B.I.S.S Research White Papers

An Explanation of APIs within Open Banking

Open Banking APIs have received a lot of attention recently. In 2020 Open Banking initiatives, lead by regulatory and technological developments, will continue to advance and proliferate.

For those unfamiliar with the subject, the aim of Open Banking is to level the playing field for banks and tech companies and in the process provide a better experience for consumers.

The continued effort behind Open Banking reform means that banks and financial institutions, using APIs, will have to open up and allow the sharing of a users financial data, such as spending habits and payments, with authorized third-party providers.

As you can imagine, the entire financial industry will eventually flow through APIs that facilitate the exchange of information and data.

The PSD2 directive that came into being in January 2018 meant that Open Banking and the use of open APIs would enable third-party developers to build apps, websites, and services around banks and financial institutions.

These APIs, or application program interfaces, are used as a secure method of communication between third-parties and online banking systems. Typically this communication comes from FinTechs (that create the API) and banks that make use of that API. This allows a secure way of giving providers access to a user’s financial information such as balances, account information, cash flow, and transactions.

In the UK, banks are now required, by law, to provide their client’s account information to companies in other industries such as payment initiators or account aggregators. On the flip-side, and by using APIs, banks combine the digital services offered by other companies on their own platforms. As Onur Simsek, Product Manager at Strands, explains, “Open Banking APIs enables banks by expanding their customer reach to address unserved and underserved areas. By doing so, it helps banks create new revenue streams from the distribution of services over third-parties. Also, partnering with third-parties will generate new opportunities to accelerate the bank’s innovation efforts and bring new products and business models to market.” Today, there are 3 types of APIs that banks can make use of: 1. Private APIs – these are internal and inherent of the bank or financial institution and are used for information exchange within the same private system. 2. Partner APIs – these are open and built for strategic business partners to the bank or financial institution. 3. Open APIs – these make data available to third-parties (that aren’t necessarily partners of or working directly with the bank of financial institution).

APIs are important because they allow one computer program to be used by another. Thus, APIs are a means by which two different programs are able to communicate. And, when you have banks that have old core-banking systems built several decades ago, APIs allow them to tap into new technologies. By leveraging Open Banking APIs, banks not only update their IT infrastructures, but they can also increase customer satisfaction, expand their product lines and distribution channels, provide better services and customer support, and continue to stay ahead of the curve. Banks that utilize API services allow them to deliver excellent and innovative user experience that ultimately helps them grow and stay relevant in this new era of increasing competition.

APIs are nothing new, they have been around now for about 20 years, but for banking and the financial industry, their use has only grown in the last couple years. Since PSD2 came into being in January 2018, Open Banking and the buildout and implementation of APIs to service this new concept began to increase. Following in the footsteps of companies like Paypal and Google, banks that began experimenting early on with APIs and collaborating with third-parties included big names such as BBVA, Citibank, and Capital One.

According to a 2015 article from American Banker, “by sharing APIs to their proprietary software with nimbler, unregulated tech companies, the argument goes, banks can innovate much faster than they could by limiting application development to their own compliance-inhibited, resourced-strapped IT organizations.” Today, in 2019, that still rings true as banks that embrace Open Banking and the use of APIs are driving innovation and opening up new opportunities which improve their bottom lines.

Capgemini World FinTech Report 2019 states that 89% of banks leverage APIs to collaborate with FinTech firms as part of their business strategy. Basically, APIs support and help banks in their digital transformation. As a result, they also help banks monetize their use and increase revenues by connecting with fintechs, new business processes, external partners, vendors, and others, in a more secure and less costly manner.
It is more cost-effective to “plug and play” the technology of external companies, rather than having to build that same technology internally. Banks can also benefit by generating new customer insights as well as providing an abundance of services that they themselves don’t have to spend time, money, and resources developing. This all helps banks provide a larger value-chain. As for customers, they can access and benefit from comparing different product offerings and choosing the best one.

It’s also important to point out that customers are always in control of what transaction data they allow third-parties to access and they can stop access to their information at any time. When it comes to SMEs, they benefit from having access to other services aside from banking and loans. These include things such as cash flow and payroll management. Furthermore, SMEs can gain from an array of new services that help them reduce operational expenses, automate cash flow forecasting, get faster settlements, and have better overall financial management, among other things.

Open Banking APIs will transform the way customers apply for credit and other products, enabling individuals and businesses to share the bank transaction data seamlessly and securely online without having to fill-out paperwork, scan their data and provide information manually repeatedly.