In 2015, the API Economy emerged as a prominent talking point for fostering new innovation in financial services and particularly as an efficient way of piloting new approaches and models. APIs are commonplace across various sectors and industries, however, why is their importance so significant as it comes to financial services?
To take a step back, its important to frame the conversation leading up to existing technology systems in use. Until the 1970’s, the majority of financial services back office tasks were handled by desk clerks with primitive tools comparable to pen and paper. Pioneers such as Sandy Weill led the centralization of the efficient back office, which through the consolidation and growth of Shearson Loeb Rhodes throughout the 70’s spread out through as an industry best practice utilizing technology.
It’s not fair to argue back offices have not evolved and developed, they have. However, in lockstep through the decades they have become increasing complicated, interdependent and mission critical. Through our work and collaboration with major financial institutions, we have heard many a story of how this infrastructure has been patched up throughout decades, to the point that expensive systems maintenance engineers have to be employed to assess what role parts of the infrastructure actually perform and is it, in fact, safe to even attempt to develop or fix? More often than not, the case for existing infrastructure is not where it is going, but rather how it stays together and for how long. Keep in mind, this infrastructure will handle billions of dollars worth of transactions in an instantaneous world.
As financial services companies tackle fintech innovations and new markets, such as the realms of private securities and issuances, an important question of what infrastructure to employ rises.
Several leading financial institutions have put in place plans to develop and renew their existing infrastructure. Some have started developing new products in other environments and consciously chosen to exclude their internal research and development processes and their existing infrastructure products. With new API products, efficient technology providing specialized services and infrastructure in place tying it all together in the digital era, many choose new models that are better equipped for the new innovations at hand.
A constant factor in technology evolution has been its pace of progress and development. Legacy technology is a natural outcome of evolution, and it naturally goes through a process of renewal. The challenge as it comes to financial services is the entrenchment of the technology when it prevents the renewal of the infrastructure. Given the significance of the infrastructure and its place in financial technology, the change may only happen in fits and starts, or indeed with significant planned transitions. Of course we cannot rule to the change through force that is through a significant crash or unplanned event.
Financial services infrastructure is not only complicated, it is also heavily regulated and complex from a business nature. The infrastructure itself is often low-margin, yet with enormous setup and maintenance costs. As with telco’s, the financial service infrastructure seems to be heading toward a trend of specialized services being built on top of it, reaping the high-margin business and the benefits of specialization, where the underlying infrastructure sets like concrete in the background.
What can we expect for financial services infrastructure?
For existing infrastructure, it has been purpose-built. For the world of exchange-traded funds, clearing instantaneous transactions for liquid assets, it has served and continues to serve a clear purpose. Would you expect to stretch that purpose to new, online marketplaces trading in illiquid and often private transactions?
The answer is clearly no and the writing is on the wall. The companies we are privileged to work with are piloting new consumer lending, business debt and solar bond marketplaces on digital back offices working through specialized APIs tailored to the digital native market. The fact that incumbent finance firms choose to exclude, gladly we should add, their existing infrastructure certainly says a lot.
Like Sandy Weills effort in the 70’s to streamline back office functions, we can argue we are at the cusp of a new change in digital back offices. Developing new models in 2016, innovators like Sandy Weill would surely agree that using decades old models and processes for new innovation makes for a complicated puzzle.
Internationally awarded digital finance entrepreneur, active in pioneering new securities models worldwide. Has worked in digital finance since 2009, recruited over 100 individuals, built up a operations on six continents and been recognized as one of the top 100 thought leaders in crowdfunding. Markus has pioneered new funding models in the US and Europe, advised policy makers worldwide - including the SEC, the European Commission and Italian regulator CONSOB - for more effective markets, and worked with visionary organizations such as the World Bank and the Kauffman Foundation to improve frameworks for digital finance. Markus has studied computer science and economics (M.Sc).