The promise of PSD2 to open up the payments space is bound up with the use of APIs as a technical means of accessing banking data. But are APIs the future?
An API (or Application Programming Interface) is essentially just a means of letting one piece of software talk to another. It is the channel that allows the use of one third-party system within another system. Open up a web page for a hotel, for example, and under ‘how to find us’ you will often find a Google map; the hotel’s web developer has used the API ‘channel’ provided by Google to connect customised map data to their web content.
In recent times, APIs have come under close scrutiny by watchers of the banking sector. The feverish pitch adopted by many when referring to the idea, especially in the context of payments, would suggest APIs are something new. Talk of a ‘paradigm shift’ and ‘payments revolution’ seems overstated when it is known they have been in use for quite some time.
A regulatory helping hand
True, in the European payments context, the push from PSD2 regulation to promote competition and openness in the retail payments space has been closely linked with the use of APIs. It is perhaps this regulatory push that has propelled the excitement, suggests Enrico Camerinelli, Senior Analyst, Aite Group.
Forcing banks to open their systems to third parties such as fintechs, and the subsequent rapid development of API-enhanced mobile and internet payment models, has generated a lot of chatter about how banks will be challenged by the upstarts. PSD2 does not prescribe any particular technology to achieve its goals but, notes Camerinelli, APIs are the best solution on offer and will remain in the frame for some time to come.
Even for banks in countries not in the EU (and thus not directly impacted by PSD2), there is motivation to be open. Those seeking to offer true customer-centricity in the corporate banking world need to offer more features and functions. Opening more channels from the back-office system into the front-end, where the customer systems reside, is one way of delivering on this and this is what APIs can do.
In the B2B space, customer experience is defined to a high degree by the level of connectivity offered, says Camerinelli. By connecting the bank’s back office with the customer’s ERP or TMS via the bank front office, the bank is making itself (or rather its data) available to grateful clients.
Beginnings of cooperation
In addition to the bank’s API developers (or those of its back office system provider) building a layer on top of its system, the corporate’s ERP or TMS vendors will be facilitating this heightened bank/client connection through their own API channel development.
In an ideal world, the banks could then build APIs between themselves, to create a through-flow of data for the multi-banked corporate client. Will it happen? “It would be nice, but it is unlikely anytime soon,” is Camerinelli’s judgement.
Current APIs built for retail payments transactions can allow competitors access to bank accounts. It could be that in the wider transaction banking space – cash management, trade finance, FX and so on – banks could overcome their reluctance to expose their different functionalities and begin cooperating.
Here they could share their technology specialisms with lesser-equipped players in return for access to technology where they are lacking, or even new markets. This ‘buy versus build’ (sometimes known as the ‘manufacturer versus distributor’ model) may yet yield a more collaborative approach.
However, building solutions for the use of competitors is a sea-change – hence Camerinelli’s view of its unlikeliness – but his view is that APIs could make collaboration possible, and collaboration makes for a true customer-centric model, which is what banks always like to claim they offer, so why not? Some are exploring options around developing a usable API strategy but the lack of practical examples to date means best practice is yet to be defined so there is a matter of feeling their way in the dark.
There are some important matters to tackle on that journey.