June 25, 2024

Tricia Oak

Business & Finance Excellency

From tech tool to business asset: How banks are using B2B APIs to fuel growth

Each time someone searches for flights on a travel aggregation site or shops online, APIs (or application programming interfaces) work in the background to make this happen. These lines of software let two different systems communicate and exchange data with one another, whether flight information from airlines or updated inventory from suppliers. Compared with traditional point-to-point integrations, APIs are flexible, cost-efficient, and easy to operate.

In the financial services industry, APIs are transforming the way B2B banking is done. As an easy means of money and data transfer between a bank’s systems and those of third parties, these tools pave the way for banking services to be embedded directly into a corporate customer’s own platforms. Instead of having to go to a bank’s own app, portal, or website, for instance, APIs enable customers to link their enterprise, treasury, and accounting systems (such as SAP or Xero) with financial information provided by banks. These companies can then initiate payments, manage liquidity, and download bank statements through their own systems, with the bank, essentially, becoming invisible.

APIs also enable banks to offer trade-financing services on new B2B platforms, such as PrimeRevenue, Taulia, and Tradeshift. These companies, which provide businesses with working capital finance solutions, let corporate clients offer their suppliers early-payment options or automation of invoice processing.

To understand what stage the banking industry is at in this transformation, we surveyed financial institutions of varying sizes (local, multiregional, and global). This research, part of McKinsey’s latest global survey on the State of APIs in Global Transaction Banking (GTB), found that, on average, just over half of a bank’s B2B APIs are currently used to connect its internal systems, such as front-end servers to back-office servers. However, in the next three years, this ratio will shift with most new APIs connecting banks to systems outside the organization.

Although APIs represent a significant disruption to the way B2B banking services have traditionally been delivered, they also offer significant opportunities. In the same way that APIs make many online products and services possible for consumers, they open up a wide range of possibilities for banks: with potential to generate income growth from existing and new corporate customer segments, improve customer experience, and energize innovation.

To take advantage of this potential, banks will need to see APIs as not just a tech tool for software developers but an important strategic asset and mainstream business priority. This means building a wide bridge between the business and technology functions, which too often still operate as distinct areas. In our survey, we asked banks to rate the extent of their collaboration along five key dimensions:

  1. Strategy. Are APIs and the solutions they can enable central to the decision making of your top management and a front-and-center topic for your business units?
  2. Operating model. Have you created agile, cross-functional teams consisting of business and IT talent, as well as third-party development partners?
  3. Technology enablement. Has IT adopted an open-source approach to development, including software development kits (SDKs), which make it easy for outside programmers to create and integrate applications?
  4. Talent. Do your IT teams understand the strategic and business value of APIs? Do your business units have basic literacy around the technical capabilities of APIs, as well as an understanding of how they open up new revenue potential?
  5. Go-to-market approach. Do you have a clear and comprehensive plan for the implementation of new products and services?

Where are banks in their efforts to deploy APIs as a business differentiator?

Banks told us that, on average, they are more than halfway regarding the work they need to do (Exhibit 1). We also asked them about the drivers behind their API efforts and how they are monetizing new products and services. Segmenting across size, geography, and maturity level, we identified a few key differences and findings.

Banks report making progress in API maturity, measured across five dimensions.

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Smaller domestic or regional banks are head-to-head with the big global and multiregional institutions. Both types of banks have identified APIs as a strategic priority and made similar overall progress, with some minor differences. Global and multiregional banks have progressed further in technology enablement, such as allowing developers at fintechs and other third parties to access their APIs and related SDKs on a convenient public portal. Domestic and regional banks, meanwhile, have been able to move more quickly to hire a substantial team of API developers, in part because they have the advantage of not needing to fill as many roles.

North American and Asia–Pacific banks lead the pack. Banks in these regions have an average maturity of 70 percent, followed by Europe (65 percent), and Middle East, Africa, and Latin America (55 percent). The maturity of North American banks is driven largely by the clarity of their business-backed strategies and their ability to secure and prioritize key talent. At Asia–Pacific banks, however, the go-to-market approach is significantly more mature.

For instance, DBS RAPID, the API-powered digital solution from Singapore’s multinational DBS Bank, offers its corporate customers a wide range of real-time banking transactions and services that can be integrated into their systems or platforms. A leading insurance company is using the solution to offer its customers quicker payment of travel insurance claims—from a few days to just seconds. Similarly, a ride-hailing company uses DBS RAPID to let its drivers cash out their earnings instantaneously, instead of having to wait up to two working days.

Leaders are pulling well ahead of laggards on several dimensions. Banks that give the highest scores to their API maturity level have attracted and retained the right talent and invested in strong business–IT collaboration, including joint funding for the development of API-based products and services. They have also helped future-proof their technology by providing access to SDKs that enable other developers to build on top of a bank’s products and services. As a result, the banks in the top third of API maturity have been able to achieve a disproportionate impact regarding the effectiveness, breadth, and revenue-generation potential of new products and services (Exhibit 2).

Key differences exist in API progress across surveyed banks.

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More than 90 percent of financial institutions use or plan to use APIs to generate additional revenue among existing customers.

APIs are seen as drivers of new revenue. More than 90 percent of respondents said they use or plan to use APIs to generate additional revenue among existing customers, with three-quarters saying they are looking for revenue streams from new customers. A related objective is the ability to innovate (three-quarters of respondents also said this), followed closely by the ability to integrate with third-party capabilities (72 percent). Finally, just over half of respondents said they want to use APIs to enhance operational efficiency, such as by improving and streamlining integration with a customer’s enterprise resource planning (ERP) system (Exhibit 3).

The top objectives and monetization strategies of surveyed banks emphasize revenue generation.

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Customer fees for API calls are the go-to monetization model. When banks leverage APIs to launch new products or services, 80 percent charge customers fees to use them, for example by charging for real-time payment collections and reconciliation. The second most popular model is revenue sharing with an ecosystem partner—63 percent of respondents said they use this. One leading global bank, for instance, partnered to deliver compliance checks—that is, the flagging of potential money-laundering transactions. Finally, half of all respondents said they generate value through data and analytics-driven insights, such as information on liquidity management and payment flows.

A call to action

Financial institutions that have moved ahead in their use of APIs have successfully positioned these connectivity tools at the center of their business and innovation agenda. To do this, they’ve taken five critical steps:

Establishing a holistic API strategy and road map. A bank’s plan for APIs has to be both wide and deep—crafted in close alignment with a bank’s broader channel and product strategy—while also being comprehensive and granular about the specific APIs needed for customer, partner, and public offerings. The go-to-market plan should be differentiated by geography and segment, as well as responsive to customer needs, customer onboarding complexities, shifting regulatory norms, and competitive threats.

Bridging traditional organizational silos. To achieve success, business and IT leaders have to work together to define, develop, and roll out a product-centric road map for new API-enabled products and services. To make sure this integrated operating model functions smoothly, KPIs and incentives should be aligned across functions and have clearly defined teams with an end-to-end ownership of API-enabled products. This is especially important considering that 30 percent of respondents in our survey acknowledged that no one in their organization has this end-to-end decision-making authority and oversight of APIs.

Making APIs central to the customer proposition. Banks need to have a clear view of how their API-enabled products and services are attractive for customers. When client strategies and new propositions are being formulated, product-development teams must consider the ways in which APIs can open up new features, services, or customer-experience enhancements. This includes a deliberate focus on customer onboarding and the overall usage experience.

Leading players are seeking out IT and business talent from fintechs and enterprise resource planning providers, particularly individuals with previous experience working with API-enabled banking services.

Finding different kinds of talent. The types of people banks need to hire is changing. In addition to hiring from other banks or incumbent payment providers, leading players are seeking out IT and business talent from fintechs and ERP providers, particularly those individuals with previous experience creating or working with API-enabled banking services. For IT, an open-source approach to development is a must, including the publishing, continuous monitoring, and improvement of SDKs on public portals. This is especially important considering that most of the growth in APIs at banks is expected to be for external connections.

Innovating and broadening API offerings. Thus far, most banks have used APIs primarily to connect their internal systems or serve existing corporate customers with basic features like payments. In our survey, over 80 percent of respondents said they already offer or plan to offer their clients the ability to access accounts, do currency exchanges, and make domestic and cross-border payments using the client’s own ERP or other systems. In other words, instead of having to access a bank’s portal to do banking, a company can make payments to suppliers or vendors directly from internal systems. Such features are now table stakes.

For the next phase, banks will need to consider using APIs to embed more value-added services into their clients’ systems, such as the management of market investments, liquidity management, and invoice financing (the ability to borrow money against the amounts due from customers). Using APIs, banks can also let clients offer their customers options such as supply-chain finance (the ability for suppliers and vendors to get paid more quickly than they would otherwise). In our survey, we found that leading players are actively pursuing these untapped areas and expect to triple growth in these more sophisticated services over the next three years. Currently, 6 to 13 percent of banks say they offer factoring, documentary finance, supply-chain finance, and invoice finance services. Over the next three years, 32 to 46 percent say they plan to do so (Exhibit 4).

Banks are currently using APIs for domestic payments and accounts; they plan to expand into trade finance.

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B2B APIs are here to stay. They are likely to become not only the most frequent bankclient interaction, but also primary facilitators of accelerated product innovation and the means by which banks and their clients integrate with fintechs and the platform economy.

Banks of all sizes and in all regions have already started on their B2B API journey, with the gap between leaders and laggards becoming evident. However, the marketplace remains in flux and significant opportunities still exist for banks that successfully expand their API-enabled offerings, particularly in the trade and liquidity area. Over the next three years, organizations that actively pursue a comprehensive API approach—encompassing strategy, operations, technology, talent, and implementation—can drive growth and position themselves at the forefront of a transforming financial services industry.