Consulting firm Gartner said earlier this year that public, web-based application programming interfaces (APIs) have fallen into what it terms the “trough of disillusionment”—the point on the hype cycle where the excitement around a particular trend or technology has worn thin and investment falls off. Gartner’s pessimism, however, doesn’t seem to have rubbed off on many in the capital markets, as asset managers, banks, data vendors, and service providers have been eager over the last year to communicate that they are packaging their offerings with APIs and partnering with API-first fintech firms.

The buzz around what has been dubbed the API economy—the so-called ecosystems of integrated business systems and services that web-based APIs have facilitated—promises seamless connectivity and competitive edge. The apparently limitless prospects for innovative partnerships has created anxiety in financial services as technologists scramble to understand how they need to recalibrate their API strategies to take advantage. This anxiety was evident, for example, at Sibos in London earlier this year, where delegates packed sessions on open banking and building payments ecosystems.

Virginie O’Shea, research director at Aite Group, says she will include “the API economy” in a report predicting trends for 2020. But she adds that she is bemused by the hype and skeptical of the “ecosystem” nomenclature.

“APIs have been around for a long time, so [the hype] is a bit odd. I think the reason there is a lot of PR around APIs at the moment is that people are trying to push data services,” she says. “A lot of large financial institutions, a lot of the market infrastructure, a lot of the vendors, are trying to provide access via API to other services. This is about APIs acting as a gateway to other services for clients.”

‘Cambrian Explosion’

As O’Shea says, APIs are not a new concept. They are, after all, just sets of software protocols or tools establishing how different systems can interact and talk to each other. The first APIs are 50 years old or 20 years old or 15 years old, depending on who you ask. And APIs are everywhere, whether as private APIs that connect developers to their company’s back-end servers, or as open, public APIs that integrate one service with another party’s service to provide a specific experience for a user.

The last few years have seen what has been called a “Cambrian explosion” of public APIs available over web connections. An IBM report quotes estimates that 1 million APIs will be in use before the end of this decade, compared to 20,000 at the end of 2015. Halfway through this year, the API directory Programmable Web says APIs registered on its site passed the 22,000 mark, after a 30% increase in registered APIs over the last four years.

After we externalized our OpenAPI and made it accessible to our partners’ developers, this cascaded into what is now the centerpiece of Saxo’s wholesale offering

Chris Truce, Saxo Bank

This explosion has been enabled in part by the modernization of API development with the release of developer toolkits and frameworks like Swagger, wider adoption of architectural formats like REST, and standards like OpenAPI.

But there have also been economic imperatives. Open APIs have transformed everyday life as tech firms push out services integrated with other services. Classic examples include ridesharing apps that use Google Maps through Google’s API to help drivers find riders, or food delivery apps that incorporate payment services like Venmo or PayPal so users can split costs.

In financial services, retail banks have led API innovation as they look to entice online banking customers. Spain’s CaixaBank, for example, lets users book hotels through their online banking app, for which they can earn cashback rewards.

In Europe especially, regulation and government initiatives have pushed API adoption in the retail space. In 2015, the European Parliament adopted the revised Payment Services Directive (PSD II), which is intended partly to open up the EU payments market by requiring banks to allow third-party access to their customers’ information, which is being done via APIs.

These conditions are having a knock-on effect on capital markets firms by driving down the cost of APIs, driving up their availability, and putting pressure on firms to show that they can keep up.

“It’s about being able to provide access to fintechs or vendors you don’t want to buy but do want to partner with, and to be seen as bleeding edge if you are a bank or a service provider,” says O’Shea. “So that’s where the idea of API strategies is coming from—it’s this idea of being a hub or what people are calling an ecosystem provider.”

Internal to External

The most successful API strategies come from firms that grow API usage internally before externalizing it to customers to connect them with data or services.

For Saxo Bank, such a strategy resulted in an overhaul of the services it offers to wholesale clients. Saxo has a trading platform, SaxoTraderGo, which, prior to 2011, users accessed via apps on their devices. There were apps for iPhone, Android, BlackBerry, and so on, plus a downloaded desktop app. These apps connected to the traders’ back offices and their own systems and to Saxo’s systems, which proved complicated to manage.

Saxo’s head of fintech, Chris Truce, says that in 2011, the bank completed development of a new web-based trading platform. It decided to develop a middleware layer for internal use—OpenAPI—that connected the platform to the bank.

“So everything the bank did—taking deposits, transactions across multiple asset classes, even corporate actions—were made available in this middleware layer and that one API would feed each app. This allowed us to make changes and updates seamlessly to features on our trading platform, web or mobile applications using the OpenAPI,” Truce says.

If the bank wanted to make a change to something in the app, it could do so once and that change would be replicated in all the apps, whether on mobile or desktop.

At first, OpenAPI was just for Saxo’s internal developers to use. “We decided to extend this facility to our partners in 2013, who had already been using our trading platform on a white-label basis since 2011, to better integrate trading solutions to their own offering for retail banks and/or wealth management clients,” Truce says.

Using this externalized version of OpenAPI, developers at the bank’s partners could develop their own custom apps for their own clients.

“After we externalized our OpenAPI and made it accessible to our partners’ developers, this cascaded into what is now the centerpiece of Saxo’s wholesale offering, the broad OpenAPI that allows any institution to natively integrate a stockbroking solution or some kind of capital markets or wealth management solution directly into the apps they already have,” Truce says.

Like Saxo Bank, BNP Paribas Asset Management wanted to extend API-driven efficiencies from the internal environment of the firm to improve the experience of their partners. The firm wants to leverage research from BNP Paribas Securities Services and provide that to its own partners via APIs, says COO Fabrice Silberzan.

Internally, the firm uses large trading applications like Aladdin, and builds its own APIs around it. The firm can integrate its own research with Aladdin through its API, for instance.

“We are very much a quant organization, so we invest a lot in research. If we want to access this research, we can organize that through a standard API call,” Silberzan says. “This was a transition for the organization because we are moving from an application-based architecture toward a service-oriented architecture. This takes time, it is a process, but it is the direction we are moving in.”

The next step for the firm is providing APIs to the outside world, which it already does with some partners, such as distributors. “We are looking to work with our own asset servicers. We are looking to BNP Paribas Securities Services to use and consume their data, leveraging the API for a seamless process,” Silberzan says.

BNP began giving distributors access to its APIs about two years ago.

“Our partners can query some information in our system without having to replicate in their own environments a lot of the processing we are already doing. What we are offering is the capacity to directly access information in a controlled manner,” Silberzan says.

Pere Nebot, CIO of CaixaBank, says the API economy has meant that integration with other companies is vastly faster and more efficient. Protocols and security rules, which once had to be agreed upon beforehand and separately with each customer or partner, are now embedded within the API protocols.

CaixaBank considers both the technical side and the business side of its API strategy. “One is technical, which is part of my role. We have to be able to transform our legacy systems into API-based systems to increase the availability and the speed of connectivity between all our systems,” Nebot says.

On the business side, CaixaBank’s objective—to deliver the best experience to customers—remains the same. But there is a big difference in the pace at which it happens, dictated by what Nebot calls the much faster “rhythm” of the APIs.

Since 2007, CaixaBank has conceived of its operations in three separated layers—one for customer experiences, a service layer, and the bank’s back end. Isolating these layers from one another has meant that the bank can sidestep a big problem for many firms—the fact that legacy systems do not integrate with APIs—and allow the bank to provide API access to customers in the first layer.

The API economy has changed what vendors can offer, too. Tom McHugh is a co-founder of Finbourne, which has an open, cloud-based investment data platform called Lusid that it is marketing to buy-side firms of all sizes.

McHugh says Finbourne wants to operate Lusid in a way that is open API-first and developer-friendly, “so that people find a lot of constructs that are difficult right now much easier to access.” Lusid has published APIs that allow in-house solutions to interface with portfolios, holdings and transactions.

“What we are offering is basically an API-first data platform that stores and knows how to account for and deal with all the financial constructs you have as an asset manager—orders, executions, allocations, transactions, benchmarks, holdings, performance measurement and so on,” says McHugh. “We offer a backbone that allows you to use software development kits and an API to manage the data you need to operate your business.”

Finbourne has partnered with Refinitiv to offer the data giant’s capabilities—like portfolio analytics and execution management—to Refinitiv clients via APIs.

Barren Landscape

It appears that the API economy has some substance to it—or at least that financial firms are looking to find ways of integrating new services to improve their offerings. But there are restraints on the true scaling of the API economy, analysts say. Gartner’s Mark O’Neil wrote earlier this year that the consultancy predicts that by 2021, 25% of organizations with public APIs will have discontinued or rebooted their public API strategy due to a lack of uptake and because of security concerns.

Aite’s O’Shea agrees that API security standards are low. Alissa Knight, a senior analyst in Aite’s cybersecurity practice—recently conducted an exercise during which she hacked the APIs of 30 banks within eight minutes each.

Additionally, O’Shea says, while seamless integration sounds great, it also means that clients can disconnect from you just as easily and connect to a competitor instead. For this reason, many firms are cautious about putting in standardized APIs.

And then there is the issue that legacy systems can’t connect to APIs, a potential issue for many large financial firms.

“They can’t consume data and push out the data that is required. So this is where you see extract, transform, load (ETL) bots being put in place—to try and transform data to push it to an external API. And that is not the best idea: You have to keep fixing the bots because they keep going wrong,” O’Shea says.

Being API-first is not necessarily a pleasant place to be; one developer calls it an “unforgiving, barren landscape.” It can often mean exposing IP to a critical, competitive world. And firms struggle to retrofit APIs into their offerings without it having made it first integral to their internal processes.

“[API ecosystems] are not really an ecosystem; it’s just a plug-in to other services,” O’Shea says. “Everyone has APIs, but they might not have RESTful APIs, they might not have the most modern APIs. That is what people are investing in to try and grant more secure access and make it easier to connect to an API strategy. But it’s not rocket science—it’s quite a basic thing that companies should have been offering anyway.”

With additional reporting by Hamad Ali