By Anders Olofsson, Head of Payments at Finastra.
Innovation around open application programming interfaces (APIs) and banking has now entered its third and most powerful phase. Open APIs are now emerging as the vital enabler underpinning a new era of ‘platformification’ in banking and payments services. This new generation of services is driven and enabled by an open, collaborative ecosystem of innovative API providers — characterised by a remorseless focus on delivering the optimal payments experience for customers. API hubs—especially when combined with other advances like cloud and immediate payments—bring a host of benefits for banks, their customers and their ecosystem partners. The third wave of open API innovation is here. For banks, the choice is clear: move proactively to ride the wave—or get submerged by it.
The third wave
You might assume that API banking is fundamentally new. But you’d be wrong. The ‘first wave’ of banking APIs emerged as long ago as the 1980s, mostly focussed on internal reconciliation and account information rather than executing transactions. These were typically developed for specific projects or customer requirements and were delivered using complex proprietary technologies as they pre-dated the commercial Internet.
We are now well into the ‘second wave’ of APIs in banking. This wave has several distinct and powerful drivers. One is the introduction of new regulations including the European Union’s PSD2 and the UK’s Open Banking initiative. These drivers have the goal of moving data ownership from the bank to the client (working in conjunction with other regulations such as General Data Protection Regulation [GDPR]). Another driver is rapid advances in technology including pervasive broadband Internet access,
cloud computing, and easier-to-use Representational State Transfer (REST) APIs. The third—is growing demand for real-time, connected customer experiences from both consumers and businesses.
The second phase of APIs is now being subsumed by the third and most powerful wave of all: banking as a platform. This is driven by an ecosystem of API providers that operate in an environment of open collaboration, and accounts for the vast majority of financial services innovation taking place outside banking institutions.
The API-enabled payment hub
Payments is a fundamental component of modern API ecosystems and the third wave is seeing the emergence of ever more advanced payment APIs that cut across silos and across multiple industries. As innovation continues, a robust suite of payment APIs is becoming essential to the success of any bank’s API program.
Open APIs are now emerging as the vital enabler underpinning a new era of ‘platformification’ in banking and payments services.
The latest step in payments is the move to ‘platforms’: flexible environments that provide a single access point to a full array of products and solutions, which are integrated through open APIs and provide broader additional value. To participate in the latest phase of API banking, banks need to move beyond traditional payments hubs, and start thinking in terms of ‘payment API hubs’ capable of supporting API access and consumption.
With the new model of API-enabled banking, services such as payment initiation and account aggregation will come from a much wider range of sources. For banks, moving to a payment hub can be the first step in breaking down the traditional monolithic, silo-based payment model. The extension to a payment API hub allows these services to be externalised and accessed by other systems within and beyond the bank.
For example, with data enrichment processes for validation; payment hubs currently carry these out using internal data. With an API-tenabled payment hub these functionalities can become a collaborative effort between the hub and third parties, with Fintechs exposing valuable reference data that can be combined and integrated with internal bank data to enhance the overall service.
Some other areas API payment hubs can benefit a bank and its customers come in the form of ‘Pay Later’ and ‘Request to Pay’ APIs. Through ‘Pay Later’ APIs, instead of having the customer pay through a single credit transfer, a bank can expose the ability for a user to pay in installments or defer the entire payment to a later date. In effect, the customer is making an online application for a loan utilising payment and loan APIs.
With ‘Request to Pay’ APIs, a bank can turn customers’ requests for payments into ‘push’ payments, where the user simply has to approve the payment for it to go ahead. This allows for a greater degree of flexibility when making payments, giving the ability for customers to pay in full versus paying partially, ask for extension, or decline a request to pay.
On top of these benefits, payment API hubs also give the ability to expand the reach and functionality of a traditional payment hub. Most payment hubs have been built from ground-up to support specific networks in the bank in terms of payment methods or regions. But by collaborating with Fintechs and consuming third-party payment execution APIs, the bank can extend the hub’s scope to support additional or alternative services layered on top of payment methods.
All in all, it is imperative to keep the customer experience front and centre throughout.
Steps to success
While third-wave API payment hubs offer clear benefits for all participants, there are a number of factors that still act as blockers for progress—and could stand in the way of building momentum for their adoption.
Regulations such as the European Union’s PSD2 and UK’s Open Banking are major drivers, however, some major markets—notably the US—have been slower than others to embrace open banking concepts. Banks often fear that regulations like PSD2, with their focus on opening up banks’ systems to innovative third parties, present a risk that they will become disintermediated from their customers.
In addition, regulators are leaving it to the market to come up with standards and guidelines for open APIs, and a lack of these could reduce the ubiquity and economies of scale that is so vital to the commercial viability of open APIs.
Finally, most banks’ IT estates consist largely of legacy applications and systems. Because of this, there are often question marks around the competency and capability of banks’ IT resources to participate effectively in the open API world. To combat this, banks must build a layer on top of their legacy systems to enable them to break down legacy processes into services and translate their communication methods from old to new technology.
All in all, it is imperative to keep the customer experience front and centre throughout. All banks should approach API banking and payments platformification in the context of delivering a differentiated customer experience for both consumers and businesses. The customer has always been the ultimate arbiter of commercial success—and amid the disruptive impacts of the move to open APIs, that’s one factor that won’t change.