I am often faced with a common question when interacting with banks and financial houses about their API strategy.
The question is: "How do we monetize our API?"
They ask me to suggest use cases where an exposed API will drive monetization/revenue.
If I consider APIs as a modern day innovation, having a lifespan of 100 years, on an Innovation Adoption Curve we are in the early majority pragmatist zone (34%). Organizations began to focus on APIs around the year 2000 with Salesforce.com and Ebay producing their first web-based APIs, rising dramatically starting around 2008, exhibited by the exposure associated with Netflix’s public API.
The concept of API monetization was introduced by Apigee in 2015, which delivered an API monetization service as part of its platform. Banks said to themselves, “this works” and started developing apps for external use. They started “outdoors” with external APIs with the goal of monetization. They then moved “indoors” to APIs that they could use internally. This was the wrong way around. After all, why should anyone want to pay for an API? If it was easy to monetize them, it would not be such a burning issue.
Indoors versus Outdoors
An example of internal API pragmatism and value capture would be, say a small to medium sized business (SMB) bank. The bank is able to deliver new feature functionality (value creation) in a periodic manner helping to drive revenue (value capture). But because of internal API pragmatism it can now deliver the same feature functionality in less time, leading to faster revenue for the SMB. Can this benefit be monetized and passed on to the production that is creating the value, either through “chargeback” or “showback?”
External API pragmatism and value capture occurs when banks, being an integral part of financial ecosystem, can help start-ups. As an example, they can provide access to new markets by leveraging a bank’s network; providing access to a secondary market to boost demand among both individual investors and startups. Such features can be made available via premium pricing as these are not commoditized services. External APIs can also help towards driving collaboration between government agencies and financial houses, benefiting an underbanked community.
Today, banks are heavily invested in API pragmatism, i.e. putting theory into practice, internally and externally. I believe each API pragmatist needs to link value creation with value capture; where the API gives users the incentive to stick with the bank and to eventually pay for the service. Every financial institution is competing for the lowest possible price for its services, thanks to mushrooming fintech competition.
As per the Bertrand model, where if two firms charge the same price, consumer demand is split evenly between them, I believe financial institutions have transformed into duopolistic companies. Duopolistic companies can achieve some form of competitiveness if they can monetize the process of value creation as opposed to the final product (typically a bank’s customer facing service), where pricing differentiation is no longer strategic.
The API economy is hard to monetize when demand for basic services is no longer basic, thanks to exponential growth in mobility. Banks and financial houses can no longer be just a deposit takers and loan givers, they need to transform into a mediator supporting the financial ecosystem. They can then monetize these mediatory services and processes achieved via APIs. This is the next operating model, in my opinion.
In my next blogs, I will discuss how to monetize both internal and external APIs.