Here is a brief excerpt from an article written by Keerthi Iyengar, Somesh Khanna, Srinivas Ramadath, and Daniel Stephens for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.
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APIs are the connective tissue in today’s ecosystems. For companies who know how to implement them, they can cut costs, improve efficiency, and help the bottom line.
Application programming interfaces (APIs) were once largely limited to technical domains but have now become a significant engine of business growth. As the connective tissue linking ecosystems of technologies and organizations, APIs allow businesses to monetize data, forge profitable partnerships, and open new pathways for innovation and growth.
Early adopters across industries are already using APIs to create new products and channels and improve operational efficiency. Within the automotive industry, for instance, APIs are used to embed efficiency data, driving statistics, route information and real-time alerts into dashboards. Some retailers are using APIs to set up multi-brand shopping platforms, track inventory, and help consumers locate stores. And a handful of banks are partnering with fintechs and retailers, among others, to develop APIs that help customers integrate banking data into bookkeeping and investment software, and provide faster internal access to a range of account information.
The value at stake is significant. McKinsey analysis has estimated that as much as $1 trillion in total economic profit globally could be up for grabs through the redistribution of revenues across sectors within ecosystems.That makes APIs, which play a crucial role in linking organizations and technologies in ecosystems, a significant competitive battleground capability. Furthermore, McKinsey estimates that the number of public APIs will triple over the next 12 months. As the functionality evolves, APIs will deliver more advanced services, such as powering the wider use of digital wallets and currencies, enabling machine learning to deliver more sophisticated operations, and supporting advanced conversational capabilities.
In addition, API marketplaces and app stores will make it easier for users to access sophisticated business and consumer offerings. However, the number of firms with mature API programs remains small. Most organizations have just a dozen or so APIs instead of the hundreds needed for a robust portfolio. And apart from a few early movers, most do not have a formal API strategy, are unclear about the true value at stake, and are uncertain about how to implement a program that quickly maximizes consumer and business impact (see sidebar, “How APIs create value”).With the API market gaining momentum, institutions that move quickly to define a business-backed strategy and monetization model, institute the right governance, and drive adoption can create powerful new avenues for revenue growth and value.
In our experience, the most successful companies implement an API strategy by following these steps:
[Here is the first.]
1. Identify -— and prioritize -— the value
APIs can generate massive amounts of value, but institutions first need to understand where best to apply them. Leaders in the field analyze where value can be destroyed or created, then they size the potential impact in terms of revenue, customer experience, and productivity.
Analyzing customer journeys is often the best way to identify API opportunities. One bank pulled business and technology professionals into a joint team and tasked them with identifying where APIs could help resolve several longstanding customer pain points.
Their review revealed opportunities to develop advanced calculator APIs capable of pulling from multiple sets of data, know-your-customer APIs, and product-aggregation APIs that could help customers access needed information more quickly and cut down on form-filling requests. The team then prioritized those opportunities that would deliver the most near-term impact, given existing capabilities. That data-driven approach gave the bank greater mission clarity and built momentum for the API program.
Understanding what it takes to develop the APIs requires a deep knowledge of the data environment, especially back-end systems where the API work is often done. Once the best opportunities are identified, API developers can identify which and how many APIs are necessary to unlock that value. A prioritization matrix can help whittle down the list of APIs based on the answers to a specific set of questions about strategic value and implementation complexity, taking technical, privacy, security, and regulatory concerns into account (see Exhibit 1).
In some cases, it might make the most sense to turn to external developers. Apigee, for example, has created a set of compatible APIs that help banks address PSD2 requirements (supported by an open-banking infrastructure). Note that value doesn’t need to come from creating something new. Businesses can also use APIs to improve functionality or add new features to existing products and services.
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Keerthi Iyengar is a digital manager in McKinsey’s New York office, where Somesh Khanna is a senior partner; Srinivas Ramadath is a digital expert in the Chicago office, and Daniel Stephens is a partner in the Washington DC office.