The rapid increase of application programming interface (API) integrations has been a significant challenge for banks for some time. However, it is now urgent that organisations find a solution and execute a strategy to avoid an API tsunami.
The situation has not materialised overnight. The urgency is due, in part, to ongoing modernisation efforts and growing open banking regulations, says Pieter de Wet, business development lead at FutureBank.
De Wet says the number of third-party integrations that banks might undertake each year is set to rise from around 15 in 2024 to 35 in 2030. “We also expect larger banks, or those deeply involved in digital transformation, to have to deal with even higher integration rates. Banks are aware of the approaching API integration tsunami, but while there’s lots of talk, there is still very little action.”
This could be due to a lack of experienced development teams and complexity of legacy systems, De Wet adds.
The drive for API integration is not just about embracing new technology. Global regulatory initiatives aimed at enabling fintech competition and increased innovation through open banking are gaining momentum.
In South Africa, the final regulatory framework from the Financial Sector Conduct Authority (FSCA) is still eagerly awaited, although more detail has been given with the publication of an updated Draft Position Paper on Open Finance in March last year.
De Wet explains that the updated paper provides more details on the final regulatory framework from the FSCA.
“The paper outlines the FSCA's approach to regulating open finance, which is a broader concept than open banking. Open finance allows for the sharing of customer data across a wider range of financial products and services, such as insurance, investments and pensions,” he adds.
He refers to information published by South African legal and tax services provider Webber Wentzel.
Details on the provider’s website reads: “Given the prevalence of the use of third-party service providers by financial institutions, the FSCA regulation plan introduces a new regulatory framework project called the Joint Standard – Requirements relating to third-party service provision/outsourcing (Outsourcing Joint Standard). Work on the Outsourcing Joint Standard is scheduled to take place over the 2024 and 2025 period flowing from the toolkit for Enhancing Third-Party Risk Management and Oversight, which was published by the Financial Stability Board (FSB) on 4 December 2023.”
Outdated legacy cores
A significant hurdle banks face when adopting new APIs is their reliance on outdated legacy cores.
According to IDC research, in a report commissioned by UK-based cloud banking technology company, Thought Machine, nearly 75% of global banks still operate on these old platforms.
De Wet says South African banks face challenges like the bottlenecks and innovation limits that are caused by legacy systems.
“Major local banks are actively working on modernising their systems. But in South Africa specifically, 85% of the top banks still prefer to own the entire value chain of banking, with third party-contributed business at only 15%. This suggests a high reliance on legacy systems and processes,” he continues.
This dependency on legacy infrastructure hampers their ability to scale API integrations quickly and efficiently.
“When unpacking the technical challenges, IT leaders must take into consideration what’s coming down the line. In the next two years, the pace of API integrations will accelerate as banks adopt AI, advanced analytics and customer experience tools so they can meet the growing consumer expectations and stay ahead of the competition,” says De Wet, who adds: “But by 2030, things will become even more complex as banks have to manage vast ecosystems of integrations, spanning many competencies, including security, compliance and customer engagement.”
Building vs buying: The hybrid approach
To effectively manage this growing complexity, many banks are opting for a hybrid "build-buy" approach.
Providing a centralised platform for data exchange between different systems and applications allows banks to manage API integrations more efficiently.
The road to API scalability lies in a hybrid approach, says De Wet.
The choice between building custom integrations or relying on third-party solutions is not a simple one, but by adopting a hybrid approach, banks can better navigate the complexities of the modern financial landscape, he adds.
“Ultimately, banks that can scale their API integrations efficiently will be better positioned to respond to market changes, deliver superior customer experiences and stay ahead of competitors. However, failure to act swiftly could lead to missed opportunities and operational bottlenecks that stifle innovation. The clock is ticking, and those who fail to prepare for the API integration tsunami risk being left behind,” De Wet says.
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