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The API Economy Impact on Payments

July 4, 2023

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Persons working with laptop to represent API Economy impact on payment systems

We live in an API economy where organizations are increasingly adopting an API-first approach to remain agile and future-proofed. In the payments space, APIs drive real business value in the form of improved customer experience, reduced costs, and innovation.

In simple terms, an API serves as a piece of code that connects and enables the access and sharing of data and functions between programs and digital environments. In other words, APIs are interpreters of sorts. These connections make it increasingly seamless to scale data sharing, order processing, and communication. APIs are widely used, and it’s no surprise to witness the API management market gain traction. The sector is projected to grow at a CAGR of 31.05% from 2022 to 2030, while its market size is estimated to total around USD 46.74 billion by 2030, a significant rise from 5.37 billion in 2022.

APIs in the Financial Sector

These digital intermediaries help developers pull in data from external sources and streamline processes in the background. So what does that have to do with payments?

Everything!

APIs are not new; the push toward Open Banking has been in progress for a while. And with their solidification in the economy, APIs became enablers for third-party developers to build applications and services around a financial institution. This means that consumers, merchants, and businesses gain more efficient access to a variety of services, one of which is payments, especially in the B2B landscape. And even though today not much over half of the bank’s B2B APIs are engaged just to connect internal systems, the trend is snowballing, and will connect banks with outside systems in the near future.

Paving a Path to Frictionless Payments

The future lies in next-generation digital platforms that will revolutionize the way payments and securities are processed and make it possible for frictionless, quick, end-to-end transactions that are predictable and transparent. With the benefits of cloud technology and APIs, such enhanced payment platforms will offer common processing services to coordinate interactions between financial institutions and other entities.

Lag or lack of speed is just one friction point for payments, but it is a big one. While many payments companies and platforms are already attempting to address this issue, there are still hurdles to overcome. What users want is a platform from which they can “instantly” send and receive funds, whether it’s via wallet-based network transfers or otherwise. And even with two-thirds of the adult population using some form of digital payment method, the true potential of the sector is still vastly untapped.

What many don’t realize, however, is that the transfer still has a settlement lag, which impacts the availability of funds. Not only is this frustrating, but it can also lead to increased fraud. The risk of fraud, which is a potential financial liability for the users, is detrimental for the payments service providers, posing an existential threat. And in the B2B payments scenario, the risk of fraud increases manifolds, as the hecklers leverage the loopholes in the digital payment system. Financial fraud alone accounted for 3.6% of global GDP, and there are many more like identification theft, phishing scams, and data theft, to name a few.

However, neither resisting digitalization nor being a bystander to it is a viable solution to safeguarding our financial assets. Technological advancement is the only cure for technological fraud. So, inevitably, APIs will play a key role in solving the biggest pain points. While open banking is not a mandated initiative in the U.S., those in the payments space that are aiming to eliminate friction and fraud should be focused on APIs. The connectivity to banking platforms as well as internal systems and other technologies will be integral to creating a winning payment technology.

Adopting an API-First Approach

There is a difference between leveraging APIs and leading with an API-first approach. Banks can often find themselves hamstrung by legacy core systems, which they attempt to remedy by adding APIs. The problem is that these integrations are less agile than API-first platforms. They may provide a way to achieve certain objectives, but the results can be cumbersome and fraught with confusion and frustration. Understandably, the market is expanding and growing at a CAGR of 23.83% and is expected to amount to USD 13.21 billion by 2030.

API-first architecture is an approach to software design that focuses on the API in an effort to create applications that seamlessly interface in a modular and reusable way. New features can be easily added as independent services that are accessed via API, which is a way to future-proof applications. An API-first approach requires strong API documentation that can be accessed by all teams. As businesses (and consumers) continue to become more interconnected, and as the cloud becomes the platform of choice, the ability to easily add in features and connect them to applications will become the paramount. This is how rich experiences can be delivered to users across devices and platforms

Business Impacts of API-First

Payments companies don’t have to look far for shining examples of API-first platforms. Stripe, Plaid, and Segment—all with valuations of over a billion dollars—are API-first platforms. APIs make things happen behind the scenes, which can make them a less appealing business case for those looking for flashy appeal. That said, an API-first approach can directly impact the bottom line by improving customer experiences, cutting development costs, facilitating faster time to market, and supporting the creation of innovative products and services.

Embrace the API-driven transformation in the payments landscape and seize the opportunity to revolutionize customer experiences, drive innovation, and stay ahead of the competition. Contact us now to unlock the full potential of APIs in payments.

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