Do’s and Don’ts of the API Economy

Chris Wood explains how successful companies are using API technology

After being a tech buzzword for the better part of a decade now, no doubt many of you are bored of hearing about APIs before you’ve ever really understood what they are. Yet for anyone serious about disrupting the incumbents in their industry, it’s hard not to overuse a word that creates such an air of intent, purpose and the expectation of a ground-breaking result.

API stands for ‘Application Programming Interface’ and its roots lie in software development to describe a means for sharing the features and functionality of a given piece of software. APIs have now become a byword for any way of providing products and services that deliver flexibility and choice to customers.

Due to the widespread use of APIs, we’ve seen the growth of the API economy. Like most happenings in tech, APIs have become collectivised from an individual entity to a system, in the same manner as the Internet of Things or the digital ecosystem. The API economy describes the production and consumption of services and the supply of money fuelled by APIs. Like most economies, the growth of the API economy has been organic in nature and its creation was not a conscious decision taken by the thousands of business who deliver APIs – the API providers –across the world. Instead, the creation of the API economy came about due to numerous unplanned factors, such as the need to expediently provide backend services to deliver functionality to mobile apps.

Over time, an API has become both a self-contained product offering and a business model. And with its continued growth, there are many reasons why being part of the API economy will become even more strategically important to many organisations:

API first

Many businesses now deliver using an ‘API first’ model, where the API is the first – and sometimes the only – mechanism for their products and services to reach the market. The API has effectively become the product. The API first model has the significant advantages of speed to market and a generally lean business model that allows API providers to be both dynamic and nimble. It has also contributed towards the creation of a paradigm known as the ‘developer experience’ or ‘business to developer/B2D’, where the developer experience is concerned with providing the features and functionality that support an API and helping developers learn about, work with and, ultimately, implement a software integration with the API.

A great developer experience establishes a conversation between the API provider and the developer and while this does little to enhance the technical implementation of the API itself, it is essential to the overall product offering as it creates a buzz around the API provider and enhances their reputation and standing in their industry.

Doing things differently

Modelling their business around APIs also allows API providers to do things differently. In a world of startups and ‘distech’ (as in ‘disruptive technologies’  FinTech, RegTech, EdTech and all their cousins), finding ways to make in-roads to incumbent business models by using eye catching new features to capture the attention of customers is an obvious business advantage. Such differentiation does not necessarily mean a unit price cost reduction however. API providers who deliver unique solutions to the marketplace often do so with a verve and creativity that instantly makes them an attractive organisation to do business with. Accurately solving a customer’s problems can often be a bigger draw than simply offering the lowest price.

APIs are the ‘thing to do’

Whether it’s real or perceived, there is currently a need for most businesses to become an API provider in order for them to gain or maintain competitive advantage within their industry. If any given organisation has an API (regardless of its capabilities), it has a significant perceived value as a marketing tool alongside being a mechanism for product delivery. Conversely, businesses without an API who are competing against them are developing an arms race mentality and feel the needs to build their own API in order to compete on a level playing field. Payments is a great example of this mentality. There is an ever-increasing number of API providers with new entrants and the existing players are each trying to grab more market share by diversifying their offering based on the capabilities of their own API.

Accessing your customers’ customers

Providing an API alters the addressable market for businesses, expanding it to encompass a new and possibly unseen audience your customers’ customers. Many APIs are integrated into an application that adds value to the features and functionality of the API (often referred to as a ‘mash-up’) while still relying on the product or service the API offers. Integrating an API into an application drives customers towards the API provider through this intermediation, opening up a customer base that may not be addressed directly but that ultimately enhances the bottom line of the provider as well as the application developer. It goes without saying that such a model can affect the existing business or operating model of the API provider, from perspectives such as how to charge customers to industry regulations, especially in areas such as KYC and AML. However, despite these possible constraints, APIs can still be a great way to increase the addressable market.

APIs in the real world

Examples of these factors manifest themselves across several industries. For example, in the payments world, Stripe should be considered the poster child for the API first approach to service delivery by being the company that the term ‘developer experience’ seems to have been invented for. Stripe’s method is simple. They deliver a payments API that provides multiple payment rails – EMV, Apple/Android Pay, ACH, Bitcoin and Alipay – that’s easy to implement for all methods and that also contains numerous additional features that can be added at any point by any developer.

Stripe’s developer experience is second to none and integrating it with a task typically takes minutes or hours compared to days or weeks. Purely because of the elegance of the delivery model, Stripe have made significant inroads against competitors such as PayPal who were much earlier to market and better established. While Stripe do not offer any real cost savings, they are winning because they deliver the same services as their rivals but they do so far better.

Another frequently cited example of the disruptive power of APIs is the Walgreens Photo Prints API, which has been successful in driving in-store photo printing sales at Walgreens kiosks. The premise of the API’s service is to allow third-party developers to add a ‘Print at Walgreens’ button to their own photo apps. Customers can then send their photos to print at their local Walgreens store while the app developer earns a commission for each photo printed. This example is interesting, given the elegant way that a traditional bricks and mortar business has extended its addressable market to photo app customers not previously used to shopping at Walgreens. Moreover, the commission model also incentivises uptake by third-party developer, instantly providing them with an easy way to monetise their apps on an ongoing basis.

One final example of how APIs broke the mould is in the case of the recently IPOd Twilio. This company disrupted the telecoms industry by providing developers with easy-to-implement telephony functionality via the kind of Software Development Kits (SDK) and APIs that massive, less nimble incumbents such as Cisco could never deliver in such a timely fashion. As with the case of Stripe, developers using Twilio can build software that integrates telephony functionality in a matter of hours and the company focuses on the paramount importance of developer experience. It speaks volumes that Twilio’s market capitalisation is currently approximately $2.5b a value that has doubled since its initial offering in June 2016. At face value, this shows the value of delivering a focused product that’s aimed at disrupting the industry incumbents and made possible by a well-designed API plus a developer experience that engenders productivity and near immediate results.

What next for APIs?

Although any business could be an API provider, it will not be a natural course for all organisations to take. Some will find themselves coerced, if the actions of the Competition and Markets Authority and their Open Banking reforms become widespread and commonplace.

But while APIs are a great vehicle for delivering new products and services, simply having one is not enough to make a splash within the API economy. Creating and maintaining a viable business in the API economy requires innovation, tenacity and skill over and above delivering a piece of technical infrastructure. Having those capabilities and applying them to the product or service that is created and delivered using an API is what singles out the API providers that are both disruptive and truly successful in their industry.

Chris Wood is a freelance API consultant