Across the payments industry, a global migration to payment services based on Open Application Programming Interfaces (APIs) is under way.
Soon it will be the norm for customers to obtain account information and manage payments using third-party applications that connect directly into bank systems via public domain APIs. This development promises to fundamentally transform the payments experience for end-users ranging from individual consumers to global corporations.
For the consumer, this looks like a win. What does this mean, long-term, for banks?
Net gain or net loss?
As banks provide access to their technology to third parties, are they at risk of technological disintermediation?
That is, do they become utilities, providing commodity account management services, and competing on cost alone?
It may appear that by opening their APIs to outside entities, banks are giving away control of the customer experience to fintechs—or even competing banks.
And, to an extent, this may be true.
But upon careful consideration, it becomes apparent that banks actually have a lot to gain by providing open APIs.
APIs are software tools that enable disparate systems and application to “talk” to each other and share processing and data. Traditionally used to enable communication between internal systems, APIs are now being opened to the public, enabling external entities to work with and integrate with bank systems. One real-world example is the consumer’s ability to log in to various portals using their Facebook password.
Today, open APIs are quickly gaining traction at banks due to a combination of factors.
Surprisingly, one factor is regulatory. Regulations are a leading factor in the adoption of open APIs. One prominent example: the European Union’s second Payments Services Directive (PSD2), which mandates that banks must open up access to accounts, payment flows, and end-customer data to third-party providers.
Another key driver for adoption of open APIs is the growing need for real-time service experiences and information, coupled with the rise of real-time or “immediate” payments infrastructures across the world.
Likewise, the fintech industry is delivering a constant stream of customer-focused innovation. This has banks feeling pressure to offer more sophisticated services and solutions. In essence, banks are being pushed by their client base to deliver new services made available through the fintechs, and open APIs make meeting those demands quick and easy.
Balancing risk and benefit
As banks begin to adopt open APIs, certain risks have become evident—not the least of which is the risk of disintermediation. It is a valid concern. When banks open access to their platforms, customers are able to access bank information through external channels that provide tailored user experiences. It removes a key differentiator from the bank, and does bring the bank one step closer to operating as a mere utility. The fear that banks will be left to compete merely on costs is not unreasonable.
It is important however, to recognize the value banks and fintechs realize in partnering. Banks and fintechs have complementary needs: fintechs are keen to tap into banks’ core account offerings and their trusted reputations for security and deep capabilities in regulatory compliance. For their part, banks are looking to leverage fintechs’ innovation and time-to-market capability.
And therein lays the key benefit to banks: By opening their APIs to fintechs, they are able to provide the customers with the features and services that they increasingly expect and even demand.
This can allow them to continue to focus on the core business of banking, rather than technology. Put simply, more banks have realized that they do not need to be experts in app development to deliver compelling customer experiences. Instead, they can do it faster and more effectively by partnering and integrating with fintechs through open APIs.
The net effect of this symbiosis is the emergence of mutually beneficial, collaborative payments ecosystems. Banks gain the ability to offer a much wider range of offerings to their customers, thus increasing the “stickiness” of their customer base as a whole. Even corporate banking will benefit: multi-bank aggregation services demanded by corporate treasurers are facilitated and accelerated through open APIs.
Market realities may drive acceptance
At the end of the day, I believe that banks will have no choice but to open their APIs, whether to comply with regulation or simply to be able to meet customers demand. That said, open APIs should not be considered a necessary evil. In fact, they provide banks with opportunities to service customers in a cost-effective and efficient manner and increase customer satisfaction.
About the author
Veejay Jadhaw is Chief Technology Officer, Global Payments Solutions, at D+H.