This article was originally published in Ciol: here.
Role of API in the world of Global Trade Finance
Tell us more about how you are working with financial institutions to integrate APIs into their existing legacy system—how do they benefit?
At a technical level, APIs allow systems to talk to each other without human intervention. If implemented properly, connections are secure and fast—and invisible to the customer. This happens by one system “calling” the other system using the API as the interface. Calling an API is a way to exchange data between the two systems. This process allows banks and other businesses to add brand new products to their existing legacy platforms.
Banks already have large numbers of customers and they have legacy systems which are expensive to upgrade and enhance. Instead of many months and many millions that would be required to upgrade a legacy environment, new products can simply be integrated directly into the digital customer journey—the user interface. Core banking systems do not need to be touched—they can be by-passed.
This means new products can be added in a low cost, quick and simple way. The complexity of operating and administering the new product sits with the external provider operating on new systems. All the bank has to do is manage the inputs and outputs by calling the APIs that are provided and managing the data flow in the user interface. This can also work well with internal systems – for example, the systems that sit on the desk or mobile of relationship managers.
In trade finance, very little has really changed for many years. PrimaDollar’s new trade finance product is simpler, quicker and cheaper than the existing product ranges offered by banks. But instead of competing with the banks, using APIs allows PrimaDollar to help the banks bring this new product to their customers directly and in their own name, sharing revenues with the bank.
What types of APIs are you using? (Public/Partner/Internal/Composite)
The API produced and published by PrimaDollar will be a private Partner API and access for our clients will be fully controlled by PrimaDollar. We have also integrated 3rd party partners public APIs to manage key functions such as legally binding digital signatures, although this access to these functions that manage PrimaDollar and its financial contracts is restricted to Partner API access only. This access is controlled via Azure Active Directory using OAuth 2.0 and the exposed Partner API is managed within the Azure API Management service.
What benefits does this have for exporters and India (how is the technology helping them)?
Exporters in India need access to working capital. Often their customers in foreign countries ask them to ship the goods without payment upfront. Buyers like to pay later when they can. But it puts pressure on exporters. Our system allows exporters to ship and get paid. The buyer can pay later, and the credit risk of the buyer is taken by us. But many exporters want to keep their financial relationships simple, and to work transparently with their trusted banking advisers who, perhaps also provide a wide range of other facilities (loans, packing credits, leases and so on).
And this makes sense to us as well. It is much better if the exporter can consolidate his financial relationships through a single portal—and it is much better for the bank if it has visibility over all of the exporter’s funding actions. This allows risks to be managed and ensures the bank can provide its financial expertise to help the exporter use the right products at the right time.
At the heart of all of this is technology. Banks move relatively slowly for good reasons – not the least the cost and time involved in enhancing internal systems to offer new products. Using APIs intelligently represents one of the biggest opportunities to revolutionise the services that banks are offering to their customers – and to do this relatively quickly and smoothly.
Give us examples in the financial world, preferably in the developing world, how APIs have benefited organizations.
A good example from another market space would the PSD2 initiative across the European markets. This has required all banks to publish a set of APIs that trusted third parties can use to receive information about individual bank accounts and provide instructions to the bank about making payments.
A result of these APIs is an entire industry that has developed online new banking and payments applications. These new third party “online banks” have made it much easier for individuals to manage their bank accounts and make payments more conveniently and at a lower cost than using the systems that banks have provided directly.
How is this technology evolving in the context of global trade finance?
APIs are developing rapidly to connect the physical aspects of trade together—allowing the businesses that manage logistics, for example, to talk to each other as physical goods pass through their control. But in trade finance, the main challenge is the complexity of the underlying legacy products, like the letter of credit.
There are initiatives to support the legacy trade finance products which are starting to show some success—but these are, inevitably, network solutions where banks and others connect to a central network which manages their communications, perhaps also tracked via blockchain ledger entries to provide trust. This is connecting the providers together but the customer has been forgotten. This is the right way to manage a complex product—which is via a central authority. But this approach locks in the participants and means that innovation is slowed down—this is simply a modern replication of a legacy process supporting a legacy product.
The better option, instead of building a central controlling network to manage a complex product for the providers is to simplify the product so that APIs can be used to deliver the product in a peer-to-peer model that encourages innovation in the customer journey and provides ultimate flexibility to the banks that intermediate between the product operation and the customer. We are not aware, today, of anyone else going down this second route—but it must, logically, be the better option.
What are the challenges that the technology faces (again, in the context of global trade finance)?
APIs are only really effective if products can be standardised and kept simple. The main challenge in global trade has been how to simplify trade finance so that it is capable of being given the “API treatment”. Once this has been done, a simple suite of APIs can be published and then used as a toolkit by banks and logistic companies to build trade finance into their digital customer journeys.
Of course, that leaves the many challenges of security, controlling access to data, privacy, and designing a user experience that is convenient whilst also encouraging correct operation. But these challenges are common to every API—there is nothing particularly different about trade finance per see.