Open banking is an emerging trend in financial technology (fintech); one based on using application programming interfaces (APIs) that enable third party developers to build applications and services around a financial institution (FI). It facilitates greater financial transparency and helps FIs innovate and create new revenue models. Open banking has been gaining significant momentum across the globe; especially in the European banking industry, driven by changing regulatory mandates.
Paving the way for API banking
The revised Directive on Payment Services (PSD2) is one such regulatory mandate; one that aims to standardise, integrate and improve payment efficiency in the European Union (EU). PSD2, developed by the European Commission (EC), is a recent major policy development that is set to impact on Europe’s payments industry.
PSD2 seeks to standardise and make inter-operable card, internet, and mobile payments. The directive is expected to accelerate open banking because it requires banks to open up data and transactions to certain new payment market entrants. By January 2018, all financial institutions in the 28 EU member states need to be PSD2 compliant. Although this is a compliance obligation, it also paves the way for a new business opportunity – open banking or API banking – to be extended to banks’ corporate customers.
Before now, banks have typically created financial silos and forced customers to use financial data only in their service, relying on the premise that this was needed to ensure security and data protection were. However, developing innovation in the financial service industry has steadily undermined this argument. Customers want to use third party banking apps, or other financial services that are not offered by their own bank. Banks themselves should have a vested interest in ensuring their customers can use these services without switching to another bank.
Corporate customers expect to have access to instant banking facilities, enabling them to interact with the bank directly from their enterprise resource planning (ERP) or legacy systems in a secure and seamless manner without any time delay. The digital transformation of the world is creating a paradigm shift in way that corporates do business. In today’s competitive business environment time is of the essence, which has compelled banks to minimise turnaround time and ensure instantaneous payments. They are also compelled to ensure that the facilities provided are benchmarked with global standards and help corporate customers to digitally transform their businesses.
Many share the view of one leading analyst, who predicts: “Banks will be required to provide API access to customer accounts, which will require bank investment in application service governance and API management. Most of the FIs will need to build – or buy – an API management gateway and create new APIs to provide access to customer accounts”.
Indeed, across the globe many have already taken their first steps in this direction. Large number of banks and FIs are adopting open banking initiatives to comply with evolving banking regulations, meet customers’ digital expectations, and stay ahead in an increasingly competitive fintech-led industry. These are transforming the way banks approach products and distribution.
While this regulatory directive will drive API banking to greater heights, there are banks that have already taken steps in this direction to put this to use. This Paper aims to throw light on the aspects of API Banking with some use cases on how the Bank customers can effectively derive benefits out of this new way of banking.
Emerging trends and usage
API basically provides access to an organisation’s digital assets and services; deployed effectively it allows users to access a third party system from their own environment. Emerging trends are evident in API usage across the fintech space, as well as banks’ usage to extend differentiated services to corporate customers.
Banking-as-a-service (BaaS) is among the most recent fintech trends to gain attention. Why is this? In the past, traditional banks enjoyed soaring profits and a formidable customer base. With a shift in customer consumption and growing trend towards online and app-based banking, new entrants in the financial space began popping up to take advantage of these patterns. Thus, consumers got spoiled by the new fintechs while banks struggled to maintain services to corporates.
Traditionally, banks enjoyed special permission to perform certain activities where they did everything. Fintechs simply offer banking services in easy-to-integrate bricks for others to offer to their customers. Thus, through their use of technology, the new API banks allow fintechs to have access and development that was previously reserved for traditional banks.
Some API models give banks the opportunity to become platforms that connect, curate and manage new services offered by fintech. The banking-as-a-platform (BaaP) model allows API banks to keep “owning” their customers, while offering the best financial product possible. As a result, fintechs are able to focus on core activities and international expansion; making their services faster, more precise, and broadening their scope. Fintechs with a banking license are actively emerging; enabling digital companies to offer financial services to their end customers. Simultaneously, suppliers can join the platform in order to give partners the best fintech services through a single API.
In the banking space, it has added the ability for a bank to provide transaction processing services to the ERP of its corporate customers through a secure channel. Some of the applications of API in the banking space can be classified as follows:
- Mobile apps development
- General information: or information not adapted to a specific customer using the app, but which provides data and news about what the institution offers (such as types of account, information on rates, cards and financial instruments etc.)
● Personalised information and transactions: through information tailored to the customer (which would require additional security measures in the access system), the API could provide details of account balances, make transfers, pay bills and receive account alerts, etc.
● Mobile functionality: those using the mobile app can access functions on their device in conjunction with the bank’s API, allowing them to use their camera (for example to deposit a cheque), near field communication (NFC) technology (to identify themselves at automated teller machines (ATMs), global positioning systems (GPS) to find the nearest branch etc.
An API can allow a bank’s partners to use its infrastructure to offer their services: shared-brand credit cards, gift cards, reward programmes, etc. The API would also give partners real-time access to reports.
- Public APIs
The same APIs that banks use internally and to work alongside their partners can help them gain new customers, fostering additional business through their integration in comparison facilities or in services focused on sectors.
- Integration in devices
The device most closely associated with the bank – the ATM – could be fitted with sensors for NFC communication and perform authentication. Potentially this could be taken a step further; with banks offering an API so that local companies can provide offers to customers in the area around the ATM.
- Data analysis
Banks have access to data on certain aspects that are very valuable to companies in other sectors: its customers’ financial information. Thus, they could make profitable the provision of access to aggregate data.
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