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API Management in Retail Banking

A strategic approach to infrastructure and service modernization.

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Many financial services organizations are struggling to modernize their infrastructure and to successfully execute digital transformation.

  • Provide a way to complete a successful digital transformation that minimizes risk and maximizes stakeholder value.
  • Create a pathway to allow progression toward a service-oriented architecture.
  • Move toward a flexible and responsive technology infrastructure.

Our Advice

Critical Insight

  • API management capabilities are an essential requirement for the successful delivery of modern financial services.
  • API management provides a structured approach to legacy systems modernization.
  • API management is a key enabler of the move to a full service-oriented architecture (SOA).
  • FinTech integrations heavily rely on API capabilities.

Impact and Result

  • The adoption of a mature API management capability will provide a flexible and integration-friendly infrastructure state that enables:
    • A structured way to achieve digital transformation.
    • Easier integration of external vendors.
    • A strategy to achieve a service-oriented architecture.

API Management in Retail Banking Research & Tools

1. API Management in Retail Banking deck – A strategic overview of the importance that API management plays in evolving away from legacy systems in retail banking.

The document walks through an architectural progression over time with a focus on the past, present, and the future state to help users develop a strategic approach to modernizing their infrastructure and preparing for the future.

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API Management in Retail Banking

A strategic approach to infrastructure and service modernization.

Analyst Perspective

Evolutionary digital transformation via API management

The need for fundamental systems transformation grows daily throughout all of financial services. Increasing competition and rapidly rising customer service expectations continue to reveal significant limitations within many core banking systems. Increasingly, financial services providers are adopting a growing suite of best-in-class vendors to meet customer needs. These changes are driving the need for API management capabilities.

The need for change is complicated in many financial services organizations because of how they have evolved their systems over time. The transition from batch-based, centralized systems designed to support in-branch banking has played a significant role in the current transformation efforts of many organizations.

Systems have evolved over time. Major transformations were expensive and risky. As a result, the systems currently in place have, in many cases, seen decades of continuous evolution. However, the current pace of technology change, combined with increasing competition based heavily on user convenience, requires more substantial infrastructure changes to meet current challenges.

Unfortunately, revolutionary transformations characterized by "rip-and-replace" approaches have a very high failure rate and produce low satisfaction scores. Instead, organizations can create a well-planned transformation journey using a key capability: a centralized API management layer that enables continuous transformation.

This is a picture of David Tomljenovic, MBA, LL.M, CIM, Head of Financial Services Research, Industry Practice, Info-Tech Research Group

David Tomljenovic, MBA, LL.M, CIM
Head of Financial Services Research, Industry Practice
Info-Tech Research Group


Understanding past approaches to systems and transformation is essential to planning for the future

All but the most modern digital native retail banks have some elements of infrastructure, code bases, and business processes that may be many decades old. They reflect how traditional banking services were delivered. Customer engagement was heavily focused on in-branch activities almost exclusively performed by a teller.

Modern retail banking is a vibrant and dynamic environment that is characterized by omnichannel service delivery that operates 24/7/365. Customers expect to be able to perform all their financial services activities when, where, and how they want.

Retail banks are also extending their products and services beyond the traditional range of savings and lending products and are increasingly offering wealth management, insurance, mortgages, and new payment offerings.

Competitive disruption in financial services is revealing substantial issues throughout the core technology infrastructure of many financial services organizations.

Business growth produced IT silos

Segmented business lines resulted in siloed systems

This is an image of the Legacy Line of Business Retail Banking Infrastructure.

Legacy retail banking infrastructure was deeply siloed. In many cases, the business lines evolved as the banks' customers' needs evolved along with the marketplace. Regulation had a heavy influence on banking and often required that major product categories be owned by separate financial institutions.

Banking's business line development had unintended consequences on its technology infrastructure.

Legacy systems have unique complexities

Mainframes encouraged the growth of monoliths

Retail banking computing infrastructure can be over 50 years old and still be in active production. Mainframe computers were the backbone of retail banking operations. Monolithic code bases are synonymous with mainframe computing.

To enhance code reuse, security, and integration of features, the code bases continued to get bigger and bigger. As products and services evolved, the code bases grew in size and complexity. As new business lines were introduced, their own new code bases were developed. They were characterized by the same highly integrated and optimized code base.

Infrastructure designed to support specific business lines led to retail banking having multiple legacy systems that did not interact well with each other. As customers were presented with more products and services by their financial institution, they had to use and maintain separate logins.

The development of additional customer engagement channels such as phone and online banking further added to the complexity that a customer encountered when trying to engage with their bank.

An inevitable outcome of legacy infrastructure that supported business line development was deeply siloed and highly complex systems.

Moving toward customer convenience

Customers demanded a more unified experience

This is an image of the Unified Experience Retail Banking Infrastructure

Competitive forces and rising customer expectations led retail banks to take their first major step to elevate the customer experience by introducing a unified customer experience.

Point-to-point integrations provided an expedient way to address the need for a unified customer experience.

Customer convenience with major change

Unified customer experience, not unified systems

The first step toward an enhanced customer experience through a unified login did not significantly impact the underlying core systems. In most cases, the unified experience was achieved by creating a more complex customer application.

The underlying systems still remained heavily siloed. Some middleware infrastructure was put in place that connected to the underlying systems, but this did not impact the monolithic codebase and deeply siloed data, processes, and business logic.

The net result of the shift toward a more unified customer experience was window dressing for the customer. Problems still existed with customer engagement across different product lines. Only partial progress was made with deeper systems transformation. As a result, the customer experience gains were somewhat superficial. This was particularly evident as customers began to engage with an increasing number of engagement channels.

Some processes, data, and options were not available across all engagement channels. Regulatory issues also prevented some activities.

Users were provided with a more unified and easier experience, but the underlying technology was not fundamentally altered.

Quick solutions can have long-term costs

The unintended consequence of point-to-point integrations: rigidity

As banks increasingly competed for customers based on the user-friendliness of their products and services, many banks felt a growing need to respond quickly. Many of the system changes required to enhance the customer experience required previously siloed data and processes to work more closely with one another.

The elevated competitive environment led banks to greatly expand their use of point-to-point integrations. They provided an expedient and effective way to achieve the integrations needed to fulfill their customer experience improvement.

The unintended consequence of the heavy use of point-to-point integrations was a new form of system rigidity. The integrations themselves added a new level of complexity.

The competitively driven need for more user-friendly systems that would overcome legacy system rigidity resulted in systems that were still heavily rooted in legacy systems with a new layer of complexity. A completely new approach is required to bring about true systems transformation that will allow banks to position themselves to succeed in an increasingly competitive and dynamic marketplace for financial services.

Expedience often outweighed a more thoughtful approach to integrations. The consequences are still impacting current integration efforts.

The beginning of true transformation

Transformation without disruption

This is an image of the New API Transformation-enabled Retail Banking Infrastructure

A truly unified customer experience requires a deeper level of systems transformation beyond introducing point-to-point integrations and middleware. However, deeper systems transformation within a legacy environment introduces significant risks to the stability of ongoing services during the process.

The first step toward deeper transformation requires a new systems architecture.

Transformation via API management

API management tools provide a low-risk and flexible pathway for systems transformation

Implementing an organization-wide API management capability is among the most strategic investments a financial organization can make. It will enable a low-risk pathway to a disciplined and risk-managed approach to transforming internal systems.

An API management platform can be introduced into the organization's infrastructure and used as aggressively as needed. Our preferred approach is a disciplined approach to transforming key products and services as well as the systems, data, and processes that enable them.

An organization can prioritize its most important products and services to be ported over to the API management layer. The API management porting process will allow the systematic dismantling of components of a monolithic code base.

One of the primary benefits of an API management approach to transformation is the ability to run parallel infrastructure. This allows the organization to continue operating the existing infrastructure while implementing the same product or service via the API management capability. No cutover will occur until it has been fully tested prior to going into full production.

API management tools are an essential enabler of an evolutionary approach to fundamental systems transformation.

Disintermediation is a major milestone

Separating applications and supporting systems

This is an image of the Modernized Retail Banking Infrastructure

An API management tool can be a vehicle to pursue an evolutionary approach to long-term risk-managed digital transformation. Attaining a complete disintermediation between customer and internal business user applications and the systems that power them is a major milestone. It lays the foundation for moving toward a modern service-based architecture.

Once an API management tool is completely rolled out, complete disintermediation will have been achieved.

Disintermediation via API management

Eventual decoupling is critical

The long-term goal of implementing an API management tool is eventually decoupling products, services, and applications from the systems, data, and processes that enable them. This is equally true for customer-facing applications as it is for internal applications.

The end state is achieved when the API management tool separates customer and internal applications entirely from the underlying systems. Once this decoupling process is complete, the organization can make changes to customer and user applications without impacting the underlying systems by speaking exclusively to the API management tool.

More importantly, decoupling allows the underlying systems within an organization to be aggressively altered without affecting customer and internal user applications. The importance of this should not be understated. Hardware, software, data, and processes can then be altered without fear of impacting the applications they support. This approach also allows extensive testing to occur before the final rollouts are done, which helps to mitigate risk from the transformations.

Disintermediation represents the reversal of past transformation efforts and sets the direction for next-generation transformation.

Eliminating legacy integrations

Replacing rigidity with flexibility

As products, services, and applications transition to the new API management capability, the rigidity accumulated over years of system-to-system integrations will be replaced with easily adaptable infrastructure.

By eliminating the direct connections between applications and the systems that support them, the entire ecosystem will become more flexible and adaptable, a very strategic benefit. IT can now begin to make more meaningful changes to the core systems that exist within the organization. New systems and infrastructure can be added and connected to the API management layer. At the same time, customer and internal user applications can also be modernized without the need to engineer a direct connection to the underlying systems.

The ability to make dynamic changes above and below the API management layer represents a major step forward in the way that core IT services and the applications that use them are managed. The API management layer dynamically connects infrastructure to applications.

The API management layer provides many other benefits as well, particularly great security, load monitoring and balancing, and centralized management.

The most important goal achieved from disintermediation is the elimination of point-to-point integrations that left systems in a more rigid state.

API management as a path to SOA

Transitioning to service-oriented architecture

This is an image of the Advanced Object-Oriented Banking Infrastructure

With a functional API management layer in place and significant disintermediation enabled, the transition to microservices can accelerate. Microservices can speed the dismantling of the remaining monolithic code and can migrate and modernize capabilities.

Service-oriented architecture (SOA) is an important future state that financial organizations should work toward.

Enabling service-oriented architecture

API management is essential to SOA

Once the API management tool is well in place, large-scale disintermediation has occurred, and the organization has become familiar with the new approach, the next step toward the deeper adoption of service-oriented architecture can progress.

The transition to SOA involves more closely examining legacy code, creating a structured approach to new software development, and beginning the transition to microservices.

Where legacy code is prevalent, there is likely a desire to modernize some or all of the code. Microservices offers an excellent way to transition away from large monolithic code bases. Strategically disassembling legacy code monoliths and transitioning them to a collection of microservices will help modernize the entire infrastructure.

The ongoing transition from monolith to microservices will eventually achieve a tipping point at which the monolith will have been largely dismantled and the remaining parts, if any, will contain only the code that is best serviced by the software.

Microservices inherently break complex code and processes into smaller components.

Microservices as a corporate asset

Microservices drive long-term efficiency

Microservices should be viewed as valuable corporate assets, and the organization should recognize the need to invest resources into their creation. More importantly, the library of microservices should continue to deliver value to the organization well into the future.

Microservices that are well planned, designed, and developed can be constantly reused by others within the organization. Therefore, as the number of microservices in a corporate library continues to grow, they will increasingly accelerate future software development initiatives.

The ongoing adoption of microservices also enhances organizational agility. As changes are required in response to changing business and customer needs, the ability to alter a component of a microservice allows those changes to be implemented quickly, and most importantly, without fear of causing unintended consequences in other parts of a large code base.

Once developed, microservices can be reused, which saves future development time and expense, and should be viewed as corporate assets.

Future-proof infrastructure

Replacing rigidity with flexibility

This is an image of the Dynamic-Configuration-Focused Banking Infrastructure

The combination of an API management capability and a growing library of microservices becomes the foundation of agile and responsive infrastructure that is well suited to embrace future product and service innovation.

API management capabilities and microservices become the building blocks for future products and capabilities.

Embracing future integrations

Future systems are based on best of breed

A fully functional API management tool that is managing an organization's activities and supporting a suite of microservices provides an ideal foundation for new services that can enable new products and services and drive ongoing modernization.

Whether you are replacing an old system with a modern one or integrating a new FinTech-based platform, the API management and microservice capabilities provide an open and flexible environment that can accelerate change while reducing effort.

The API management capability provides many additional benefits including enhanced end-point security, better utilization data, load-balancing capabilities, and statistically based security, to name just a few.

The combination of API management and microservices enable the rapid development and deployment needed for modern financial services organizations to thrive.

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David Tomljenovic

Search Code: 100151
Last Revised: December 5, 2022

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