The activities of financial organisations are, by their nature, information intensive. This is particularly true for investment management, where many types of data are integral to everyday operations.
As asset managers and securities servicers adapt to digitisation, the effective and efficient management of data is emerging as a crucial driver of success. But, all too often, the same organisations struggle to overcome the limitations imposed by complex collections of legacy technology.
In these circumstances, it is unsurprising that Application Programming Interfaces (API) have become a major area of focus for many firms. The connections APIs can provide have the potential to transform the capabilities of many organisations, without the need to overhaul existing technology and with relatively low risk of business disruption.
This thought leadership paper is the latest in our Game Changers series. The paper considers six aspects of APIs including their key features; the benefits they can bring; their specific applications for investment firms; the potential impact on industry structures; the challenges and risks they can pose; and their relationship with emerging technologies.
We hope that this and the other Game Changers papers will stimulate debate and help our clients to shape their approaches to digitisation.
The digital revolution is putting data at the heart of strategic planning in the investment industry. But the well-known limitations of legacy technology are a significant barrier to creating truly ‘data driven enterprises’.
This paper explores the potential for APIs - relatively humble software intermediaries – to unlock hidden value from the industry’s existing systems and data. Briefly, we find that:
- APIs are integral to the digital economy, and play a growing role in retail payments. Awareness of their potential benefits is growing rapidly among financial institutions
- APIs can create flexible, adaptable and efficient connections between platforms and applications in the investment industry. This allows them to get around many of the limitations imposed by existing technology, transforming capabilities without the need to replace core systems
- There are many potential applications for APIs in asset management and securities servicing. These can deliver incremental gains or major improvements in areas as diverse as product development, customer experiences, portfolio management, third party distribution and operational efficiency
- The connective power of APIs has the potential to transform relationships in the investment industry. By improving data integration between investors, asset managers and service providers, they could reduce costs and improve transparency across the value chain
- Despite their benefits, APIs present potential challenges and risks. Security and data protection are the most obvious, but data standards, versioning and other areas all require careful management if APIs are to deliver sustainable improvements
- APIs can help organisations to optimise other fast-developing technologies such as artificial intelligence and distributed ledger technology. They make it easier for organisations to manage the inflow and outflow of big data, and to develop collaborative relationships with external developers
In short, APIs could achieve dramatic improvements in capability and efficiency for many investment firms – without the cost and disruption of re-platforming. And they can support productive cooperation with industry peers and new entrants such as FinTechs or RegTechs. As a result, they also have the potential to shake up the industry’s competitive dynamics.
But for all their potential advantages, APIs do not offer a magic wand. The connectivity they create brings its own potential risks; achieving sustainable success will depend on careful management. And while they can be designed and tested comparatively quickly, achieving implementation at scale will take time.
All this means that investment firms need to consider their potential uses of APIs as a matter of urgency. Some are already investing in outward facing APIs. Other firms that want to harness their potential benefits need to act now to build a business case for investment and make APIs a central part of their technology strategy.
APIs are not new, but have evolved significantly in recent years. They are now fundamental to many mobile and digital services
Key areas of debate
1. APIs – what, why and how
APIs are software intermediaries that allow different applications to interact and share data. APIs can be used within an organisation or externally, providing a defined level of access while protecting other aspects of an application.
APIs are far from new. They were used for basic information exchange in the 1970s, and to create middleware in the 1980s and 1990s. But this evolution has accelerated rapidly over the past decade as hardware and software have improved. ‘Open APIs’ (not always a helpful term, see box) are now fundamental to many digital applications, allowing for interoperability between applications over the internet. For example, it is APIs that enable social media users to link their posts to content on other platforms.
As they become increasingly integral to the digital economy, awareness of APIs – especially in outward facing roles – is exploding in the financial industry. This reflects a number of factors.
- Regulation: The EU’s second Payment Services Directive (PSD 2) requires banks to give other payment providers access to customer accounts. APIs will have a key role to play, and the UK’s Competition and Markets Authority specifically requires banks to address PSD 2 in this way
- Technology: APIs may not be new, but they facilitate the pooling of data that is vital to unlocking the full potential of fast-evolving technologies such as cognitive computing
- Commercial logic: Demand for mobile applications is growing rapidly around the world. APIs are crucial to delivering the digital capabilities that consumers increasingly take for granted
These drivers are already encouraging many financial institutions to increase their focus on APIs. Asset managers, especially hedge funds, are beginning to use APIs to facilitate data gathering and analysis. And securities servicers are planning to use APIs to develop value-added services based around data management.
The use of APIs in the investment arena has a long way to go, and it remains to be seen how they will evolve. We would expect typical outward-facing APIs to combine the features of so-called ‘open’ and ‘closed’ APIs (see box). But for most users of investment services, how APIs work is of far less interest than what they can do. It is these potential benefits that we examine in the next section.
APIs – open, closed, or both?
It is not unusual to hear references to ‘closed APIs’ and ‘open APIs’. Closed (or ‘private’) APIs typically operate behind firewalls within an organisation. In contrast, open APIs are made freely available and provide universal access to an application. This can appeal to start-ups hoping for rapid expansion, but gives developers limited control over who uses the API, or how they do so.
In practice, most outward-facing APIs designed by financial institutions are likely to sit somewhere on the spectrum between ‘closed’ and ‘open’. They will be designed to deliver user-driven services while retaining significant security features to protect existing platforms and data.
Over time, different users will develop an understanding of the balance of functions that suits their specific needs. Too much openness could create some obvious risks. But too little will limit APIs’ disruptive potential and make it hard for users to harness their potential benefits. It will be interesting to see how API technology evolves.
APIs are not new, but have evolved significantly in recent years. They are now fundamental to many mobile and digital services. These and other factors are leading to a rapidly increasing focus on APIs by a range of financial institutions. It remains to be seen how the design and use of APIs will evolve across the investment industry.
2. What benefits can APIs deliver?
Information has always been the lifeblood of the investment industry. This is only increasing as digitisation unleashes huge volumes of data and vastly improved analytical capabilities. Unfortunately, existing technology is often a major obstacle to financial institutions hoping to become ‘data-driven’ enterprises. Legacy systems and middleware, for example, are often unable to support digital services or cloud computing.
This should come as no surprise. Many asset managers have limited investment budgets, and have been forced to prioritise regulatory compliance in recent years. And although securities servicers have always invested heavily in technology, expansion across different markets and territories has left many firms with complex system architecture.
APIs have the potential to turn this conundrum on its head. Instead of making costly and disruptive changes to their core systems, firms can use APIs to release new value from their existing technology and data. APIs can be wrapped around existing platforms and incorporated into new software. In our view, the key benefits they can deliver are:
- Connectivity: This is the core function of any API. APIs can connect firms’ internal platforms in new ways, and transform an organisation’s connections with external partners such as clients, investors, regulators and service providers
- Efficiency: Creating new internal and external connections using APIs can allow organisations to make a range of efficiencies. Replacing manual interfaces with APIs helps to reduce duplication, improve speed and lower costs
- Adaptability: APIs allow providers to tailor the accessibility they want to provide, and allow users to decide when and how to use them. This agility creates strong user engagement while protecting systems of record
- Innovation: By creating new links between platforms, APIs can potentially unlock a range of revenue-generating opportunities. These include enhancing existing functions, such as distribution, and creating entirely new services and capabilities. APIs can also facilitate collaborative innovation with external developers
- Flexibility: APIs can function within organisational networks but are also able to communicate with mobile operating systems. They can also accept an escalating number of connected platforms. These features allow developers to incorporate them in a wide range of applications
These attributes mean that APIs can improve efficiency and create new capabilities – without the need for costly re-platforming. They can also help organisations to update or renew their systems with minimal disruption. By providing a flexible engagement layer, APIs can help to ensure that users receive an uninterrupted service.
APIs can provide fast, flexible connections between a range of data and systems, both inside and outside an organisation. This gives them huge potential to overcome the limitations of existing technology – improving efficiency, enhancing capabilities and facilitating innovation. APIs can achieve dramatic changes in technological capability, without the need to replace existing platforms.
3. What about specific use cases?
APIs have a wide range of commercially valuable use-cases in the investment industry. In particular, they can help both asset managers and securities servicers to align their business models with the growing power of data. For asset managers, some of the most compelling applications include:
- Reducing the scale of in-house data processing and storage. Instead of receiving large ‘data dumps’ from service providers, firms can pick and choose data, as and when they need it
- Pulling in external data to support portfolio management. A number of firms are increasingly interested in combining the analysis of market data (such as prices and announcements) with alternative data (such as web traffic, satellite data or social media activity)
- Strengthening distributor relationships by improving data sharing with financial advisers, platforms, fund supermarkets and robo-advisers. Instant connectivity helps distributors to provide a fast, efficient user experience that complies with conduct regulatory expectations
- Enhancing their ability to connect directly with individual investors via social media and other web applications. The ability to provide real-time reporting could also help with the development of innovative services such as socially responsible investing
- Improving the efficiency of outsourcing arrangements, by aggregating and analysing clearing and settlement data. This can help to identify operational weaknesses and to optimise service provider relationships
- Helping to realise the benefits of M&A. Connecting systems during post-deal integration can deliver scale-driven synergies and help to achieve the benefits of vertical integration
APIs can also help securities servicers to strengthen client relationships and to develop new services and capabilities. Some possibilities include:
- Improving the efficiency and reliability of existing services by reducing duplication and manual intervention, and strengthening connections between local, regional and global platforms
- Enhancing the inward flow of external information. This includes receiving trade data, asset manager instructions and corporate actions
- Delivering data ‘microservices’ – à la carte information – to asset management clients. For a securities servicer, this is a step towards becoming a data manager rather than a pure transaction processor. It could also allow for the introduction of differential pricing for different data components
- Involving clients in service design, and becoming involved in their own product development. For example, analysis of transfer agency data could help an asset manager to develop a new product and market it to a specific customer group
- Over time, APIs could help enable the creation of a real-time investment book of records, updated by securities servicers and asset managers alike, as positions change
We make three overarching observations about these potential applications:
First, APIs provide firms with a toolbox that can be used to achieve everything from incremental improvements to more dramatic changes. Outward-facing APIs are more likely to have transformational effects, although they may prove more challenging to implement (see Debate 5).
Second, the potential benefits of APIs vary between organisations. Individual circumstances will dictate which use-cases create the greatest value for clients and investors. In some cases, the collective impact of multiple ‘tactical wins’ may be surprisingly large.
Lastly, the connective applications of APIs could have a broader impact on the nature of relationships between asset managers and securities servicers. This is something we explore in the next area of debate.
APIs have a huge range of potentially compelling applications in the investment industry. Asset managers and securities servicers alike can use APIs to make faster, more efficient and more effective use of data. Every organisation will have its own view of the most valuable use-cases for APIs. The common theme is the role they can play in aligning business models with the growing power of data.
4. Could APIs reshape the investment value chain?
We have seen that APIs could enable asset managers and securities servicers to make far-reaching changes to their operating models. Taking a further step back, we see potential for APIs to change the way that investment firms interact with each other.
Financial investment typically involves a high degree of intermediation. This allows for specialisation, but has well known drawbacks in terms of efficiency and transparency. In addition to investors, asset managers and custodians, the ‘value chain’ often includes wealth advisers, brokers, administrators, sub-custodians and other actors. At each stage in the chain, much the same data is captured, stored and managed on a variety of technology platforms.
APIs are not a ‘magic bullet’ to resolve these complexities, but they clearly have the potential to enhance data integration between different actors in the value chain. This could have some far-reaching effects.
- At a minimum, APIs will help to close ‘air gaps’ between organisations by reducing manual processes and redundant duplication. This will make cooperation and collaboration between investors, asset managers and asset servicers more effective and efficient
- This will strengthen integration across the value chain. Securities servicers and asset managers will become more closely integrated, creating a close partnership – or ‘extended data enterprise’ – that gives investors a seamless service
- New relationships could be created. For example, as large asset owners like sovereign wealth and pension funds bring portfolio management in-house, APIs could help securities servicers to build direct relationships with these investors
- In time, securities servicers could act as data consolidators, providing an ‘end-to-end’ platform that supports every activity from client capture through to asset safekeeping. APIs could also help to facilitate the development of shared industry utilities to handle processing functions such as securities clearing or transfer agency
In short, APIs could begin to reshape the investment industry on the basis of data flows, instead of on the separation of functions. In the process, they could have a major impact on competitive dynamics, allowing more nimble firms to gain a competitive advantage. At a time when many traditional investment practices are coming under increasing scrutiny from investors and regulators, such an outcome could have huge collective benefits in value, service and transparency.
The connective power of APIs opens up the possibility of transformational change right across the investment industry. Over the coming years, APIs could become the enablers of major changes to relationships between investors, asset managers, securities servicers and other actors in the investment value chain.
5. What are the practical challenges and risks of APIs?
Having argued for the benefits that APIs can achieve, we should also highlight some of the potential challenges and risks associated with their use. We group what we see as the most important considerations under five headings:
- Security and data protection: Security is only as strong as the weakest link in the chain. The connectivity APIs create means that firms will need to be confident that every connected platform or application has suitable levels of protection. In Europe, the arrival of General Data Protection Regulation in 2018 will only reinforce the vital importance of safeguarding customer data
- Data standards and language: Organisations that want APIs to facilitate communication between applications will not only need the right mechanisms. They also need the right language. A securities servicer that wants to give clients access to numerous systems might need to apply a single set of data standards across the organisation
- Versioning and updates: Realising the long-term benefits of APIs will require ongoing maintenance. The need for firms to update APIs over time could be a significant challenge. Users and other partners will not want their operations to be disrupted by downtime. In fact, the more successful an outward-facing API becomes, the harder it may become to keep it updated. Effective version control will be essential
- Relationship management: Once established, APIs will not only require technical support. Ongoing relationship management will be vital to ensuring that APIs are used to full effect. This may include a dedicated team of support staff to handle troubleshooting. And to avoid ‘flying blind’, API providers will need to monitor when and how users are accessing each platform or application
- Secondary risks: Failings or weaknesses in any of the above areas – from minor reliability problems to major security breaches – will create additional risks. As the largest institutions in the value chain, securities servicers could be at particular risk of reputational damage or regulatory sanctions
Of course, the precise challenges and risks that APIs could pose will depend on the circumstances of each user. The number of outward facing APIs that firms operate, and the organisations that use them, will clearly have an effect. There could also be geographic variations, depending on local regulation, infrastructure and investor preferences.
Finally, API programmes will face the same hurdles as any investment, including the need for effective oversight, careful change management and supporting changes in processes and human capital. Taken together, these factors show that API investments will need to be based on a solid business case that can be explained and justified to investors, regulators and other stakeholders.
As for any technology investment, making better use of APIs will not be without its challenges. Financial institutions will be particularly concerned with issues such as security, regulation and reputation. But realising the benefits of APIs will also require careful thought in areas such as data standards and version control. This suggests that it will take time for many institutions to move from proof of concepts to wholesale implementation.
6. How might APIs interact with emerging technologies?
We have highlighted how APIs, not revolutionary in themselves, can achieve dramatic changes by connecting existing platforms and applications. Looking ahead, they also have the potential to act as enablers for capabilities that the investment industry is still only beginning to embrace. For example:
- Unlocking the potential of automation and cognitive computing. The ability of these technologies to revolutionise portfolio management and user experiences largely depends on fast, flexible access to large amounts of investment and customer data
- Delivering new user experiences to individual investors. Speedy access to large amounts of behavioural data could help wealth and asset managers to develop ‘recommender’ engines that automatically offer tailored solutions to high net worth or retail investors
- Developing new securities servicing capabilities. Near real-time data could be harnessed to develop new services in transfer agency, or to help securities servicers develop their support for complex, highly liquid vehicles such as ETFs
- Connecting to shared facilities powered by distributed ledger technology (DLT). Developments in DLT (aka blockchain) could allow for the creation of shared databases that act as a ‘golden source’ for all market participants. APIs could connect these central facilities with managers, custodians and other users
In addition to these specific functions, APIs have an important role to play in building collaborative relationships between financial institutions and external developers such as FinTech and RegTech companies. Such partnerships allow financial institutions to combine their proprietary technology or data with the capabilities of agile start-ups. For example, an asset servicer could complement its existing real estate platform with real-time valuations based on land registry data.
Several large banking groups have already established innovation centres and virtual portals that use APIs to give third parties limited access to their systems. The ultimate goal is to encourage an ecosystem of third parties to develop, providing investors with a spectrum of innovative services.
The potential of APIs to unlock the power of new and emerging technologies only reinforces the need for financial institutions to make them a key element of detailed technology planning, closely aligned with wider strategic goals.
APIs are not just about improving connections between existing platforms and applications. They also have the potential to act as a major enabler of emerging technologies such as AI and distributed ledger. Furthermore, they have a vital role to play in facilitating cooperation between financial institutions, and collaboration with FinTechs and other external developers.
The investment industry is evolving rapidly. But while recent years have seen many innovations, the mechanisms by which data is shared and transferred between platforms and organisations have changed comparatively little – so far.
APIs have the potential to change this picture dramatically, and all without the need for costly and disruptive re-platforming. Instead, they can allow asset managers and securities servicers to make smarter, more effective use of existing data and systems. They can also help firms to leverage the potential of emerging technologies, such as cognitive computing. And they open the door to new collaborative possibilities with FinTechs and other developers.
The potential benefits range from comparatively modest efficiency gains, to major transformations in capability. As the power and importance of data analysis grows, APIs will help firms to create more data-centric business models. Individual firms that can maximise the value of APIs - whether they are incumbents or new entrants - stand to gain significant competitive advantages.
Looking further ahead, APIs could even contribute to reshaping the investment value chain, including the creation of shared industry utilities or a single ‘golden source’ of data. The ultimate impact on the cost, speed and transparency of investor services could be far-reaching.
Technologically, APIs are comparatively simple to design, test and implement. They can also be developed selectively, with a focus on the most valuable use-cases. Even so, thorough planning and a solid business case will be vital to overcoming potential hurdles in areas such as data standards, version control and security. Realising the benefits of APIs will take time.
Some financial organisations are already investing significant sums in APIs. In contrast, much of the industry is only beginning to realise the strategic impact they can have in a data-driven world. Firms that want to leverage the power of APIs should be taking action now to identify potential use-cases and to put APIs at the heart of an integrated technology strategy.
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