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Don’t buy a new core banking system without asking these five questions about APIs

Inspired by the recent Cantilan Bank’s successful iCAN app launch, we list the key ingredients that power award-winning market impact.

You may not be able to see into the future, but you can still make your institution future-proof. Use any change as an opportunity for new customer acquisition. The key lies in the fundamental philosophy of your core banking system.

The changing environment

Things have changed rapidly in the world of financial services.

Traditional, long-standing institutions have found themselves challenged by the new breed of providers – neobanks without branches, quasi-bank providers, online lenders, fintech startups etc.

The fintechs have driven new variations on traditional financial products– like the Buy Now Pay Later craze sweeping the world.

Consumer habits and expectations have been transformed by their experiences of smartphone apps. COVID has accelerated the changes. During lockdowns, people sought new ways to conduct transactions without visiting branches, and ways of paying for things without physical contact.

For institutions unwilling or unable to cope with the changing landscape, the result can be extinction. In the Philippines, for example, the central bank ordered the closure of no fewer than five rural banks and coops during 2020 alone.

The maxim ‘adapt or die’ has never been more true

Adapting to an unknown future

Of course, no one can predict the future entirely. But here’s a prediction that is 100% accurate:

The future will be different from today.

But that uncertainty shouldn’t be a problem. In fact, if you use that knowledge as your North Star, you can’t go wrong. All thanks to comprehensive banking APIs.

What are APIs?

APIs (Application Programming Interface) act as intermediaries between applications so they can communicate with each other.

At their most basic, APIs allow one application to view, get, input or update information in the other by passing requests and returning data.

We use APIs every day without even thinking about them. They facilitate everything we do on the internet: APIs form the connections between your browser and your search engine, for example. They allow you to ask where the nearest vegetarian restaurant is, and for Google to tell you. APIs enable applications to talk to each other.

APIs are often likened to a very efficient waiter in a restaurant. The waiter will take your order and – providing what you want is actually on the menu – will take it through the swings doors into the kitchens and pass it to the chef. The chef will prepare the dish and give it to the waiter who brings it back to your table. One of the beauties of this system is that, you don’t need to know how to operate the cooker or know where to find the ingredients. The proprietor is equally happy with the arrangement – you can’t take two eggs when you’re only entitled to one. Nor can your efforts to fetch the meal yourself result in you burning down the entire establishment.

Like the best waiters, they are fast, invisible, and flexible enough to adapt every change in chef, menu, and customer. That’s why they are the key to the future.

What makes APIs so powerful?

There are probably a hundred reasons, but here are a few

They make connecting applications and services to each other almost as simple as ‘plug and play’.
Because APIs are built to common standards (REST and SOAP are the two most common) and use a common data format (JSON) they are easy for developers to understand and use.
APIs can bridge the gap between legacy systems and new technologies so the two can work together.
They make automation easier, making workflows faster and more efficient
They help manage security, and access to data.
Because they are purely intermediaries which carry requests and return data, they help maintain independence between applications
They make it easy to personalise the user experience.
They open up new possibilities to make use of existing data. For example, you can make better use of your data by plugging in more powerful Business Intelligence module than the one provided with your core system.
Most importantly perhaps, they aid innovation by vastly speeding up the process of new product development.
They can be valuable products in themselves because you can charge partners to use them.

Why are APIs important in banking and finance?

So much for the general. How about the specific applications in the world of banking and finance? APIs enable a core banking or lending system to connect to hundreds of other applications and services quickly and securely. These might include:

Other systems

ERP, HR,and accounting systems
In-house applications
Other banks
Point of sale

Due diligence

Credit scoring
Trust scoring
e-KYC
AML services

Intermediaries

Field collection apps
Agency banking

Money management

eWallets
Payment cards
Bill payments
ATMs

Loan management

Direct loan disbursements
Loan repayment channels
Online loan applications

Management

Business intelligence, reporting, data visualisation etc
Sending data to compliance authorities and audit systems

Messaging and communications

Customer marketing
SMSmessaging
Messaging channels (Viber, Whatsapp, Facebok.)
Social media
Website forms
Chatbots

Not just APIs but API-first

Problems can arise when APIs are bolted on or treated as an afterthought. Web APIs have been around for two decades but it’s only relatively recently that developers are realised the importance of approaching products and systems in which the use of APIs is not only anticipated, but fundamental to the design from day 1. The philosophy is that the product or service’s reason for existing is to connect.

The Oradian approach to APIs

Our core banking system, Instafin, was designed to be open and accessible to external services from Day 1. Rather than try to build and maintain a range of specialist modules and services ourselves, we have always taken the view the best thing we can do in the interests of our customers is to create a robust, secure, and flexible core banking platform with the power of almost limitless interoperability. This gives our clients the freedom to connect to the third-party systems, services and applications which are most appropriate to their needs. The choice is theirs.

Instafin API is designed to be a robust tool for developers to build and maintain in-house applications and services, reporting tools, programmatic or automated processes.

Five questions to ask your core banking system provider before you buy

0. Check Track-record. Which business successes were powered by that API?

Oradian API was the first banking cloud API to be certified in the Philippines – powering the pioneers like Cantilan and supporting their, now epic, digital transformation journey. Experience and learnings that come with it can not be easily matched, and the best-practice is translated to all future partners. The knowledge must flow.

1. Are APIs available for every aspect of the system?

Some companies only offer APIs to cover the ‘gaps’ in their own offering. In effect, this creates a ‘walled garden’ which prevents you from using third-party apps instead of their own. For example, a CBS provider with its own mobile banking app may not provide the APIs necessary for you to connect to a third-party version in order to tie you into using theirs.

2. Can you use all the APIs free of charge?

It is quite common for CBS providers to charge you extra for using certain types of API (or per API call), again to dissuade you from using third party applications instead of theirs.

3. Do the APIs adhere to most common API standards?

For APIs to be understood and used quickly and effectively they should be created to common industry standards. Web APIs like REST APIs and SOAP APIs are the most common.

4. Exactly what API documentation is available?

Are the APIs fully documented? Do they cover everything that can be seen and done through the interface? Some providers may fob you off with example use cases, but these won’t be sufficient to allow your developers quickly integrate new services and channels. The API should be intuitive and simply work, un-noticed. Just like plumbing, it works and you are not necessarily aware of the pipes within walls. Can your developers focus on the service they are integrating instead of the complexity of the API?

5. Can you act Instantly? Push. Not just pull.

There are quite a few use cases (some of them quite important like new potential customer creation), where you want to act at once, to stay relevant to the customer while the attention is there. In these cases, you need to make sure that triggered APIs are available, so that your external systems or services are alerted. In important situations you can not wait for the next Pull request, which may be defined hours after the event, to become aware of the change – you need to act on customer expectations at once. Make sure that both Push and Pull type of APIs are supported for business critical use cases and services.

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2021-11-03/by Michael Dorazil

Exploring digital transformation in microfinance

Africa, Financial inclusion, Fintech

Oradian’s founder Julian Oehrlein was one of a panel of experts recently invited to take part in a fascinating discussion on Digital Transformation in Microfinance. Here he reflects on some of the lessons that came out of that webinar…

These are challenging and exciting times for microfinance institutions (MFIs), writes Julian Oehrlein. The emergence of fintechs such as pure-play digital lenders has massively altered their world. But thankfully the technologies that have made it possible for new players to enter the field are also readily available to MFIs enabling them to compete on an almost level playing field. For many MFIs, digital transformation is now the priority – a need accelerated by the pandemic.

For MFIs looking to take a leap forward in terms of efficiency and growth, what part does digital transformation play? How can MFIs make a success of it and what are the pitfalls to watch out for? These were some of the questions posed at the recent webinar: Digital Transformation in Microfinance.

The event was organised by SANAD, a fund which provides debt and equity finance to partner institutions in the Middle East and Africa to support growth and employment in the region’s micro, small, and medium enterprise (MSME) sector. I was delighted to be invited to join a very distinguished panel:

Margarete O. Biallas is Digital Financial Services Specialist at the International Finance Corporation (IFC) in Washington DC. A member of the World Bank Group, the IFC is the largest global development institution focusing exclusively on the private sector in developing countries.
Nordyn Yacine is Chief Digital Officer at Vitas Group which for 20 years has been lending to MSMEs in the Middle East via a network of financial services companies.
Keeping us all on track and moderating the event was Ian Jenkins, fintech lead at Base 115, a boutique firm of financial services technology executives.

The invaluable work done by MFIs was encapsulated in a beautiful opening video about a cheese-maker in El Minya, Egypt called Ahmed. His father began the business with just one cow but today they sell 1,000 tins of cheese a day accessing working capital via SANAD to overcome short-term cash flow problems when they arise.

The digital transformation journey

Margarete set the scene by talking about some of the trends currently affecting MFIs – not least the avalanche of fintechs which sometimes seems to be crowding MFIs out of the market. Other influential trends include cloud-based core banking, open banking, artificial intelligence, and machine learning. In response, large numbers of MFIs are investing in digital projects, she said.

She stressed that the first step on any digital transformation journey is to think through the what, why, and how:

What you want to achieve
Why you are doing it
How you’ll do it.

These building blocks for the digital transformation journey in turn require a thorough understanding of two areas:

Customer vision: a coherent grasp of customer pain points, the importance of personalization, speed, convenience, and CX.
Market knowledge: understanding the changes caused by new competitors, demographic changes, new technologies etc.

From here it’s important to understand the core capabilities necessary to develop and implement a strategy. What are the performance metrics which will demonstrate the project’s success or otherwise – e.g. revenue, operating efficiency, distribution? Delivering these requires an organisation to have critical capabilities in a broad range of areas:

Strategy and governance
Organisation and collaboration
Customer experience and interaction
Technology and platforms
Information and insights
Growth and innovation
Security and privacy
Operations and ecosystems

But Margarete had another strong key message for any MFI embarking on a digital transformation: “You need to understand it’s a huge change management programme. It’s culture change. Digitisation affects and disrupts people. Managing the change process itself is critical,” she said.

The benefits of digital transformation

“The full digital transformation is not an easy journey but it’s a worthwhile one,” she reassured them. “Most grow their customer base and achieve new operational efficiencies.”

Asked about MFIs in more volatile markets, Nordyn pointed to the power of digital transformation to help reduce security costs. “It is costly for MFIs to maintain security measures in places such as Iran,” he said. Replacing physical money movements with digital ones greatly reduces the attractiveness to criminals. “Digital wallets can be used for loan disbursement and repayments,” he said. In the longer term this can diminish the need to maintain actual physical branches.

Challenges to digitalization

Nordyn mentioned that in some territories it’s just not possible to digitise certain stages of the process – for example, digitising Know Your Customer (KYC) relies on access to databases which may not exist or scanning IDs which are not available. “All of these problems make an end-to-end process impossible,” he pointed out. “At some stage human contact is required.”

My own view here is that no MFI should feel that anything less than 100% digitalisation is a failure. There will always be connections to the real world. The most important thing about digitalisation is to take as much friction out of the process as is possible. And although having no population-wide ID available makes the cost of processing an application more expensive, in one sense it doesn’t really matter because it applies to everyone in the market. Ultimately, digitalisation is about being better than the competition by either offering it at a lower price or by having a better product. It’s about automating what you can.

The restrictive obstacles of regulators

For Margarete, the security obstacles of working in the more difficult parts of the world are dwarfed by challenges put in the path of digital transformation by regulators. Talking about attitudes to opportunities such as cloud technology, she said, “We’ve seen most success where regulators allow for experimentation.” She praised the National Bank of Cambodia for its support when Wing Bank was set up in 2008. The NCB’s approach was ‘allow to test, try early, fail fast, then regulate accordingly’ but this is rare among regulators.

How can MFIs increase their chances of successful digital transformation?

It was interesting to explore how MFIs can achieve more by being realistic about their ambitions. Nordyn had some great advice about speeding up time-to-market by focusing on delivering a minimum viable product (MVP). “Test the product, test your market reach. The secret is to be able to react and adapt very quickly based on how the MVP performs,” he said. Adding to that, I would say this: take the opportunity to trial your new products on a small scale – at a single branch, for example – rather than roll out your MVP everywhere all at once.

Something that chimed closely with me was Nordyn’s advice to MFIs: “You don’t have to do everything yourself. Partner with a fintech which has expertise in one part of the value chain to get you started.”

I agree. Why try to build your own digital wallet? A fintech which does that (and only that) is going to be better at it than you ever can be. And no partnership decision is for ever. Depending on how things go, you can choose later on to continue the arrangement, take over yourself, or find a better partner. One of the great advantages of a modern core banking system (CBS) such as Instafin is that its open API architecture makes plugging and unplugging partners a cinch.

It reminded me of the problems we sometimes encounter with MFIs who try to imitate their competitors. Understanding what the competition is up to is important, of course, but you also need to understand your own strengths and USPs, and define your own niche.

It’s vital that MFIs have realistic expectations of what’s involved in a digital transformation project. Achieving a cloud-based real-time system is always going to be a big project. It’s one reason why it’s important that your CBS partner is properly invested in your success. At Oradian our motivation to see our customers grow is built into our pricing model. The annual subscription fee is based on the MFI’s size at the beginning of each year. So once they’ve grown – and not until – we get to grow with them. One of the many benefits of this approach is that we are incentivized to help them find the best product to meet their needs. We are so invested in the long-term relationship that we don’t even charge an implementation fee.

What issues do MFIs face when it comes to digital transformation?

Nordyn talked about the cultural challenge MFIs often face, their target customers being underserved by the banks, the segment having less access to technology, and social media use being lower. A lot of the processes rest on interaction and social binding between loan officer and client, he argued. Margarete pointed out that in many MFI segments this was not preventing fintechs from swooping in and taking MFI business with services which are fully automated end-to-end.

I think both these observations are true. At Oradian, we have MFI customers and fintech customers and have seen a degree of convergence. Well-run and forward-thinking MFIs have succeeded in automating every part of the process. and making best use of the relationship their brand has with its customers. But we’ve also come across instances of fintechs realising they also need an offline component to their business. Some have started using agents to improve their collection rates. Both can learn very well from each other, I believe.

It was pointed out that in some countries one of the major challenges is a shortage of people with the right technical skills but I think we all agreed that this in itself is not a significant barrier to digitalisation. Adopting a cloud-based core banking platform takes away the need for an MFI to be hosting, developing, fixing, patching, updating, or otherwise concerned with software. The most important thing for an MFI is having people with the talent to run the process.

For Nordyn, the most important talent to have in place is the ability to specify and translate business needs. “If you don’t know what you want as a business, you will never get it,” he pointed out.

Margerite agreed. “The most critical point is understanding the what why and how, and your customer’s needs. These are things you can never outsource,” she said.

For me it was a thought-provoking hour. My thanks to SANAD for organising it and for inviting me to take part. You can watch a recording of the seminar here on the SANAD YouTube channel.

If you’d like to discuss any of the issues raised with me, please feel free to get in touch with me via hello@oradian.com.