the domain driven design would be at paramount to realize this vision.