In financial services, APIs play a huge role in enabling connectivity, interoperability, and consolidation, whether internally within different business units or externally with service providers or end clients. In essence, APIs are data delivery mechanisms that allow firms to easily transfer data from one place to another.

As usage and adoption of APIs within the capital markets increase, firms should still be cognizant of what they want to achieve using APIs and be aware that not all APIs are created equal.

According to a McKinsey report, banks are increasingly relying on APIs internally to reduce costs and complexity associated with IT integration. In its 2020 McKinsey global survey on APIs in banking, about 75% of banking APIs are used for internal purposes, and 20% are used externally to support integration with business partners and suppliers. According to the report, banks plan to double the number of these APIs by 2025.

“To put it mildly, there has been a flood of APIs,” Arvind Swami, director for the financial services industry in Asia-Pacific at Red Hat, tells WatersTechnology. However, the IBM subsidiary has observed that at some large financial institutions, only 5% of APIs are being consumed.

One of the reasons for this, Swami says, is that there are no clear standards for using APIs. And there is still a limit to how much data firms are willing to share. “On the external side, there has been reluctance in terms of sharing, or opening of systems. We saw that even in Australia, when the customer data rights came, there was a lot of pushback from the larger financial institutions,” he says.

So the issue becomes more about the willingness of the firm to share data with others and not just about interoperability.

Build it right

Equally important is how those APIs are integrated. If it’s built right, what is being built internally can later easily be opened to become open APIs, adds Swami.

“A lot of the financial institutions we have spoken to that started first with an open API strategy are now relooking at all of it, because they’ve created so many open APIs and not many of them are in use. Secondly, they have two layers: one internal and another external, which is managed separately. It creates an operational nightmare,” he says.

It comes down to creating a robust API framework and strategy—and Swami says many argue over whose responsibility that is.

While the consumption of APIs may seem low, other sources believe it will decrease operational risk rather than add to it, and therefore become the default setting for firms to push and pull data.

Mathew Kathayanat, head of product for Asia-Pacific at Deutsche Bank, says APIs are one channel for data that sits alongside other channels like Swift, web portals, and self-servicing tools.

APIs offer a more real-time datafeed and greater integration opportunities than the other channels. APIs can also allow banks to enhance the information contained—for example, adding insight from additional data like the likelihood of failure on a settlement.

Kathayanat says the key is how firms use the integration and additional insight in APIs to drive change to their traditional models and move toward a multi-party integrated workflow rather than the serial message-based process most firms have in place today.

“In the long-term, APIs may just be a stepping stone toward a single source of data that we all operate on—that is the promise of the integrated digital and data ecosystem,” he says.

Using APIs could compensate for the existing limitations in, say, Swift messaging standards. For example, an API payload—the data being transported—can eliminate the need for the MT568 Swift message by incorporating enriched and additional details. MT568 is a Swift message used to provide instructions and details relating to a corporate action event.

Swift has tried to remedy that using its ISO 20022 API format to include a list of all impacted accounts in a single message. MT564—the message used to provide an account owner with details of a corporate action event along with possible elections—has a limitation of 50 data fields per message, whereas using an API format, an account owner could receive all details, even if it contained, say, 80 data fields in a message.

‘Give me APIs’

For all the efficiencies that APIs bring to firms, it’s important to remember that the data still has to be cleansed, maintained, and normalized, in terms of structure, values, content, and fields.

Steve Fazio, co-founder and chief product officer at AccessFintech, says APIs saw a boom 10 to 20 years ago due to the growth in user interfaces. That then led to the rise of website aggregators.

“It happened in every industry. Kayak did it for airlines, and we had firms doing it in capital markets. Now you have the buy side saying, ‘Build me an API, or give me an API store and I’ll fetch the data.’ But what they didn’t get was that it’s going to be different APIs [from multiple different sources] and that API management is a lot of work,” he says.

For example, there are many ways firms can refer to a “buy” and a “sell.” At some firms, it could be “B” and “S”; at others, it may be “+” and “-”. It can vary for a simple distinction between a buy and sell classification. And that’s not even getting into how banks deal with entity names.

“As a buy-side firm, I now need to step in and normalize all of this,” Fazio says. “And lastly, I have to build a container that can consume these APIs. And most buy-side firms will say, ‘Give me APIs,’ and they sign up for the API. And the first thing we hear is they come back and say, ‘Our technology team doesn’t have anywhere to actually display the API. So can you give me an Excel spreadsheet, please?’”

Perhaps a larger asset manager might have the resources to build a user interface so firms like AccessFintech can be interoperable with them, and the data can pass through a gateway. Smaller firms might not be as fortunate.

AccessFintech is a firm founded in 2016 to evolve the capital markets operating model through data and workflow collaboration. It recently raised $60 million in its Series-C funding round led by growth equity firm WestCap. Its Series B round saw first-time participation from Deutsche Bank and additional investment from existing investors JP Morgan, Citi and Goldman Sachs.

While Fazio sees APIs as a valuable tool, trading houses need to consider what these APIs are used for.

Meanwhile, a CEO at a vendor that provides interoperability tools for the capital markets, says firms need to think about why those APIs are created, especially if most of them aren’t used.

“You’d have to go back to the product team who designed the APIs and say, ‘What made you feel like writing all these other APIs?’ I think development teams in general nowadays are looking to be really agile and nimble,” the CEO says. “And so the sensible way to go about building these things is you start with the core requirements. You do a first version where you’ve got the key things that customers and others have asked for, and then you make it available to them, and then start seeing how people use it. Then, you start to get feedback, and over time, you might add more capabilities.”