When Third-Party APIs Will (and Won’t) Benefit Your Business

Today, there are tens of thousands of public APIs that let organizations integrate just about any functionality they need, from mapping to telephony to storage. This dizzying array of third-party APIs puts incredible resources at the fingertips of any startup, but organizations must also consider the drawbacks as they make decisions about how to grow their business with this technology.

Advantages

First, let’s take a look at some of the advantages of using third-party APIs. The “buy” approach--using a third-party API rather than developing one in-house--generally allows for quick deployment. Using third-party APIs means your engineers could spend days integrating, as opposed to months building. This not only saves time and money, but also frees up limited development resources to focus on other things, like the core product.

Third-party APIs also enable startups to add features that would be extremely difficult for them to build on their own due to resource constraints. Chances are these features will be better, since they are developed by an expert team at a company like Salesforce or Google that specializes in a particular area. In addition, third-party APIs give startups easy and secure access to data that would be challenging for them to get on their own.

Consider Uber, for example. The company uses APIs for mapping (Google Maps), payment (Braintree), mobile SMS (Twilio) and more to build its service while focusing on the core competency of peer-to-peer transportation.

The financial industry is another market ripe for third-party APIs.

"A [fintech] software startup doesn’t have the time, resources or expertise to create a secure link with every bank and brokerage in the country. It makes more sense for the startup to leverage the API of a data aggregator,” said Brad Lawler, president and co-founder of DRAFT, a crowd-sourced online investment tool. “This decreases time to market and allows a startup to focus on unique analytics instead of worrying about wrangling data or managing relationships with individual banks."

Potential Concerns

With all of that said, using too many third-party APIs can wreak havoc on your infrastructure by causing too many external dependencies for your core service. Uptime and latency times vary in different environments. Pulling data from five different providers, each with a different SLA and latency time, could be a recipe for disaster for your customers--and for your organization. The use of multiple external dependencies can also make it more challenging to integrate with third-party services in the future.

Cost is also a factor when considering whether a third-party API is best for your company.

While it is often cheaper to buy rather than build a service, when you rely on a third party, you are essentially paying for data. When assessing third-party providers (or whether to use one at all), cost should always be considered in relation to the amount of value the API will provide. For example, let’s say you are evaluating whether to use aggregation data to determine a lending decision. If that data can reduce the risk of default on a loan, then the net savings of using the aggregation data is roughly equal to:

[ Total loans in default without using data ] – [ Total loans in default using data ]  – [ Cost of data ]

If using that data will not generate value, it is not worth paying for.

Selecting The Right Provider Is Key

Ultimately, a third-party API is only as good as its provider--and only as good as its provider is around. The bottom line is that startups need to be very careful when choosing an API partner.

For example, you can be pretty sure that Salesforce and Google will be around if you run into problems with one of their APIs, but the same can’t be said for many smaller companies. If a service goes down and you can’t reach the provider for support, it could seriously compromise the functionality of your own app.

With that said, there can be road bumps even when working with well-established and trusted companies. You may know where to find them, but you may not have much pull with the big guys if they change the rules governing the use of their APIs in a way that negatively affects your app.

“Understand what is in it for the API partner. Is a relationship purely commercial? Are you helping them push the boundaries of their own offering?” said Rajesh Bhat, co-founder of Roostify, a startup focused on easing the home loan experience. “Understanding this dynamic can help to align expectations and potentially create strategic opportunities for both sides.”

Startups also need to consider their short-term versus long-term goals when considering whether to build or buy. Using a third-party provider always comes with some degree of lock-in. The “buy” route may provide short-term benefits, but startups should be wary of getting stuck with an API that won’t meet their needs in the future. It is important to question whether the offering will be able to grow along with the business. If not, buying may not be the right choice.

Do the Right Thing

Third-party APIs are a powerful tool for startups, but, like all powerful tools, they must be used with caution. There are a number of steps startups can take to mitigate these risks and make decisions that will help grow, rather than hurt, their business.

  • Go with what (and who) you know: It’s usually best to go with a provider that has been in the business for a long time. If you are considering a lesser-known and/or newer API provider, do your research. Learn from other companies that have experience with the company and the API--ask questions about performance, updates, communication, and adoption; and make sure its documentation looks solid.
  • Give priorities to companies that have developed competency in developing APIs or whose business is APIs. Indeed, an API-first design usually goes hand-in-hand with a better experience, according to Nimit Sawhney, CEO of Voatz, a mobile voting platform: "API providers whose technology is built on an API-first design tend to fare a lot better in terms of usability, functionality and the overall developer experience."
  • Take the time to do testing if you can. Many companies provide ways and means for testing out their services before you have to commit. You should also look into the quality of the API data--ensure you are going to get what you need and that it will generate ROI.
  • Finally, evaluate the provider’s support capabilities to ensure you will get the help you need. If the provider is a startup or small provider that does not offer robust support, keep in mind that downtime to your business should be factored into your overall estimation of costs. Support is key.  

The tens of thousands of APIs out there provide a vast and deep pool of resources for startups to tap into. Startups should focus on building what is innovative and use third-party APIs intelligently where they can. This means working with well-researched and trusted providers that bring clear value to the table.

What do you find to be the better option? Buying an API or building your own? Please share questions, or tips of your own, in the comments section below.

Cheung Tam Cheung Tam is the director of API product management at Yodlee Interactive. Before Yodlee Interactive, Cheung served as a senior product manager at Intuit.

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