In Fintech circles, the talk this year (when not about Bitcoin or Blockchain) has been about banking APIs. API’s or Application Programming Interfaces refer to instructions, procedures and tools that help computer systems talk to each other.
In the age of the Internet and data sharing (securely and with permission) by publishing APIs has become the cornerstone of business strategy for tech savvy companies.
Facebook, Twitter, Pinterest, Linkedin – all provide their APIs so that software developers can build programs and mobile apps that link directly to their sites and systems to query and retrieve content to enrich customer experience.
Google made APIs for Google Maps available. Companies such as Citymapper use these APIs to link with Google Maps (and other urban information providers) for their smartphone app that works in 29 cities.
APIs for digital payments
APIs for digital payments make sense. These generate additional business volumes. PayPal’s API ensures that online retailers can embed the option to pay with PayPal on their websites pushing more payment traffic through PayPal.
Stripe, the wunderkid of ecommerce payments, recently launched Relay – an API for stores to sell their products inside third party apps.
Many other online payment specialists and facilitators utilise payment APIs. Braintree – the online payment specialist (and Stripe rival) now owned by PayPal – facilitates payments for the likes of Airbnb, OpenTable, and Uber.
APIs for digital banking?
Providing banking APIs enables third parties to develop mobile apps and digital content and services that retrieve data directly from a bank’s systems to provide certain banking and payment tasks.
Small businesses stand to benefit the most. They often pay significant sums of money in bank charges and not always manage their cash flows well. Many small businesses go under not because they are unable to sell their products or for lack of demand for services but because they are unable to adequately manage their cash flows.
Bank of America, Citigroup, Credit Agricole, BBVA are some of the banks already using APIs to help their retail and small business clients.
Banks can develop digital apps on their own. But letting others develop these harnesses the creative power of the crowd – the multitude of talented entrepreneurs across the globe – in ways that are impossible for the tech department of a single bank to do.
There are a few things banks worry about.
- Customer relationships: Banks are weary of giving up their “front-end” role to upstarts and risk losing valuable customer relationships. Banks are not alone in thinking APIs can negatively impact customer interactions. Earlier in 2015, Linked announced that it was restricting use of APIs to approved partners only indicating that they “clearly want to direct more traffic to LinkedIn itself, where user engagement is much more likely to result in actual revenue.”
- Costs: Ensuring APIs work with old “legacy” banking systems will entail significant costs contributing to increased revenues not for banks but for third parties.
- Security and Privacy: The most significant concern. Banks argue that only people with very little understanding of security would go so far as to compare Google Maps or Facebook profile information sharing to sharing banking data. More problematic still for banks is enabling third parties to initiate immediate payments or move money directly from a customer’s account which requires strong security controls for authorisation and authentication. Customers must fully understand that by authorising third parties to make financial transactions on their behalf, they be exposing themselves to certain risks depending upon the security procedures deployed by the third party.
Regulators are – in general – highly favourable to the idea of APIs. The use of open APIs will open up payment and banking services and accelerate the pace of innovation. It will also provide greater choice to customers and instil more competition in the banking industry.
Standardising payment and banking APIs will make it very convenient for developers as it will ensure the same digital app works for all banks – interfacing with all types of legacy systems and making it easy for customers to initiate transactions, obtain confirmations, retrieve and understand information about their finances.
But mandating banks to publish APIs – in the name of innovation – will infringe on the competitive landscape in which banks play. Developing APIs should be a bank’s strategic choice. Banks who do not innovate and provide services that are valued by customers, risk losing them.
In Europe, the Payment Services Directive 2 (PSD 2) further broadens the scope of what non-banks will be able to do to undertake certain roles through direct access to bank accounts. These are: Payment Initiating Services Provider – PISP – (third party instructing the bank to make a payment on behalf of a customer); Account Information Services Provider – AISP – (third party requesting customer information for reporting, credit checking, or other purposes).
By mandating APIs, regulators – with all their good intentions – will essentially take an important element of competition away.
Notwithstanding the legitimate security and privacy concerns and the regulatory penchant for adding complexity and uncertainty where none exists – banks need not fear losing control.
By releasing APIs and sharing customer data with permission, banks can potentially move the mundane banking tasks – tasks that carry costs but not direct returns – to third parties.
Let third parties automate the mundane. Successful banks in the future will focus on the valuable money making stuff such as underwriting loans to resolve cash flow problems, arranging large loans such as residential or commercial mortgages, advising on investments and on savings for retirement, or managing foreign currency exchange risk. Third parties can offer these services too but customers far more likely to trust their banks in value added advice. In any case it will help improve services that banks offer and push them to innovate to compete with younger nimbler companies.
Though customers don’t switch banks generally in search of better technologies, a bank with an open API culture will attract more customers (because there will be more and better financial management programs available online or through app stores for customers to use) than banks who choose to keep their core systems proprietary and closed.