Importance of API Economy and Open Banking

Utpal Chakraborty

Digitisation journey of a Bank starts with building Digital Skeleton, and one of the most critical aspects of it is building an effective API Ecosystem. And when I say “Effective” – it starts with a holistic integration strategy, a robust architecture that caters to security & regulatory requirements, and a governance model that not only addresses current requirements but can be extended to future needs.

APIs are a digital glue holding the IT systems of an Enterprise; hence API Economy plays a significant role in the digitisation journey of a Bank. It is instrumental in integrating the Banking IT ecosystem with various internal & external systems and digital channels. Banks that create and maintain a true API Economy can exploit significant competitive advantages.

The advent of the API economy has essentially revolutionised the way banks and FinTechs work within the financial services industry. While API technologies are not new, but the disruption in the financial industry that started recently compelled the banks and finance industry to gear up for the API Economy and Open Banking revolution. Some big banks who are frontrunners in the digital journey have made themselves equipped with a very good integration strategy & infrastructure, but there are a huge number of small and mid-size banks across the globe still figuring out the optimal path to reach there.

Although APIs are a great way to connect one system with the other, but the story doesn’t end there for a highly regulated institution like bank. It needs some more ingredients to build that robust and extensible API ecosystem.

APIs can be considered as effective multipurpose tools that enable the implementation of a true Open Banking Ecosystem. Open banking APIs are valuable assets to the banks & financial services since it allows them to –
1) Improve service offerings

2) Enhance customer engagement and

3) Create new digital revenue channels

An efficient API infrastructure enables the legacy banking system to transact with the external world and expose a variety of products and services to their customers through different digital channels. In this way, the banks can even leverage the innovations of the FinTech startups and move beyond the traditional definitions of banking. With open banking API strategy, banks can give the opportunity for FinTech startups to create innovative solutions and plugins to the bank’s IT ecosystem. I feel it’s the best way of encouraging innovation and creating business value from the same.

In this entire landscape, just to organise things in a better way, an Enterprise Service Bus (ESB) or an API Gateway essentially plays a crucial role. Enterprise service buses(ESBs) can be defined as software architectural patterns used to develop and implement communications among software applications that are mutually interoperable within a service-oriented architecture, SOA. An ESB, is an architectural pattern in which a centralized software component (an ESB product) enables the integration of applications. The architecture supports some core features like -Application Integration, Data Integration, and automation of business processes in Orchestratedmanner. The Enterprise Service Bus is a standardized integration platform combining Messaging, Web Services, Data Transformation, and Intelligent Routing for reliable connection and coordination of interactions between a large number of heterogeneous applications. An ESB platform is also expected to maintain transactional integrity while performing such functions.

With the emergence of ESBs, there is a way to integrate Web Services and SOA in a meaningful architecture to complement applications and services into a core that extends the extended enterprise at a wide scale. The overall purpose of applying technologies like SOA, EAI, B2B, and web services is to build an integration architecture that can be omnipresent throughout the extended enterprise and beyond. A Unified Connectivity Platform leverages SOA principles and the features of ESBs to enable truly reusable, service-oriented business architectures, which deliver agility and ease of development that an enterprise like a Bank need to remain competitive in today’s landscape.

Also Read:- Conversational AI Platform as Digital Fabric for Banks

Technically, integration components within the ESB are abstractly decoupled from one another, and connected through the bus as logical endpoints which are exposed as events driven services. Banking applications can plug into the bus when needed and are capable of having visibility and sharing data with any other applications or services plugged into the bus. For a bank, an ESB is an efficient way of exposing internal applications to their peers without building a point-to-point integration. This approach addresses many of the challenges that are obvious while doing an integration project in a Bank.

It is the API Economy of a bank that makes possible the ambitious initiatives like customer 360-degree analytics, ML-based personalised recommendations, rendering products & services in a variety of digital channels and many such projects that keep buzzing around nowadays. So, it would not be wrong if we say API Economy is the core of the digital transformation of a Bank.

(In Part-2 of this article, we will discuss another modern architecture named “Microservices Architecture” and an integration architecture named “API Gateway” and how these can revolutionise the application modernisation journey of Banks)

Views expressed by Utpal Chakraborty, Chief Digital Officer, Allied Digital Services Ltd., AI & Quantum Researcher

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