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Open APIs promise to fundamentally transform the experience of payments for end-users, ranging from private individuals to global corporations. Whether driven by the global rise of FinTechs and real-time payments, or by regulations such as PSD2 in Europe, it’s clear that the momentum towards open APIs is now irreversible. As a result, it will soon be the norm for consumers and businesses to obtain account information and initiate and track payments using third-party applications that connect directly into banks’ systems via public domain APIs. But this isn’t just a big change for customers — it also brings huge implications for banks, not only around how they source, manage and use payments technology but also around how they differentiate themselves in the payments marketplace.
Application Programming Interfaces (APIs) are neither new nor as complicated as their name suggests. Originally developed 15 to 20 years ago in the era of enterprise systems and service-oriented architecture (SOA), APIs are software tools that enable different systems and applications to talk to each other and share processing and data. In their early days, APIs were largely internally-focused, proprietary and non-standardized, meaning they were inaccessible to the outside world and that substantial customization work was needed to link to them. But today, with the emergence of open APIs, their role and importance have escalated to a whole new level.
The big differences with open APIs are that they’re visible externally and easier and simpler to access — and their emergence over the past decade or so reflects the rise of the developer as a force in corporate IT. In an era when enterprise software was traditionally procured by the central IT function, open APIs emerged as an almost grassroots response to enable new software to be developed on top of other products and platforms. To meet these needs, open APIs share a number of characteristics. They’re developer-friendly and developer-centric; accessible from outside the corporate firewall; built using web-based programming; and “fine-grained” and standardized, enabling developers to take advantage of multiple APIs from multiple vendors and attach new utility to existing systems quickly and easily.
These qualities have seen open APIs take off rapidly in industries such as technology and social media. Now these same attributes are positioning them as a disruptive and potentially revolutionary force in banking and payments. Traditionally, banks have built, owned and controlled the channels and applications through which customers access their services — be a retail customer checking their balance online or undertaking a mobile transfer, or a corporation initiating a batch of cross-border payments. With open APIs, third-party developers can gain access to banks’ systems and build their own channels and interaction screens for customers to use. The result is that customers are able to see and manage their banking transactions and accounts through portals that the banks haven’t set up and can’t directly control.
Multiple Drivers for Adoption of Open APIs
For both banks and the third-parties tapping into their systems, this is a seismic shift that’s being driven by a number of forces. A specific driver in Europe — and one that may have wide implications globally, depending on how the rules are interpreted — is 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-parties approved by those customers. But even without such regulations, the global move towards open APIs in banking is unstoppable, for two main reasons.
The first is the rapid worldwide emergence of the FinTech industry, delivering a constant stream of innovation focused on meeting customers’ financial services needs more effectively, especially in areas like payments, mortgages, and financial management for small and medium-sized enterprises (SMEs). All bank customers — including major corporations — are now demanding payments, cash management and treasury service experiences that mirror the speed, ease and convenience provided by consumer applications and devices. They don’t mind whether these solutions are provided by their bank or a non-bank third-party — and the rise of FinTechs means the latter is increasingly the case.
Banks are eager to harness this innovation quickly and flexibly within their own offerings to win and retain customers. To help them do this, they’re moving away from purpose-built solutions to an environment where they assemble solutions from a series of vendors, using open APIs as the “glue” to link all the components together and create the customer experience they’re seeking to deliver. This approach generally involves using software-as-a-service (SaaS) platforms, where applications can be provisioned easily at low up-front cost, and then dialed up and down as needed. For example, a bank looking to attach a mortgage calculator to its website is now more likely to attach a third-party solution via open APIs than create one from scratch.
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