Open APIs: Understanding the Changing Mindset and Technology in Digital Payments
Know why open banking may be a boon for financial institutions and how a changing mindset could be the answer to new revenue streams.
Open APIs are not a new thing; however, they present a very real and perceived challenge to financial institutions (FIs) that are having to lift the kimono to FinTech by mandate of new regulations. With the EU’s revised Payment Services Directive (PSD2) requiring European banks to grant secure access to customers’ transaction accounts to third-party providers, many FIs are feeling the pressure of disruption.
This access is granted through application programming interfaces (APIs), which is not a new concept. APIs allow for the sharing of data across different business applications and have been utilized by countless platforms over the years, including notable ones like—Salesforce.com, Facebook, Twitter, and more.
The difference is that many open banking APIs have been made available by these popular platforms by choice, allowing customers to improve upon and customize how the platform is used. With open banking APIs, FIs are seemingly having their hands forced by competition-focused regulations.
We believe that FIs should look at open banking and open APIs as critical opportunities rather than critical losses. By shifting the perception of regulations like PSD2 and others that are likely to follow, FIs have an opportunity to capture new payments revenue, provide an improved and innovative customer experience, and participate in the new competitive dynamics of finance, banking, and payments.
The Changing Role of Banks in Commerce
This shift in perception begins with a reimagining of roles. The traditional banking and payments system is in flux. Banking products and services have become highly commoditized. Even the opportunity presented by mobile was unable to knock new perspectives into FIs. As mobile banking gained steam, banks jumped on board with mobile banking apps. However, like other products and services, there were no real differentiators that made one more appealing than another. The global mobile banking market is expected to grow to $1,824.7 million by 2026, with a CAGR of 12.2% from 2019 to 2026. A bank’s or financial institution’s mobile banking service allows users to conduct financial transactions remotely using a mobile device.
Rather than fighting to maintain pace with changing technology and consumer preferences, banks should leverage emerging technology—and the developers and third-party vendors that understand it best, to do the heavy lifting. Open banking APIs are already extensively used within banking infrastructure to move data between systems and platforms. Banks should instead focus on how third-party companies can help them monetize existing services by improving upon these systems. These external parties have the ability to make enterprise IT systems and other services easier to consume for customers. In other words, open APIs should be viewed as a strategy rather than a hindrance or matter of compliance.
This is especially true as banking goes digital and consumers expect an end-to-end digital experience. Not only does that mean less focus on bank branches, but it means truly understanding the preferences of Millennials and Gen Z’ers and evolving to meet those needs. Banks need to focus on making banking payments more agile and innovative—and FinTechs are the key to achieving this.
Banks need to reposition themselves from the “gatekeepers” of modern banking to the conductors of improved digital banking and payments experiences for merchants and consumers.
Monetizing Open APIs
The mandates of regulations like PSD2 are clear. However, there is nothing that says banks must stop there. By being strategic about how they offer access that goes beyond the basic regulatory requirements, banks can offer value-added products and services that benefit all parties in the ecosystem. One possibility is to offer seamless, fee-based APIs to third parties for payment services. Better yet, banks can create offerings where they manage customers’ digital identities across merchants.
Assessing existing business capabilities will be the first step that can be monetized. As mentioned earlier, banks are already using APIs across a number of business processes internally. This means they already have streamlined processes that can be dressed up, standardized, and sold to third parties to support the secondary market. Rather than develop and maintain the APIs themselves, third parties can leverage the banks’ access—for a fee—to incorporate the functionality into their own applications easily.
Technology Partnerships Pave the Way
Banks have a rocky road ahead. The landscape is changing quickly, and whether they choose to be strategic or not, banks have a lot of required change on the horizon. Working with a trusted digital payment technology partner that can help ideate strategy, create roadmaps, develop and design winning solutions, and guide implementation of those solutions—will be the difference between thriving FIs and those that die off.
Opus has over two decades of experience working with FinTechs and banks alike in producing revenue-driving solutions in the payments space. We want to help financial institutions embrace the coming changes with APIs and help them stay ahead of the competition. Reach out to our team to find out how Open APIs can benefit your organization.
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