API Innovation in banking: Creating competitive advantages for businesses

While the financial services industry may have less of a reputation for innovation than hi-tech and consumer goods industries, the pace of solution innovation is accelerating, and the potential for transformative change is growing, inspired by banks, established and emerging technology companies, and regulators. A key factor in this acceleration is the increasing use of 'open APIs', which enable banks and third parties to leverage and monetise data, and enable new business models, payment and information flows. So what are APIs and what opportunities do they offer in practice?


Application Programming Interfaces (APIs) in brief

Firstly, an API is the part of a server that processes requests for information and sends responses. This capability can be packaged up, effectively into a product - an open API - to enable an organisation to provide access to data held in its systems to its customers, or to third parties. As a result, APIs become the vital senses through which organisations and technologies connect to and engage with each other.

APIs are not new and we use them every day. On our smartphones, whenever we use an app or website to search for the cheapest flights and hotels, book restaurants, check the weather forecast or pay for online purchases, APIs are involved. The question, however, is what potential open APIs confer to banking, and why this has emerged as such an important evolution. Financial institutions and their technology partners already use APIs extensively for their own purposes, such as accessing market data for pricing of transactions. The issue now, however, is how to turn the use of open APIs around so that banks are providers rather than consumers of data.

One of the biggest challenges in banks is that due to the scale, reach and range of activities, often developed over many years, data is typically held in separate silos or systems. This makes it very difficult, costly and time-consuming to extract data from multiple systems to create new solutions and services for customers. Instead, using APIs effectively provide an integration layer across these systems.

"By using APIs to access information from across systems, banks are able to create dynamic new solutions far more quickly and cost-effectively. In addition, by opening up these APIs to trusted third parties, such as 'fintech' companies, customers benefit from the creativity, agility and innovation of these companies with access to innovative new solutions."

Raof Latiff, Head of Digital,Institutional Banking Group,DBS

Catalysts for innovation

But while APIs are well-established across many industries, there are two key reasons why banks are now embracing the potential for innovation and building APIs to make their data more readily accessible: regulator demand and customer demand. Looking first at regulation, in Europe, for example, the second payment services directive (PSD2) and Access to Accounts (XS2A), which take effect at the start of 2018, oblige financial institutions to offer customers and third parties the ability to have access to their data via APIs. The aim is to increase competition and fuel innovation in the payments space, primarily to benefit consumers, but the regulations also impact on commercial and corporate customers. 

Regulatory intervention is not limited to Europe, and regulators around the world are motivated not only to increase competition using open APIs, but also to fuel collaboration, innovation and financial efficiency across ecosystems, therefore enhancing overall competitiveness. As the Monetary Authority of Singapore’s Chief Fintech Officer shared1, "To this end, it is necessary for firms to look at how they can effectively meet existing customer and business expectations. If we want to realise our vision of becoming a smart financial centre, the key enablers of innovation - rapid experimentation, active collaboration, and a conducive ecosystem must be present. The Monetary Authority of Singapore (MAS) is of the view that the proliferation of Application Programming Interfaces (APIs) in the financial sector will facilitate Singapore’s transformation into a smart financial centre."

The second key driver is customer demand. While some banks continue to think of open APIs as a technical requirement to meet regulatory demands, banks that do not take the initiative to build competitive services will find their position rapidly eroded by third party payment service providers. According to a recent McKinsey report2, “The value at stake is significant. McKinsey analysis has estimated that as much as $1 trillion in total economic profit globally could be up for grabs through the redistribution of revenues across sectors within ecosystems. That makes APIs, which play a crucial role in linking organisations and technologies in ecosystems, a significant competitive battleground capability."

Many solutions have been targeted at providing new payment services to retail customers, but these solutions offer equivalent and in some cases greater value for corporations, such as to optimise collections. Furthermore, while payments are a key area where we have seen innovation so far, the potential extends far beyond this. By bringing secure data from disparate sources together, whether within one organisation or across a wider ecosystem, and leveraging big data, artificial intelligence and biometrics, banks and technology companies are in a better position to identify unusual financial transactions, enhance transaction and data security and improve access to information for liquidity and risk management purposes.

APIs in practice: transforming business models

Corporations of all sizes and across many industries can benefit from open APIs, integrating transaction and information flows in new ways that are closely inter-connected with their business model and create competitive advantage. For example, Grab, South East Asia's leading ride hailing platform, has worked with DBS in Singapore to introduce cashless payments for taxi fares without the cost or delay of using cards. This collaboration has resulted in GrabNow, an app that enables passengers to pay electronically through Grab’s cashless payment capability, GrabPay. This offers convenience and security for passengers, but drivers also benefit from the ability to transfer fares directly to their account or withdraw cash via ATMs.

DBS is also working proactively with partners to enhance clients' internal processes. For example, DBS and leading cloud accounting platform Xero recently introduced a new API-driven capability to enable Singapore businesses to connect their DBS business banking accounts directly to their accounting platform, creating a seamless, secure, timely flow of transactions and information. This replaces costly and time-consuming integration projects and greatly reduces the time spent on importing and reconciling bank statements, currently a major challenge and drain on productivity amongst smaller businesses.


Leveraging the opportunity

Looking ahead, the potential to use open APIs to design new ways of interacting with customers, suppliers, transactions and information is transformational. Banks that do not invest now will pay high opportunity costs and see an erosion in their competitive value. This applies in every region, but the risk and indeed opportunity is strongly apparent in Asia where the pace of innovation is fastest and the potential to create smart societies is greatest. Similarly, corporate treasurers and finance managers have an unprecedented opportunity to design workflow and engagement tools that build competitive advantage and optimise efficiency, transparency and control.

"As banks, fintechs and corporations co-operate and co-create, open APIs provide an essential means of accessing and sharing data to benefit the ecosystem as a whole. Corporations can benefit from these new solutions that enable them to leverage data to identify areas of inefficiencies and potential opportunities to improve returns."

Raof Latiff, Head of Digital,Institutional Banking Group,DBS


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