What is the API economy, and why does it matter?

While organizations use APIs to provide better ways to access data and core capabilities, the way those APIs can be leveraged by developers within the organization as well as outside of the organization constitutes the “API economy.”

More broadly, using APIs to expose core business capabilities externally sets the business itself up as a platform, ripe for third party innovation upon. In return comes new routes to market, new monetization opportunities, and potential for capturing new business opportunities not possible through traditional means.

The API economy refers to the controlled exchange of digital data and services through APIs. The API economy is the combined value exchange between providers of APIs and consumers of them — both of which exist within a company and beyond. 

The API economy is not a technical concept, nor is it a financial model. Instead, it reflects an ecosystem of mutually beneficial exchange of data and digital services.

Although an organization can be entirely API-driven internally, the primary focus of the API economy is B2C and B2B. A classic example is the cloud itself, which giants like Amazon revolutionized. The AWS cloud is nothing but a massive collection of APIs that offers access to the Amazon infrastructure and application resources. Other well-documented examples include Twilio, Google Maps, and Stripe.

Companies participating in the API economy build their services and products with an eye toward either (or both) of the following:

• Consuming APIs from the marketplace to speed up the development of entirely new features and enhancements to existing features, often to augment and improve an existing digital experience.
• Exposing APIs to add value for consumers, whether those be end users or other companies. Extending reach, market share and monetization opportunities.

These companies focus on their engineering side while adding API-based features from a marketplace or partners, or exposing their APIs for use in the marketplace. Therefore, to participate in this economy as a technology-oriented business, you need to decide which of your digital services should be accessible through APIs, and how they should do that. (See best practices for productizing APIs.)

The effect of the API economy on businesses

A business can be an API provider or an API consumer (and often both!). Either way, it becomes a part of the API economy. One of the main effects of the API economy is how it levels the playing field.

There was a time when large companies could spend an unlimited amount of money to offer closed source services or the largest source of data, often locking in consumers to use their platform. In the API economy, successful companies integrate and use different data and services quickly and most efficiently. Small start-ups are now competing with large multinationals, and bigger players are acquiring individual apps because of their disruptive potential.

The value chain of the API economy not only exposes a company’s internal assets to internal users, but also to business partners, third-party developers, or the general public. Businesses can now expand their horizon — their services aren’t just limited to their end users or end products. Similarly, when you adopt an API-first approach as a digital service provider, this significantly lowers the bar for potential users to integrate and consume your services so that they can increase their development velocity and thrive.

For example, let’s say a courier service company has developed an API that tracks the status of traffic lights at every intersection in major cities. This API provides that data to a specialized app used by couriers, estimating approximate delivery times and sending personalized messages to recipients.

While this data on traffic lights is essential to the courier business, the data, along with richer traffic “events” such as congestion or closures, can be useful to other businesses as well — including ride-sharing, food delivery services, ambulance services, or even law enforcement. Exposing your company’s API allows other businesses to build their own apps and reach a broader audience within those cities.

The digital-first approach is another classic example adopted by many state and central governments around the world. Most public services have internal systems for serving the public. Instead of building a full-blown digital platform from scratch to offer all those services, many governments opt to create an “umbrella” digital platform that consumes services and data from individual departments through APIs.

API economy benefits 

The exchange of data and services through APIs allow faster product turnaround, increased consumer satisfaction and trust, access to newer markets, enhanced collaboration, and many other benefits.

Faster development and go-to-market times 

Companies can optimize their development efforts and reduce go-to-market times when they use existing APIs. 

Building a thriving internal API economy is a great way for financial institutions (or organizations in any industry) to create a valuable catalog of APIs. This catalog of APIs, when well documented and made discoverable, allows other developers within the organization to leverage and reuse for future projects and outcomes. This drives efficiencies across the business, reduces the overhead of duplicate APIs potentially being created and adding to the technical debt, and it affords time to focus on ensuring every API that does make it into the catalog is built to high quality and conforming standards.

One digital experience can leverage an API built for a previous digital experience, knowing that it’s useful, relevant, and has already met the security and governance standards set. Efficiency, reduced risk and faster project delivery times ensue. Learn more about how Kong helps businesses future proof API security and scalability.

Efficient digital user experiences

One major benefit of the API economy is an improved customer experience.

Consider just-in-time insurance offered to a customer before they drive off with a new car. Thanks to the API economy, a buyer can purchase insurance or financing as part of a delightful and meaningful car-buying experience. And they can do so from a provider they’ve never been a customer with before. They might never even have become one if it meant engaging with them in a traditional manner. 

Who wants to sit on the phone outside a car dealership on hold — waiting to repeat all the details of the purchase just to obtain a quote which might not even be any good — just to have to say sensitive information aloud?

When the API economy allows the car dealership to leverage insurance products and services embedded within the experience that customers are already engaged within, the process is seamless, easy, and conducive to a positive outcome for both the car dealership and the insurer. This results in brand value creation for the dealership, and a new customer for both the dealership and insurance company.

Continuous improvement and delivery

As APIs are opened up to customers and third parties, they can be customized and improved on the back of adoption and feedback.

The more an API is adopted, leveraged and depended upon, the more consumption data is captured for measuring its success and ultimate API “worth” to the business providing it, as well as to the broader API economy. Broad adoption results in broad benefits and a heightened sense of importance around improvement and engagement.

API monetization 

API providers not only benefit from a favorable market reputation, but they can also monetize the usage, which sometimes leads to an entirely different line of business. (Check out our guide to API monetization technical best practices for more on this.)

For example, an API provider can create a strong client base in the early stages by offering a free tier. After establishing a loyal following, it can offer value-added APIs using a revenue-sharing or subscription model. This is often seen in companies who use data they have access to as a source of value to others, which can be monetized as part of an API monetization strategy  

Think again about how Google Maps (and others, like Apple Maps and Waze) use smart devices in cars and other forms of transport to capture, collate and measure drive time, conditions and optimal route predictions. This data has economic benefit to a whole myriad of digital experiences provided by other brands, all of which can be easily embraced via the API economy and easily monetized.

API economy challenges

In terms of challenges, most IT leaders are concerned with security. High-traffic public APIs are always prime targets for attackers and state-sponsored malicious actors. Poor coding, accidental exposure of credentials, and the lack of updated SSL certificates can all lead to misusing an API for non-intended purposes or being made inaccessible with DDoS attacks.

Although APIs are language and platform agnostic, sometimes ensuring interoperability between different APIs can be cumbersome and cost-prohibitive. For example, an organization migrating and converting its legacy, on-premise SOAP-based APIs to cloud-based REST APIs may find that it has to rewrite the entire code-base.

Above this, the challenge remains on adoption and how a potentially very traditional business can pivot to take advantage of APIs, the API economy, and the potential to become a Business-as-a-platform style company — where future interactions could potentially by primarily (or solely) programmatic.

This challenge in particular is not addressed with technology alone. It takes overcoming inertia around the status-quo business model, some cultural resetting and a desire to venture off the comfortable path of today and look towards gearing the business for the digital future.

How to get started

Aligning your business with the API economy isn’t as complex as it may sound. All it takes is a bit of planning and putting a few building blocks in place.

First, you need to confirm that your organization is ready for this shift. Your stakeholders need to understand the value proposition, and your company strategy needs to incorporate it as a clear goal.

Next, you need to find out if your application landscape is API-ready. Are you using only on-prem, monolithic applications? Is this older model mixed with the new model of cloud-native, microservices-based applications? If there are newer applications, then there may be APIs available for those.

Similarly, ensure your developers are comfortable building and reusing APIs. You can accelerate their journeys by adopting an API-first approach. With this approach, every development goal is to publish the final product as an API or build new solutions from existing APIs.

API economy and financial services

Thanks to the API economy, there’s now a whole ecosystem of API-related products, tools, open standards, and protocols. These are maturing as more and more companies are joining the API economy.

Many robust API gateways are now available in the market, and various security applications now ensure safe and secure access to API endpoints. As the API economy grows, so does innovation in the API space.

The overall value created by APIs can sometimes be beneficial on a larger scale. For example, a consortium of banks may decide to expose some of their partner APIs for other financial institutions like insurance brokers or stock trading firms, often serving the same clientele. The end customers can get great value from such efforts.

Many will be familiar with how the Google Maps API, or the Stripe Payments API has brought rapid innovation when adopted by the experiences provided by the likes of Uber or Airbnb, and the same is now possible within the banking world.

From simply leveraging the Google Maps API to provide “branch locator” functionality on a banking website or within an app, to exposing banking and financial products and data for other brands to embed within their offerings because they can’t or it’s just not prudent to build those capabilities themselves. 

The API economy is allowing business to move faster through the adoption of existing capabilities that can be leveraged to improve a customer experience. 

Summary

Along with open banking and embedded finance, the API economy is incredibly meaningful to financial services. The API economy allows traditional banks to find new routes to market and capture customers who would not normally engage with them, and FinTechs to spin up as fast as they typically do, with the disruptive offerings they bring.

Build up your API strategy

It takes great tech and the right partner for the modernization journey. You’ll want a platform to get you started with APIs — if you’re not already there (you can start by reading our eBooks on APIs) automating all aspects of the full API lifecycle, and supporting the modern (and ever-changing) distributed and complex IT landscape. 

You’ll also want a vendor with the knowledge and know-how to help you mature from APIs internally to APIs externally, and eventually landing in the sweet spot of active API economy participation.

Shocker: we think Kong is a pretty smart choice for helping with all of the above — a robust technology platform for quick API development, easy deployment, reliable communication, and simple maintenance.

Interested in the API economy? Let Kong can help you build your API strategy for 2022 and beyond. Set up a personalized evaluation today.