Application Programming Interfaces (“APIs”) are a form of software intermediary which allows for two applications to talk to each other and allows businesses to reach customers at key moments in their consumer journey.
APIs are used by many of us on a daily basis, from sending a message on WhatsApp to searching for holidays on a comparison site. They are a great way of accessing and utilising data across the industry; and, with the Financial Conduct Authority (“FCA”) currently considering the applications of Open Finance, it is important for insurers to consider the positive impact APIs can have on their business.
Despite their widespread use in the tech world, their use on the financial sector is only just emerging. They are currently used in open banking, first implemented in January 2018, which enables customers and businesses to consent to third-party providers (“TPPs”) aggregating all of their financial data and presenting suitable banking products to them. The use of APIs in open banking also allows for these TPPs to transfer money from customers accounts to a businesses account directly, without the need to use a third-party payment service provider such as PayPal. Open banking has therefore led to greater financial management for consumers and businesses alike. The changes brought about by open banking have been onboarded by HSBC, Lloyds, RBS, Santander, Nationwide, and others.
Open banking has led to the development of open finance, an expansion of the use of APIs into the financial services sector. Through open finance, TPPs would be able to aggregate a customer’s financial data and initiate transactions on their behalf, such as switching insurance contracts or current accounts. This goes a step further than open banking in that decisions can be made about which products to choose, without direct input from the consumer.
Some insurers are already using API technology. For example, By Miles became the first UK insurtech to be authorised by the FCA under Open Banking Regulations in early 2020. Their API technology enables them to look more closely at credit scores and obtain evidence of where a customer has made regular insurance payments over the year and can therefore be offered a policy, when previously a negative credit score would have suggested otherwise.
Open finance has the potential to give consumers and businesses greater control over their finances through allowing third party access to their data. Insurers will be able to collate a customer’s financial data, including claims history, current product information, and basic personal data, and then use this information to tailor quotes and services to individuals. Insurers will also be able to reduce their costs through cutting out payment service intermediaries and completing payment transactions themselves. This direct transaction from the customers account to the business can see huge savings in fees incurred by payment service intermediaries.
APIs can also be used to improve user experience and make the claims process as smooth as possible. For example, mobile functions, such as using the camera to photograph an accident, or GPS to record the location, time and date of an incident, can be incorporated into the process. Insurers can also leverage map and weather APIs to track hurricanes and predict flooding so that consumers can manager their insurance policies. An InsurTech called Tractable apply artificial intelligence to accident recovery by allowing digital damage appraisal through a photo, rather than by a physical inspection. Ageas use this solution to triage claims instantly; cutting down on the time the claims process takes; and, ultimately improving the customer experience.
Of course, there are some negatives. The main concern is that many businesses will not have the means to facilitate open finance. The level of investment required to develop these APIs may be too much for some start ups to justify. There are also worries about data sensitivity. This is especially key in relation to the insurance market. Insurers deal with large volumes of complex data and heavily rely on legacy systems. If systems allowing large-scale data transfer are invested in, APIs may be implemented.
All of the functions mentioned above can create a stronger customer business relationship and further market participation as a result. The implementation of APIs has the potential to lead to smoother customer journeys and bolster consumer satisfaction and confidence in insurance as a result. The claims process will be made more efficient for insureds and insurers alike, through the flow of data provided through this technological advancement.
With the implementation of open finance approaching, insurers should consider how APIs could help to transform their business if they can overcome the primary hurdles of technological development.