Digital banking, banking-as-a-service, open banking, embedded finance, fintech, modularization. At the heart of this industry innovation is the application programming interface (API). APIs make it easier for a range of businesses, from huge utilities to tiny startups, to integrate digital financial services (DFS) providers’ data and capabilities into a wide range of services. These include use cases like school payments, pay-as-you-go solar energy systems, ride-hailing motorcycles and digital savings groups. As the range of use cases grows, low-income customers benefit from greater competition and choice.
But the benefits of APIs come with challenges and risks. Over the past four years, CGAP supported MTN, Zoona (and Tilt Africa), BTPN, Wave Money and Absa Africa as they adapted their business models and technology capabilities to open APIs. In the process, we learned a lot about what goes into a successful API offering. We have also benefitted from the deep expertise of our advisory committee helping to steer this work, which includes experts that have opened APIs at companies like BBVA, Safaricom, Sila and Hover. And we have gained invaluable insights through engagements with other industry leaders like WeBank, Stripe and Paytm.
Based on our experience, we have five key takeaways for DFS providers that might be thinking about opening APIs.
1. Be clear on why you are opening APIs
First, ensure you have clarity on your strategic business priorities and only then consider if and how opening APIs can help you achieve these goals. Your goal might be to accelerate third-party innovation, grow revenue from the monetization of assets previously unavailable to third parties, or speed up and lower the cost of integrations.
MTN, for example, had already integrated many of the large enterprises in Uganda, so it focused its API program on the long tail of smaller startups to accelerate third-party innovation and grow mobile money usage in the long term, among other things. Within two years of launching its open API program, it had over 10,000 developers in its sandbox, with over 400 third parties live in production across 10 countries. Similarly, by opening APIs, Indian fintech Eko managed to expand its distribution footprint from 15,000 to 150,000, grow transaction revenue by 350 percent and increase revenue fourfold.
Being clear on why you are opening APIs will help you clarify two key things: your target API consumers and which APIs to open. DFS providers tend to start their API journey by offering money movement APIs that enable businesses to receive payments from customers and pay employees or suppliers. Beyond money movement, APIs tend to fall into one of three categories: leveraging data, managing consent and identity, or expanding the ecosystem.
Of course, not every DFS provider should open APIs. Beyond strategic fit, DFS providers should also consider whether there is demand for its APIs and whether it has the people and technological capabilities to deliver APIs.
2. Let your business needs drive your technology decisions
It is easy to assume APIs are purely a technology issue. While business leaders might prefer to completely outsource technical decisions to their IT counterparts, it is important that technology and business teams are closely aligned on their vision for an API. This includes what the technology needs to deliver and why. We propose three design principles to guide your open API technology decisions: adopt a self-service mindset, protect your reputation and deliver an awesome third-party experience.
Starting with a minimum viable API product can also help avoid costly upfront mistakes when building new technologies. Zoona, for example, got started using a cloud-based API management solution with a low monthly cost and minimal upfront investment. This kept initial costs low and meant minimal write-offs when they subsequently pivoted their business model and ultimately chose to update their API management platform.
3. Understand and engage your new customers early and often
Open APIs often expand the business model of digital financial services providers from being direct-to-consumer businesses to incorporating a business-to-business focus. DFS providers opening APIs need to think about how to work with these new customers. CGAP identified four key API customer segments for open APIs: standalone coders, early-stage innovators, growth-seekers, and existing enterprises.
By understanding which customer segments are a priority, you can better hone your value proposition and ensure that priority segments match business goals. For example, standalone coders and early-stage innovators might drive the creation of innovative products, but these businesses often have untested business models. Self-service, affordability and a well-designed developer portal are critical for this segment. Growth seekers and enterprises such as large utility companies may increase a DFS provider’s revenue in the short term, but they will have higher expectations around tailored value propositions, integration assistance, and service level agreements that confirm what level of access will be available.
Each customer segment will also need to be able to interact and test your APIs in their own time. Open APIs allow integrations to be built when it suits third parties. Businesses of all sizes will want to test and understand a DFS provider’s APIs directly from your website and when they understand the potential of the open APIs, they will start the integration process.
In the video below, FSPs share some tips of their own on customer engagement.
4. Identify and manage risks
Risk teams may judiciously raise a number of concerns when business teams propose opening APIs – protection of customer funds, cannibalization of revenue, and data privacy, to name a few. These risks are real and need to be managed prudently. But with the right combination of technical, operational and contractual measures, they can be mitigated.
There are risks in doing nothing: the financial services industry is transforming en masse toward embedded finance and enabling integrated capabilities, so all DFS providers should consider whether opening APIs and/or using APIs available from other players is the right strategic move for them.
5. Get going but keep it simple
Opening APIs is an opportunity to extend customer reach, facilitate the creation of new use cases that are relevant for low-income customers, and create new revenue streams. However, it transforms a business in a multitude of ways and requires changes to internal culture, processes, skills, business models, sales and marketing approaches, and technology. This can be a costly endeavor and may not be appropriate for every DFS provider.
If opening APIs makes sense for your business, we advise starting with low-risk, low-hanging fruit opportunities. Taking too long to show value (whether direct revenue or otherwise) can lead your executive team to lose patience, change strategic priorities and reallocate resources. You don’t need to have everything in place on day one.
Get started, keep it simple, listen, learn, iterate and grow from there.
To learn learn more, see CGAP's collection of resources on open APIs in digital finance. It includes case studies on the experiences that FSPs have had with open APIs, along with a suite of practical resources to help others FSPs get started on their own API journeys.