API risk and rewards

As digital payments continue to grow, API-led connectivity can unlock innovation and growth for financial institutions. Here’s a look at some of the risks that come with APIs—and how to manage them.

The way that consumers interact with banks is changing—and it has been for some time. According to the World Bank, two-thirds of adults worldwide now make or receive digital payments. On top of consumer demand, banks are also facing increased pressure to meet the demand for new products and services, all while largely dealing with remote workforces.

This mix of long and short-term needs is hampered by legacy systems, lack of speed, and inflexibility. Implementing new systems and innovating is extremely difficult without highly reliable and secure systems that also have the ability to remain compliant. As with any changes, caution is required, both to manage and reduce operational risk and also to maintain and enhance the ability to respond quickly to evolving customer needs. With the ongoing digitization in the backdrop, this ongoing tug-of-war pits speed against risk management.

New Operational Risks

Security is among the top operational risk concerns, especially as financial institutions (FIs) are expected to keep confidential customer data private, eliminate fraud, and remain secure from breaches. With the rise in digital transactions resulting from COVID-19, the risks around digital transactions are increasing too. The influx of payments on digital channels makes it increasingly difficult to spot and flag analogous and fraudulent behavior—and bad actors know as much.

Third-party collaboration has also stolen the spotlight for good and bad reasons. As open banking promises to help banks facilitate improved customer experiences and create new revenue streams, it brings added risk. The ability to cut costs, respond quickly to customer needs and innovate—amounts to nothing if third-party negligence leads to a breach. Additionally, hiccups in the performance of third-party services can reflect poorly on the bank that is utilizing them to enhance its own service offerings. Outages and the inability of customers to access critical financial services can severely harm a brand.

Harnessing API-Led Connectivity and Managing Risks

It’s clear that banks and other FIs cannot turn the clock back or ignore the trendlines toward digital payments. Instead, leveraging API-led connectivity can allow banks to enjoy connected data, devices, and applications without bearing the risk that comes with tight couplings.

This integration approach allows FIs to package assets as productized APIs, enabling a plug-and-play methodology to modernize systems and promote agility and speed. The APIs also facilitate self-service and can be customized to meet the needs of security and governance. In this way, they may operate as gatekeepers for both processes and data, allowing for knowledge about and controls on who accesses resources.

APIs can then be exposed to wider networks, enabling FIs to create efficient applications and customer-centric services and experiences. In turn, the role of IT shifts from micromanagement of systems to more strategic initiatives while maintaining governance, security, and compliance over newly decentralized access. This also fuels an enterprise-wide pivot towards flexibility, agility, speed, and innovation.

Common risks when exposing APIs

APIs also facilitate partnerships with third parties via a standardized mechanism for data-sharing. While some governance around data sharing has been standardized per the PSD2 directive, there are still some risks that come with exposing APIs. Opening up APIs can foster innovation and the creation of new products and services, but risk management is still critical. Some concerns that FIs must be cognizant of, throughout digitization include the following:

  • Unsecured customer data: APIs may open up customer data to misuse or use without consent. Third parties may expose or unlawfully use customer data beyond the terms of consent.
  • Fraud: Unauthorized or fraudulent transactions can occur on customer accounts.
  • Damage to reputation: Third-party partners that are negligent or otherwise act inappropriately can damage an FI’s brand, especially where partnerships may be co-branded.

Final Word

Many of these concerns can be addressed through customized and fine-tuned contracts between FIs and any third-party providers that outline key risks. These contracts can clearly outline the responsibilities and liabilities to be taken over by both parties.

API-led connectivity presents a clear path for FIs to navigate the new banking landscape and changes in consumer behavior. It enables better security, improved availability, and more third-party collaboration. Enhancing security and governance around APIs can help FIs manage the risks associated with API-led connectivity while also allowing them to future-proof against continued disruption.

Get in touch with us today to accelerate payments and boost customer satisfaction.

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