Why the Pay Later API Standard Could be a Turning Point in Banks’ Digital Strategies
In January, SWIFT*, a global supplier of financial messaging services, announced the “Pay Later” API specification. “Pay Later” enables merchants to offer consumers financing via banks at the point of sale. This move represents a massive leap forward in the banking industry’s thinking around APIs and ecosystems.
As I’ve written before, the banking industry’s reactions to digital disruption have been at best inconsistent, with incumbents often unwilling to challenge the status quo and to make the changes necessary to compete with digital natives. As a standard that any business can leverage, SWIFT’s “Pay Later” API specification is well positioned to pull the financial industry in new directions and help businesses launch services that better support customers’ buying preferences.
Over the last couple years, we have seen application programming interfaces (APIs) foisted upon banks via regulatory mandates. Open Banking regulations such as Europe’s PSD2, for example, require that when customers consent, banks must make payment initiation and account transaction data accessible to third parties via APIs. This effectively enables start-ups, fintechs, and challenger banks to muscle into payment services over which banks have traditionally held tight control. These laws have been written with consumers in mind and are intended to increase competition in banking. Consequently, some banking leaders view the API economy as detrimental to their business.
However, the competitive landscape has changed massively over the last decade.
Virtually every industry is increasingly dominated by software platforms and the ecosystems that surround them. Amazon, Etsy, Uber, Lyft, Square, Airbnb — more and more, the channels that consumers use to transact value and secure services rely on interactions facilitated by software. These platforms have spent many years and many millions — and often, billions — of dollars building out their ecosystems. As consumers and businesses increasingly transact on these platforms, bank executives should ask how they can ensure they have access to these customers.
This is the promise of the SWIFT “Pay Later” API announcement. APIs are the way software talks to other software — and they are thus the way enterprises embed their core business functions into digital platforms and ecosystems. Nothing is more core to banking than lending and payments. With this announcement, SWIFT is helping to define the industry’s response to the growing dominance of these platforms and the threat of disruption from alternative payments fintechs that are already executing API strategies to capture lending business during the purchase transaction.
In designing the API specification, SWIFT assembled stakeholders along the entire value chain to ensure that its approach would work for merchants, banks, and the underlying technology systems that power them. It also recognized the inherent mismatch among increasingly global platforms and today’s highly-fragmented banking industry. Only by working together and showing willingness to self-disrupt can banks hope to compete with the rising flood of fintechs.
It is thrilling to see the announcement of the “Pay Later” API specification. It is not only recognition by the banking industry that the competitive landscape has changed, but also a positive move by banks to come together to proactively compete in the API economy. The question now is, will banks work together and utilize APIs to preserve their role in commerce?
*SWIFT is a customer of my employer, Google Cloud’s Apigee team. SWIFT’s announcement is distinct from its work with Apigee.
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