How API banking creates value and drives business.
There is a revolution underway in the payments world, and banks that are open to collaborating with customers and developers will emerge the likely victors.
Around the globe, financial institutions are exploring the risks and rewards of opening up their systems to third parties that could make payments on behalf of customers, as well as provide a host of other experiences not typically offered through traditional banking apps. Those experiences and capabilities would be supported through application programming interfaces (APIs).
A more dynamic landscape
When I want a cup of coffee from my favorite coffee shop, their app easily points me to the nearest location, allows me to order and pay before I get there, instantly updates my rewards points, offers me the chance to redeem a reward if I have earned one, shows my current account balance and lets me increase it while also tipping the barista digitally as I pick up my drink.
What if those app developers went to work for my bank, giving me an experience for managing my financial life that was as easy as getting my coffee fix? That is the possibility open banking introduces.
Open access begins an era of unprecedented transparency in payments. With the injection of third-party services, innovation can flourish and grow, driving more transactions and additional payment use cases that could not be possible without external invention. Providing secure API access to systems once closed is costly, and banks are actively seeking ways to monetize the services to justify the investment. An example of how this might work could lie in the entertainment industry, which has transformed to an “open” framework quite successfully.
Want to watch a movie? Choices were once limited to travelling to a theater. Today, consumer choice around how to see a movie includes going to the theater, live streaming on a multitude of devices, playing a DVD, watching one of multiple movie channels on a satellite or cable network, playing back a digital recording we have stored, etc. As choices have been added, public consumption of this type of entertainment steadily increases. In time, open APIs will impact traditional banking in a similar fashion.
When a financial institution opens its platform to third parties, the possibilities of what a developer can introduce become limitless. From solving agility challenges caused by legacy systems that are both costly and time consuming to update to adapting and “flexing” as consumer needs change, APIs can be extremely beneficial. Examples might include alternative language applications that would allow a financial institution to better serve customers regionally without having to build an entire infrastructure to support multi-lingual services, loyalty aggregators or geolocation capabilities linked to rewards offers, cash access and financial concierge services.
Providing API access does not mean anyone with an internet connection can start developing and releasing applications using any bank’s customer data. Trust and security are the cornerstones of traditional banking, so it will remain paramount that financial institutions employ more dynamic and specialized tools for authenticating customers and verifying identities in an open banking solution.
As consumers, we treasure solutions that are both secure and convenient, often rewarding them with our loyalty. Third-party providers will be vetted, authenticated and monitored. Financial institutions will maintain a level of oversight and control necessary to respond in the event of a breach, dispute handling or service failure at any point in the value chain. The way in which the community of trusted API developers is cultivated will raise the caliber of offerings and excellence in service for the entire ecosystem.
Coming to America
In Europe, regulators already have mandated Open Access to Accounts (XS2A) under the PSD2 initiative, and similar efforts are on the way across the Atlantic Ocean. Many large financial institutions are already active, and learning much from Europe’s head start.
Open access will require banks to collaborate with fintechs in order to build innovative new solutions around their APIs. Convenient, third-party services built around their accounts will be extremely valuable to retail and corporate banking customers, and build a richer banking experience that fits today’s open world.
It’s a brave new world for those who dare!