As blockchain occupies much of the discussion and headlines on how financial technology stands to transform financial services, another dynamic is more stealthily making an impact.
The Application Program Interface, defined as a set of routines, protocols and tools for building software and applications, is enabling market participants to more efficiently connect with one another for the purpose of exchanging data and information.
“I call it the Silent Revolution,” said Leda Glyptis, director at Sapient Global Markets. “For B2B players, the advent of the API is changing their business model, their price point, their internal organization, and their system organization, including eliminating UDTs (data-transfer protocols) and spreadsheet-based processing.”
“You need to clean up your systems and make sure you have your data quality so that when your client makes an API call, they get exactly what they need,” Glyptis continued. “It’s also a Silent Revolution on the retail side, although possibly less silent with the advent of certain regulation that requires the creation of an open API layer. Then what becomes very interesting is that it opens up the door to anyone, banks included, to provide a layer of financial information aggregation services.”
Copenhagen-based Saxo Bank operates multi-asset trading platforms for retail clients and on a white-label basis for brokers and other banks. Christian Hammer, Saxo’s head of platforms, said the firm has focused on technology disruption since its launch in 1992, and was “fintech before the term was even invented.”
“In 2015, we launched our new SaxoTraderGo built on Open API from the ground up, with focus on usability and performance and seamless integration between desktop and mobile devices,” Hammer said. “Our Open API allows clients and developers to build further on the trading infrastructure we have spent more than 20 years developing. For example, hedge funds may want more specialised risk functions or clients may want more post-trade functionality. We cannot be everything to everybody and by opening our infrastructure to clients and developers we offer the possibility to tailor our platform to specific needs.”
Christian Hammer, Saxo Bank
“Fintech is just a fancy word for unbundling the value chain,” Hammer added. “Our strategy is built on three pillars. First, we wanted a clear consolidation of our own platforms which we moved to HTML5. Secondly we wanted our API to be available to external clients. Thirdly there is a huge opportunity to digitise the wealth management space and for robo-advisors.”
According to Silicon Valley Bank R&D Lead Dan Kimerling, here are two primary factors driving interest in API strategies: regulatory changes predominantly in Europe that are forcing financial institutions to expose interoperable end points and identity management services, and banks’ increased desire to collaborate with third parties.
“Banks have always had collaborations — the classic example is the bank that provides financing to the car dealer who sells you a car,” Kimerling said. “We’re seeing a lot more of these various types of collaborations, especially as the number of financial technology companies exploded in the past five to 10 years. A derivative aspect of that is how can banks that want to partner up with these types of fintech companies provide a scalable or clickable solution to enable, at a technical level, these collaborations? APIs are the technical way to do so.”
Kimerling likened the API evolution, or revolution, to the state of the internet in 1994, with similar reservations about the openness and transparency of the new model. “We can probably count the number of U.S. banks that have talked publicly about their API program on one hand,” he said. “I do think that people are getting a lot out of it, relative to where we are in the process.”
Among the challenges for banks in developing API layer is the availability and quality of data, much of which still ‘lives’ on spreadsheets, noted Glyptis of Sapient. “A second challenge is commercial: If you used to charge X for servicing and reporting, how much will you charge for providing an API with simple throttling access to how much of the data you just consumed?” she said. If you connect two huge institutions, then chances are the receiving institution will have no trouble at all consuming all that data and it will be much cheaper for them, or at least they would expect it to be much cheaper because they’re doing some of the processing themselves.”
While APIs are a new way of doing things for many financial services concerns, the technology itself is proven. “There is no grounds for concern around the bits and bytes behind it, but it’s having a massive and deep impact on how commercial relationships with the banks are being structured,” Glyptis said. “Again, I call it the Silent Revolution because it’s having a very real impact right now, but no one is looking at it because they’re too busy going to conferences about something like blockchain.”
Featured image by Yuichiro Chino/Dollar Photo Club