Thursday, 25 July 2024
By Achille Deodato, CEO of Indigita SA
and Laura Vermeulen, Head of Strategy & Business Development of Indigita SA
The origins of banking systems
The first modern banks emerged in 14th-century Italy. Their operation was based on paper registers recording deposits, credit notes and withdrawals. For several centuries, banking institutions operated on this basis, and even today, some Swiss banks display their original registers for customers and visitors. With the advent of technology, the banking system underwent a radical transformation, adopting computerization on a massive scale.
Particularly after the Second World War, banks began to develop IT systems to digitize and secure their records. For a long time, simple banking services, such as deposits, stock market investments, loans, etc., required relatively basic IT systems, which could be developed and managed in-house. However, as banking services and regulations became more complex, the banking sector experienced increased specialization in different business lines.
The evolution
Historically, the production and distribution of financial services were managed within tightly regulated channels controlled by the banks. This meant that all services were processed in-house, creating a single value chain within the bank's infrastructure. The so-called Core Banking System (CBS), forming the backbone of accounting operations, was centralized and inflexible, often resulting in inefficiencies and high operational costs when it came to adding new services, data or processes.
As a result, banks, particularly small and medium-sized ones, began to prefer purchasing banking IT platforms produced by specialist companies. Technological acceleration and the complexity of banking services have demanded a radical change in IT systems, both in terms of security and in terms of operations management and reporting capacity. With the spread of online banking services and inter-bank relations requiring the ability to operate in real time, banks have had to interface their systems with the outside world.
For the client, the complexity of the changes made by the banks remains imperceptible. Clients have mainly noticed improvements in e-banking interfaces. However, the complexities of the systems remain internal to the banks and are not visible to the outside world. Today, we are witnessing a gradual fragmentation of IT systems to manage the growing complexity of banking services.
The introduction of APIs
The last ten years have marked a significant turning point in the banking industry with the introduction of application programming interfaces (APIs). An API is a set of protocols, routines and tools that enable software applications to communicate with each other. APIs define how different software components should interact, providing standardized methods for retrieving data, executing functions and managing processes. In essence, an API acts as an intermediary that enables various applications, services or platforms to connect and exchange information with the CBS. APIs can be seen as modules that facilitate the creation of services and products, while simplifying software development and maintenance.
APIs have freed banks from their siloed operations, enabling integration with external systems, both banking and non-banking. This has enabled innovative financial services and products tailored to customer needs, revolutionizing the traditional banking experience.
Cost savings, flexibility and compliance
The focus of API deployment has evolved over time. Initially, the focus was on saving costs by reducing IT complexity and enabling greater agility. Indeed, one of the main benefits of APIs is the significant reduction in operational costs. By automating and simplifying manual processes, banks can achieve greater efficiency and reliability.
As banks became more proficient with APIs, the focus shifted to personalizing client services. Today, customers expect a smooth, personalized banking experience. Thanks to the data collected via APIs, banks can offer services and products tailored to the specific needs of their clients, improving customer experience, loyalty and satisfaction.
APIs also play a crucial role in the regulatory arena. Financial institutions use APIs to automatically process large quantities of data and align them with processes aimed at ensuring regulatory compliance of banking operations. This automation helps reduce human error and ensures that banks comply with current regulations, while facilitating auditing and ongoing monitoring.
Conclusion
APIs have become an essential component of modern banking, transforming the industry from a traditionally closed system into an open, collaborative ecosystem. The evolution of core banking systems, coupled with the introduction of APIs, has enabled banks to improve efficiency, personalize customer experiences and explore new revenue streams. As financial institutions continue to invest in API programs, the future of banking will be more dynamic, innovative and client-centric.
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