API monetization – answers to the nine crucial questions

Five years ago, we'd have been hard pressed to find someone in finance who knew what an Application Programming Interface (APIs) was. Today, most banks and other financial firms have implemented their own APIs. Their systems are ready to interface with partners and consumers in ways that provide customers with extra value and the institution itself with new ways to grow.

But what is the best way to get the biggest return on investment in APIs?

In this FAQ, we take a look at the ins and outs of API monetization.

• What is API monetization?
• Why are APIs valuable to other banks and finance companies?
• What APIs can be monetized?
• What are the risks of API monetization?
• What are the benefits of API monetization?
• Can API monetization help leverage brand equity?
• Can APIs improve the customer experience?
• How can APIs help to break into new markets?
• What revenue models are associated with API monetization?

What is API monetization?

A company can invest in the creation of APIs which solve specific challenges for it. API monetization allows other companies with the same  or similar  challenges to use the company's APIs, in return for a fee. Each monetized API instantly creates a new revenue stream. And by offering additional services related to an API  for instance, integration consultancy, business advice and so on  there is the potential to create many more additional revenue streams.

Why are APIs valuable to other banks and finance companies?

Besides offering other companies access to customers, APIs can also help companies to cut their time to market. Rather than re-invent the wheel when faced with problems, companies can use APIs a bit like Lego blocks, to simply slot into their platform and solve the problem for them. And, of course, they will pay for the service.

What APIs can be monetized?

Organizations can monetize any API which is not part of a proprietary or sensitive process. Types of APIs to monetize include (ensuring compliance and customer consent in mind as appropriate):

• Authorization APIs
• Payment APIs
• Product APIs
• Fraud APIs
• FX Conversion

For instance, a bank can develop APIs which resolve the challenges of providing account verification, FX conversion, fraud prevention services to address specific requirements by challenger banks / financial service providers.

What are the risks of API monetization?

There are relatively few risks to API monetization. Fears of technology theft can be addressed through proper copyrighting and a tightly written legal contract between a company and those that lease its APIs.

Working with the specialized external partner can help to address other potential risks: for instance, by taking steps to ensure that APIs are secure and cannot fall into the wrong hands. The same external partner should also be able to help with the wider technical and business aspects of monetizing APIs: for instance, designing a payment model that is robust enough to ensure maximum return on investment in a fast-moving digital environment.

What are the benefits of API monetization?

By monetizing APIs, organizations can turn a sunk-cost investment into a new revenue stream. It also allows to turn departments which have been cost centers, for instance, tech support or internal developer teams, into revenue generators.

Can API monetization help you leverage brand equity?

Banks often have centuries of brand equity and consumer trust as well as customer relationships stretching back decades. Entrants to the market, such as fintechs, have none of these things. They need a way to get in front of consumers and gain their trust. What better way, than being embedded in the experience of using the consumer's trusted bank app?

Can APIs improve the customer experience?

Beyond simply offering new services by integrating with partners, APIs can help make your organization more intelligent, allowing it to improve its customer experience. By integrating across value chains 'including owned and third-party touchpoints' and by enabling a much faster-pace of customer interaction, APIs allow to gather data on how customers prefer to interact and what products and services they like on the fullest possible range of channels and devices.

How can APIs help to break into new markets?

Some of the most lucrative markets in financial services are in rapidly developing middle-income countries, where there are still large pools of as-yet unbanked but increasingly prosperous consumers. Often these consumers don't have PCs, the normal way for them to access digital services is through mobile apps.

To reach these customers, financial services organizations need to be able to offer them a meaningful mobile experience in their local language. Ideally, products and services should be on offer via platforms people already know and trust.

Building such a platform that meets all these criteria would be prohibitively expensive. Using open APIs can accelerate the development, and cut the costs, on any owned platform for these markets. At the same time, it enables to easily and economically integrate with local partners, without language barriers.

What revenue models are associated with API monetization?

There are several potential revenue models associated with API monetization in banking. The most common are:

• Licensing fees: organizations can license APIs for an annual fee, based on expected transaction volumes or other relevant variables
• Revenue sharing: organizations can simply share some of the relevant revenue stream with their partners either the fintechs that offer services or the companies that pay to use APIs
• Transaction fees: organization gets paid a fee for every transaction completed using its API by its partners and institutional customers
• API call fees: rather than paying per end-user transactions, organizations using third party APIs can pay for each time they call upon it (which may be more than once per transaction)

There is also an opportunity to generate extra revenue by providing integration, technical and business support for companies licensing third-party APIs.