New developments in technology have made consumers shop online at greater rates than ever before and this is changing baseline expectations. E-commerce sales in the U.S. grew 39% year-over-year in Q1 2021, according to the U.S. Department of Commerce, and online purchases continue to increase their share of total sales each year. Accelerated by the pandemic, this consumer push towards digital payments and online purchasing is going nowhere and it’s on payments companies to keep up.
Anyone who is not currently embracing digital transformation risks losing competitive advantage. Even purchases made in-person are increasingly cashless, with Capgemini’s World Payments Report finding that global non-cash transaction volumes increased by 14% and reached 708.5 billion in 2019 — the greatest surge in a decade. Whether customers are buying from home or in-store, they want the option to pay digitally, which means payments firms must invest in the technology to support that.
In most cases, this often means implementing an API-led strategy. APIs, or Application Programming Interfaces, create gateways between applications that allow them to communicate and share data. Data sharing underpins any successful digital strategy today; as consumers move within payments platforms, their data needs to safely travel with them. APIs allow FIs to harness existing solutions and integrate them for quick and easy deployment throughout their platform, which is much more efficient than the alternative: point-to-point integrations.
The Challenges of Working Point-to-Point
For many companies in the market, their expertise lies in financial services and not technology. This doesn’t mean that a successful digital strategy is out of reach, but it can mean that building one from scratch becomes a huge drain on resources. One key reason for this is that technology keeps evolving, which means the work is never finished. As developers build additional applications on top of existing code, it could lead to an overly complex, dependent system that is vulnerable to failure.
This is particularly common when working with monolithic web services or building custom point-to-point integrations. It can be tempting to solve an issue with these integrations, which simply creates a unique channel between two applications. In smaller platforms, this may be fine but as companies scale, the number of integrations grows exponentially — quickly becoming overwhelming to manage. An infrastructure with 3 components will only need 3 connections; an infrastructure with 5 components requires 10, while one with 10 requires 45. For any company prioritizing growth, this is a dangerous road to start down.
There is also the danger of systems becoming dependent on each other, which will pose issues if one fails or needs to be replaced. This can be particularly troublesome when it comes to data sharing, as many newer technologies require a smooth flow of data to function properly — a notable example is Artificial Intelligence (AI). Although the system may work fine when everything is functioning, it may be too late to prevent damage when something does go wrong.
One solution for this problem is to hire enough support staff to monitor the infrastructure and preemptively address concerns, but this is its own drain on resources. Not only will it become expensive to scale this support team as the platform grows, but it also redirects valuable IT attention away from innovation and towards maintenance.
Long-term, a point-to-point approach is likely to delay growth at best and prevent it at worst. Instead, payments companies need to look for a strategy that is designed to help scale digital performance and improve the customer experience.
The Payments Architecture of the Future: API-Led
APIs can transform legacy processes and help organizations keep up with exponential growth. Many technology companies have already built the tools that payments companies want to deploy, so it often doesn’t make sense for in-house developers to recreate those solutions from scratch. By connecting existing technologies with APIs, companies can maximize their resources and quickly introduce best-in-class solutions for their customers.
APIs are not just useful for third-party integrations, but also for scaling. This is because APIs are reusable and therefore the opposite of a point-to-point integration; rather than being designed for a single-use case, these interfaces can be applied to multiple areas of the business at once to democratize data access. Updating the technology will update all instances of the API in the system, meaning that companies don’t need to worry about individual fixes.
APIs enable companies to free up their IT team to focus on different projects at once and innovate more efficiently. What’s more, developers can build on top of each other’s work by accessing previously unavailable data, which will further speed up the digitization effort. New consumer products can be launched faster, ensuring that the payments company stays ahead of the market.
Preparing for a Digital Future
While API strategies are becoming more popular, there is still a delay in adoption. The Capgemini report found that only 35% of banks are deriving value from data exchange APIs, while even fewer (25%) are taking advantage of transaction APIs. This means there is an opportunity for digitally savvy payments companies to act fast and position themselves as innovators in the industry.
By implementing an API-led strategy, FIs can be confident that they are building an adaptable, customer-centric system. As the gateways ensure a constant flow of accurate data, it is possible to keep up to date with any changes in consumer behavior and feed that information instantly to every relevant area of the business. While there will always be a need for future innovation, the flexible nature of APIs means that they can support both today’s tools and that of tomorrow’s.
