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Strategy

How Modern APIs Can Build On the Legacy Systems of Financial Institutions

Today’s rigid banking systems are vulnerable to disruption, but well-designed APIs make it easier for customers to engage

Evan F.P.
March 20 2019

Financial technology startups have made waves across the entire global financial sector. Traditional banks and capital service brands are now scrambling to implement digital platforms that offer reliable payment services, online capabilities, mobile app support, and countless other benefits. There’s just one problem: today’s banking infrastructure relies on established legacy systems, many of which aren’t designed for digital platforms. The good news is that APIs have the potential to integrate with legacy systems and lead industry innovation.

Digital payment services and e-wallets may have built their solution-oriented platforms from scratch, but legacy banking systems have valuable benefits that make them worth maintaining. Each individual process is secure, reliable, and resilient, and was refined and stress tested over a long period of time. While modern fintech innovations are more flexible and user-focused overall, legacy systems remain ideal for intensive data processing tasks. That’s exactly why banks rely on them to support their most critical functions, such as deposit accounting, payment processing, and loan servicing. Today’s banks continue to store their most valuable data — from customer information to administrative documentation — on these legacy systems.

All the same, these systems have significant drawbacks. Legacy processes are far less adaptable to new technological capabilities and policies, let alone the evolving individual needs of customers. This is especially true when it comes to modern payment services, which a growing number of consumers access via mobile apps.

On one side we have legacy systems with inherent value to financial underpinnings, but limited digital capabilities. On the other is a customer base that’s far more interested in digital payment options than ever before. That’s where APIs come in — well-designed interfaces that act as useful connective tissue by accessing data from legacy systems and formatting it for digital platforms.

As noted by MuleSoft’s Danny Healy, using APIs this way creates an agility layer where business partners can access and interact with legacy system data without relying on its underlying processes. This allows banks to integrate new applications, data sources, and even physical devices into their networks. Handled correctly, APIs can help financial sectors decentralize aspects of their networks and grant wider leverage when introducing new innovations.

Unlike many fintech platforms based entirely on the cloud, APIs can also maintain the data security of legacy systems. On a user level, customers are interacting only with the API – not the legacy system directly. Developers can also impose limited access to certain datasets and compartmentalize information based on customer or administrative permissions. In short, the agility layer within the API that makes legacy systems more flexible also acts as a buffer that prevents hackers from obtaining valuable data.

Perhaps most importantly, APIs will help companies become flexible when developing the next generation of payment services. analyzed the issue of point-to-point integration, a legacy system side effect that forces tight interconnections between systems. On the whole, these interconnections are responsible for financial networks’ rigidity – the characteristic which left them vulnerable to disruption in the first place. According to the report, three-quarters of IT decision makers believe point-to-point integration is a crucial obstacle to innovation. Removing it to focus on APIs would allow companies to reduce costs, deliver faster services, extract more value from datasets, and remain competitive.

HSBC is a prime example of how APIs can extend the capabilities of legacy systems. In 2016, the bank introduced a Digital Partner Platform portal that allowed third-party firms to access its APIs. This portal let HSBC extend its services to digital banking initiatives, such as the ability to open bank accounts across international borders. These processes are still strong today, with HSBC even integrating its systems to Iwoca’s Open Banking Connections platform.

Unfortunately, many other banks are adapting slowly to technological change, leaving API projects in a theoretical state. Nonetheless, we should soon see an influx of third-party interfaces in Europe, where PSD2 legislation is opening banking data to third-party companies. This is expected to encourage competition as businesses create new mobile-focused APIs that link bank accounts to fintech platforms, adding to legacy systems through the processes described above.

For the time being, legacy financial systems are here to stay. But that doesn’t mean they can’t be modernized in ways that promote flexibility and innovation without compromising security. Thanks to PSD2 and legislation like it, we should see a proliferation of useful APIs that increase overall market competition. And as HSBC’s experience shows, just a single step towards open banking platforms could be the one to revolutionize the way customers approach their finances.

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