By Mike Faden
APIs allow different financial applications and systems, including payment services, to instantly communicate and access each other’s data. Much of the current industry focus is on so-called open APIs, which are published and generally available to any application developers; for this reason, they fuel the development of innovative new financial services that combine information from different sources, experts say.3
Factors driving the growing adoption of open APIs include regulatory and payments-industry initiatives, competition from FinTechs, and rising customer expectations. Among the U.S. organizations behind the drive toward APIs are the Federal Reserve and the National Automated Clearinghouse Association (NACHA).
APIs are not new. They’ve contributed to the success of technology-based companies in various industries; APIs allow travel websites to do comparison shopping, and they enable applications to use mapping services and voice-based digital assistants, for example.4,5,6 In addition, some payments services providers make available APIs that allow their services to be integrated into e-commerce websites and B2B marketplaces.7
Now, though, they are being adopted more widely across the financial-services industry. Several factors are driving this broader adoption, experts say.
Among them are rising customer expectations that their payment services and banking experience should more closely resemble other mobile and web applications. “Customers expect services in real-time, with smooth and seamless interfaces, which are becoming increasingly personalised through intelligent use of data,” according to Payments U.K.8 Another factor is the worldwide trend to faster or “immediate” payment services; older methods of moving data between applications, such as batch file transfers, are becoming inadequate because organizations and applications need to exchange data in real time.9
A growing number of regulations in different countries mandate that banks open up customer account information to other applications, with customers’ permission. These initiatives include the EU’s Payment Services Directive 2 (PSD2). Among other things, PSD2 aims to facilitate the use of third-party payment services that directly access customers’ bank accounts, as well as applications that let customers view consolidated information for multiple accounts.10 The U.K. Open Banking initiative currently lets organizations more easily compare products from different banks; in January 2018 it plans to release APIs and standards that let third-party applications read transaction history and initiate payments from customers’ bank accounts.11
Industry groups and initiatives are also promoting the use of open APIs. In the U.S., NACHA, an industry association focused on ACH payment services, formed an industry group in early 2017 to develop standard APIs for use across the financial-service industry. “Despite the obvious benefits of APIs, adoption – particularly within the U.S. financial services industry – has been slow,” the API Standardization Industry Group said in its initial report. “We believe that a lack of standardization … plays a significant role,” alongside other potential obstacles, the report added. The group aims to develop an “API Playbook” that will help the payment services industry develop an ecosystem based on standardized APIs. “API standardization can be transformational,” helping to improve the safety and transparency of transactions, automate processes and communications, and enhance support of payments innovations, according to the report. Standardized APIs could also reduce fraud by enabling faster communication among financial institutions, the group said.
Also in the U.S., the Federal Reserve-led Faster Payments Working Group, which is working to define the country’s future faster payments landscape, noted that APIs and open standards are prevalent among the industry’s proposed solutions “to enable competition and value-added services.”12
APIs can be applied in payments services in many ways, according to Accenture. They include letting external payment services access bank accounts; providing customer verification; aggregating data so customers can more easily analyze it; and opening new accounts faster and more simply.13
Some experts say that APIs may fundamentally change the way financial services are provided, with a shift from a monolithic model in which banks built and controlled the channels through which customers accessed their accounts to a world in which innovative services may be delivered by other companies accessing bank account information via APIs. As a McKinsey & Co. report put it, “In the current environment, transaction banks are unlikely to be the sole source of innovation. FinTechs have proven themselves adept at crafting compelling consumer experiences and developing highly focused solutions. These FinTech-developed functions are not necessarily competitive with those offered by banks.”14
Open APIs are gradually transforming the payment services landscape, potentially providing businesses with innovative new options for payments and for financial services in general.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. Driving Innovation in Payments— Powered by APIs & Open Banking, Accenture; https://www.accenture.com/t00010101T000000__w__/au-en/_acnmedia/PDF-30/Accenture-Driving-Innovation-Payments-APIs.pdf
2. “How Open APIs Are Reshaping the Future of Payments,” Payments and Treasury and Solutions News; https://www.dh.com/system/files/resources/emagazine-payments-and-treasury-solutions-news-nov-2016.pdf
3. Driving Innovation in Payments— Powered by APIs & Open Banking, Accenture; https://www.accenture.com/t00010101T000000__w__/au-en/_acnmedia/PDF-30/Accenture-Driving-Innovation-Payments-APIs.pdf
4. Driving Innovation in Payments— Powered by APIs & Open Banking, Accenture; https://www.accenture.com/t00010101T000000__w__/au-en/_acnmedia/PDF-30/Accenture-Driving-Innovation-Payments-APIs.pdf
5. “6 things that you didn't know had APIs behind them,” BBVA; https://bbvaopen4u.com/en/actualidad/6-things-you-didnt-know-had-apis-behind-them
6. McKinsey on Payments June 2016 issue, McKinsey & Co.; http://bkm.com.tr/wp-content/uploads/2016/07/McKinsey_on_Payments_Issue.pdf
7. Driving Innovation in Payments— Powered by APIs & Open Banking, Accenture; https://www.accenture.com/t00010101T000000__w__/au-en/_acnmedia/PDF-30/Accenture-Driving-Innovation-Payments-APIs.pdf
8. APIs – what do they mean for payments?, Payments UK; https://www.paymentsuk.org.uk/sites/default/files/APIs - what do they mean for payments April 2016.pdf
9. “How Open APIs Are Reshaping the Future of Payments,” Payments and Treasury and Solutions News; https://www.dh.com/system/files/resources/emagazine-payments-and-treasury-solutions-news-nov-2016.pdf
10. “Payment Services Directive: frequently asked questions,” European Commission; http://europa.eu/rapid/press-release_MEMO-15-5793_en.htm?locale=en
11. “Customers,” Open Banking Ltd.; https://www.openbanking.org.uk/customers/
12. Faster Payments Task Force Final Report Part Two: A Call to Action, U.S. Faster Payments Task Force; https://fasterpaymentstaskforce.org/wp-content/uploads/faster-payments-task-force-final-report-part-two.pdf
13. Driving Innovation in Payments— Powered by APIs & Open Banking, Accenture; https://www.accenture.com/t00010101T000000__w__/au-en/_acnmedia/PDF-30/Accenture-Driving-Innovation-Payments-APIs.pdf
14. Global Payments 2016: Strong Fundamentals Despite Uncertain Times, McKinsey & Company; https://www.smefinanceforum.org/sites/default/files/post/files/McKinsey_Global_Payments_Report_2016.pdf