How open APIs change the face of payments

Despite certain advantages and legislative support in some countries, the concept of open APIs is still skeptical of many banks. This is especially noticeable in Russia. However, it is difficult to deny that such an approach contributes to changing the very paradigm of payment technologies.

The development of the open API concept foreshadows major changes in the payment industry, which can be felt by all end users, from individuals to global corporations. The main drivers, whether it is the development of financial technologies around the world and the transition to real-time payments, or new legislative initiatives, such as the European Parliament Directive PSD2, make it clear that movement in this direction has already become irreversible. As a consequence, the use of third-party applications that directly access banking systems through publicly available APIs for obtaining information on accounts, generating and tracking payments will soon become the norm. However, such changes will be felt not only by consumers. No less serious consequences will be for the banks themselves, not only in terms of working with payment technologies, but also in terms of changing market positioning.

Application Programming Interfaces (APIs) - the invention is not new and not as complex as it may seem by its name. Being first developed 15–20 years ago in the era of enterprise systems and service-oriented architecture ( SOA ), the APIs were then not available to the outside world and in order to set up communication with them it was necessary to do a lot of work on the adaptation of applications. However, today, with the advent of open APIs, the demand for this approach has reached a whole new level.

The big difference between open APIs from its predecessors is that they are visible "outside" and much more accessible. The emergence of programming interfaces and the growth of their popularity observed over the past decade testifies to the increasing role of developers in the world of corporate information technologies. In an era when the development and implementation of any software in companies was one of the main functions of the IT department, open APIs appeared almost as an initiative at the level of ordinary users who wanted to get new applications based on existing products and platforms. This approach has its own characteristics. In particular, such interfaces are focused on developers, are based on web technologies, fine-tuned and standardized, which allows developers to take full advantage of many APIs from different vendors and add new functionality to existing systems easily and quickly.
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These qualities have led to a rapid increase in the popularity of the concept in industries such as the high-tech industry and social media. And these same features now create good prerequisites for innovation, and perhaps even a revolution in banking and payments. Traditionally, banks themselves have always created and controlled channels and applications within which customers get access to their services, regardless of whether it is a question of checking the balance of a retail account or the corporation’s order to conduct a series of cross-border payments. Using open APIs, third-party developers can access banking systems and create their own channels and means of interaction with customers. As a result, the latter will have the opportunity to see their bank accounts and operations, as well as manage them using non-banks and managed by third-party portals.

Factors contributing to the proliferation of open APIs

For both banks and third parties connecting to their systems, this fundamental shift was made possible by a variety of driving forces. For Europe, and in the future, perhaps, for the whole world, the second Payments Services Directive 2 (PSD2) directive that came into force in 2016 was a catalyst, obliging banks to open access to accounts, payment flows and end-user data for third parties, cases where users themselves approve of such access. But even without taking into account such legislative changes, there are two main reasons why the global movement towards API in banking cannot be stopped.

The first is related to the rapid formation of the global Fintech industry, whose activities are aimed at providing a steady stream of innovations for more efficient financial services, especially in such areas as payments, mortgages and financial management for small and medium businesses. All bank customers, including large corporations, are now interested in improving the speed, simplicity and convenience of working with payments, cash and financial products at the level of modern consumer applications and devices. For them there is no great value, which organization provides these services - banking or some third-party. And thanks to the growth of the fintech market, the latter is increasingly becoming the norm.

Banks are struggling as soon as possible to put these innovations in their service within the framework of their own flexible offers aimed at winning and retaining customers. To achieve this, they move away from the model of specialized solutions tailored to specific cases to create an environment in which they can assemble solutions in parts, choosing components of various vendors and using the API to “glue” them into a single whole in order to create exactly experience that is needed by one or another consumer. This approach usually involves the use of SaaS platforms that can easily and simply provide a whole range of applications at low cost, with the ability to use them when necessary. For example, a bank that needs to add a mortgage calculator to its website will most likely build a third-party solution using an API rather than writing its own application from scratch.

The second key driver is the dissemination of open APIs - a growing need for real-time information and services. This also includes the ongoing implementation of “instant” payment infrastructure throughout the world. This trend suggests that the traditional model of creating batch transaction files and transferring via FTP is no longer suitable for these purposes, and that organizations and applications need real-time data exchange — a task that publicly accessible APIs can do well. BBVA, the leader in this field among banks, has actually published its entire banking platform on the Internet and provided other organizations with the opportunity to use it for their own innovations. This step is a reflection of a more extensive phenomenon in the field of software development and implementation - the transition from products to platforms, allowing to solve problems faster and more efficiently and offering a more holistic approach.

Changes in the format of bank differentiation

Against the background of general trends in the areas of payments and banking, the specific level of progress varies from region to region. For example, Europe is the fastest in terms of real-time payment processing, and North America is just beginning to catch up with it. However, despite the different starting positions and the speed of progress, the described trends generally indicate a movement in one direction: global convergence with the new format of competition and positioning among banks.

Historically, banks competed with other banks, trying to outdo each other in terms of the efficiency of services and the technological effectiveness of their portals, which, until recently, were almost entirely developed and maintained by them. Now the situation is different. Now they are in a new world, where two other criteria underlie the differentiation. First, the main set of operational services and commissions of the bank essentially turns into an operating “engine” into which third-party companies can integrate their external interfaces. And secondly, an important role is played by the quality of open APIs that make such integration possible for third-party companies. In this context, the “quality” of the API comes down to the accuracy, relevance and completeness of the information they can provide. For example, can a client, with their help, track in real time the current state of a cross-border operation?

The fragmentation of the operations department can be an obstacle to developing high-quality APIs.

Be that as it may, for some banks, the ability to offer open APIs that provide extensive, high-quality information in real time can be difficult for the systems used in operations departments and data management approaches. If for fixing data on different types of payments the bank uses different systems, then bringing them into a single form for transmission to a wide range of third-party partners via the API can be a very difficult task. In addition, the value and usefulness of a payment message today is increasingly dependent on commercial and contextual information associated with the main transaction. For example, a payment for health services may contain useful information about insurance companies that cover it.

All these factors make us pay attention to the ability of the operating departments of banks to maintain high-quality APIs. If on the back-end side the payment system resembles spaghetti, then the API on the front-end will need to sort out and organize the data in order to present it to third-party partners in the right form. And the implementation of this work in real time significantly complicates the task. Therefore, banks seeking to develop open APIs need to properly analyze the technological solutions of their operating departments and determine whether they can cope with providing all the necessary information in real time.

Payment hubs as a means of removing obstacles

Often they do not cope with this task. This means that the bank needs to take some action. Probably, in such cases, it will be necessary to create new platforms that unite disparate systems and more fully meet the requirements of open APIs. This requirement contributes to the development of the concept of so-called payment hubs ( payments hubs ), allowing to transfer the processing of all types of payments on a single platform. In combination with the previously described use of SaaS, the potential of payment hubs in open API environments offers banks two possible practical scenarios.

The first option is the development of an intrabank solution when an organization integrates the necessary API technologies into its system that provides payment hub services. This model should ideally and in real time cope with the processing of orders and information requests throughout the route of their passage through the information channel from third-party applications to end users to the payment hub. Banks should also focus on creating an extended set of tools, divided into many separate small services designed for a variety of purposes: from debit authorization to calculating fees for payments.

The second option is to use the services of a third-party service that has all the software and hardware necessary for processing payment transactions. A service provider can be both an intermediary, supporting a large number of clients, and individual services for a narrow circle of clients. In the world of open APIs, the solution should allow third parties — or as they are called in the PSD2 directive, providers of payment and billing information service providers — connect directly to the secure internal APIs of such an infrastructure. Ideally, the chosen solution should combine the advantages of a “pay as you use” system with best-in-class payment processing technologies with the ability to access the world of open APIs in one action.

Obviously, no matter what approach banks choose with respect to open APIs, the issue of security will play a primary role here. In this regard, a new approach is becoming increasingly common in various sectors: if security used to mean “protection”, then in the modern world, effective security can only be achieved through “collective information exchange”. A wonderful example of this fundamental change is the revolutionary Blockchain technology, within which a high level of security is achieved through openness and general access. Therefore, even despite the fact that the discovery of systems through the API really creates certain risks, this problem is quite amenable to solution due to the correct choice of technologies and collective cooperation.

Towards an API Future

In general, it becomes clear that banks should actively and positively embrace the development of the open API concept, since this technological method will enable them to become part of a new ecosystem of financial services and payments and strengthen their positions in it. For this, banks will need to form a clear vision of the future and restructure their business in a new technological format.

Open APIs are developing rapidly, becoming one of the fundamental elements of the future of banking and payment services. Banks need to start embedding them in their business right now, or in the coming years they will have to play the role of catch-up.