Mercator links API growth to open banking platforms

In response to interoperability trends in the financial service sector, Mercator Advisory Group Inc. released guidance on deploying and implementing application program interfaces (APIs). Developing an Appropriate and Sustainable Business Plan for an API Portal, published April 26, 2018, traces the API journey from internal use within an organization to broad deployment among competing enterprises.

Report author Tim Sloane, vice president, Payments Innovation and director of the Emerging Technologies Advisory Service at Mercator Advisory Group, said the European Union has enacted an "open banking" mandate, requiring financial institutions to open their banking portals to fintechs. These requirements will soon take effect in the U.S. market, which will necessitate open banking portals with clearly defined use cases, he advised. Pointing to leading companies, such as Visa Inc. and Bank of America, which have met this challenge, Sloane identified six successful approaches to implementing APIs.

"Interest in the European Union's revised Payments Services Directive (PSD2), open banking, fintech, and public hackathons has increased the relevance and visibility of application programming interfaces (APIs), yet it remains rare for a financial institution to have a business case for its API investment," Sloane stated. "This report provides identifies and analyzes six business cases and deployment models for developing an API portal and provides examples of successful implementations and warnings regarding where the main challenges are likely to occur."

Six approaches

Mercator's 26-page report defines APIs and explains how organizations can successfully deploy them. Following are six recommended approaches to deployment and integration:

1. Internal integration: This original use case for APIs remains the least-cost and most common deployment method.

2. Supplier integration: Working with external resources is generally more complex and costly due to compliance and risk management requirements.

3. Open banking: This method, like supplier integration, is also more complex and utilizes more expensive technology.

4. Corporate client integration: Integrating corporate clients involves trusted parties, which simplifies validation and testing and protects existing revenue.

5. Open API, innovation hub: Innovation hubs can be a high-stakes effort. The report highlights companies that have strategically planned for this type of implementation.

6. New business models: The last use case faces challenges similar to those of innovation hubs. Advance, traditional business planning is recommended.

"From internal integration to partner integration to entirely new business models, thanks to APIs, it is true that 'Software is eating the world,'" the report's accompanying infographic summarized. Related costs are as differentiated as the various models, which range from a few thousand dollars to millions in revenue, the report concluded.

The report found wide variations in scope, costs and value among various API models. While APIs have been around for more than 20 years, Mercator suggested effective planning and strategic implementation are needed to ensure their sustainability. The report makes clear the financial service sector is embracing transparent, interoperable and collaborative methodology. As new regulations require banks to open their API libraries to fintech competitors, financial service organizations must embrace a common definition of APIs while protecting their IT infrastructures.

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