It seems in the news every day that I read something about how APIs will change banking, how PSD2 is a game-changer, how banks that embrace APIs will lead the future, and so on. But what I’ve yet to see is a deep understanding as to what APIs are, and why they can be such a game-changer.
What are APIs?
APIs (application programming interfaces) are simply a contract; a defined set of inputs and outputs that allow two bits of software to talk to each other. APIs have been around pretty much since computers existed. What has been revolutionary over the past decade is how low-cost computing has put a computer everywhere, how the internet brought all these computers together, and how representational state transfer (Rest) has simplified getting these computers to talk to each other.
We now live in a world where you can buy a computer for less than $50, which has the power and connectivity to interact with every part of your digital life. This is the game-changer the API economy brings.
How do APIs work?
To make this real, I’ll provide you with a real example unrelated to finance, using a website called IFTTT (if this, then that). IFTTT is a website that allows you to create small programs called applets. Applets allow you link multiple APIs to achieve a result – a new process that was otherwise not possible. Let’s take an example. In the latest BMW cars, there’s a feature called ConnectedDrive, which connects your car to the internet. Traditionally this would be linked to the manufacturer via a custom app, and you could check where your car is, check that it’s locked, check the fuel level, and so on. However, BMW exposes APIs via BMW Labs, which allows other computers and systems to also read this data.
Garageio allows you to control your garage door from your phone, via its service, and via its custom app. Again, this would normally be a closed system, limited to just this manufacturer’s app and system. However, Garageio also exposes an API.
Finally, there’s a connection created between these two APIs in an IFTTT applet (though it could quite easily be coded by a developer in a matter of minutes), which checks your car’s location against your home location, anticipates your arrival and opens your garage door for you.
This is the power of the API. It allows computer-to-computer communication for very little effort/cost, which breaks down silos and exposes new value to both systems that goes way beyond what each could do on their own.
Of course, there is a downside here: each of those systems loses some control over the total experience. So if something fails to work, whose fault is it? BMW? Garageio? IFTTT? And how does this impact the end user?
APIs allow you investment in digital glue. Bringing together multiple APIs for a low cost can result in new experiences that provide much more value than any of the parts alone.
The API revolution is truly a game-changer. Why? Because it allows new experiences to provide far more value for far less cost. However, it comes with risk: those experiences will no longer sit in silos, but will spread across many touchpoints.
For banking as a sector, it’s undeniable that this change will come, and PSD2 is testament to that. Who would actually lead in the overall customer experience and be a part of the ecosystem, or be impacted by others, remains to be seen. What’s clear to me is that APIs enable silos to be removed and customer experience to be put first and foremost, and I think that any bank that thinks about customers first will do well in the future.
Now I’ve covered why the API economy is such a game-changer, in my next post I’ll investigate how this could impact customers.
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