When the EU’s Payment Services Directive (PSD) in 2007 called for a single market for payments to ensure more security and innovation, it signalled the start of a new transactional era, streamlining systems and processes.
PSD2 legislation followed in 2018, increasing customers’ rights and introducing: new surcharging and currency conversion rules, enhanced security through Strong Customer Authentication (SCA) and a new framework for payment and accounting services with third-parties accessing account information.
The European Banking Authority was mandated to support this Directive by developing Regulatory Technical Standards (RTS) for SCA, including a requirement for all businesses to offer online payment services and multi-factor authentication on electronic transfers.
Alongside security, this call to operate in a new Open Banking (OB) environment and share data is prompting banks and other financial services providers to re-think their business models. Even before OB is fully embraced, the UK’s Financial Conduct Authority has called for input to its 2020 Open Finance (OF) consultation paper.
PSD2 is a catalyst for change
PSD2 is clearly a catalyst for change. By facilitating exposure of data, products and services to third-parties and competitors, market players will be forced to develop new products and find ways to engage with customers.
It will impact the future competitiveness of financial services providers and transform the way people use and move money. Digital change enables businesses to reach new revenue streams, increasing service line efficiency and flexibility.
The goal is to prompt innovation, increase competitiveness and help businesses or consumers better understand and utilise their finances. No business can compete in this new ‘open’ world, without an Application Programming Interface (API).
Digital glue connects systems
It is the digital glue that connects different systems, enabling businesses to better connect with partner clients and the whole ecosystem, reach new channels, monetise data and services, provide customers with digital and omnichannel experiences, develop platforms for partners, boost innovation and create viable products that reach the market quickly, enhancing customer experience.
An API moves a business from single or multi-channel customer communications to multi-experience ecosystems. It also ensures firms meet security, performance, governance and access-control guidelines, protecting customer data and their technology.
A more connected world dictates customer data can no longer be held in different systems. It should be stored in a single database and shared internally or externally. Legacy technology and closed systems or infrastructure are barriers to creating API connections.
API management software specialists, OB technology vendors or in-house IT teams are capable of delivering the required APIs. However, less sophisticated software could lack the transformation elements and those relying on in-house solutions could create potential update issues and security exposures.
In order to roll out the best model for an open economy, sector players need to take the following actions into consideration.
Understand the API value: Data consumption and regulation compliance alone will not create a competitive advantage. It is important to understand where the API adds value and how it aligns with strategic objectives.
Identify new partners: Another important factor is to create an ecosystem with fintechs, other financial services providers and third-parties.
Recognise security: Companies providing data through APIs will have to comply with security and access-management regulations—developing a clear understanding of who is consuming the data and where it is flowing to. This equally applies to third-parties in relation to security around accessing and manipulating customer data.
Global uncertainty at play
In the coming decade, it will be impossible to serve customers’ needs without APIs and banks have already recognised this gap—viewing the technology as the future go-to tool. Despite their importance, not all are clear how to integrate APIs within their businesses.
Message variations
With differing global open banking implementation messages, players can be forgiven for their uncertainty. According to Innopays Open Banking Monitor, markets such as the EU, UK and Australia are taking the lead, passing their own regulations and forcing banks to share data. Others, including New Zealand, Mexico, Hong Kong, Singapore and Japan are setting up pilots and publishing API documentation.
When it comes to compliance, in the EU it applies to retail and corporate banks offering online accounts—whereas in Mexico, it is all financial institutions. In Australia and New Zealand, it is the top four major banks.
For mandated countries, OB regulators have set a timeline between 18 to 24 months to share data. Regulators are keen to foster innovation and let their markets develop solutions.
For example, the Monetary Authority of Singapore issued its API Playbook in 2016, the Financial Conduct Authority mandates higher levels of standardisation allowing Third Party Providers (TPPs) to more easily build and connect to banks’ APIs in the UK and the Data Standards Body has set customer experience guidelines in Australia.
In some markets, banks are building standardised APIs and making bilateral agreements with TPPs. DBS in Singapore recently launched one of the world’s largest API developer portals, making over 155 APIs available.
Around 300 developer portals are currently live and over 50 countries have some form of API in place, involving more than 10,000 banks. Asian banks are ahead of the game when it comes to the scope of services being opened up.
When it comes to global security and accessibility standards, PSD2 provides maximum detail, acknowledging the difference between gaining access to TPPs through screen scraping information from dedicated web pages and using a dedicated, more secure API.
API economy is the way forward
Whatever the variations, it is clear an API economy is the way forward. Firms using APIs in Brazil report significant increases in revenue, reduced support costs and enhanced service offerings.
For example, when Banco Topázio implemented an API strategy and exposed its foreign exchange service to partner—over 70 fintechs were connected, increasing its currency exchange and debt issue revenue. In 2018, Banco Topázio recorded R$1 billion in forex and debt issue transactions over a nine month period. In 2019, it reached the same figure in four months.
In another example, traditional insurance company SulAmérica integrated its systems with IBM Watson to create a chatbot and reports that around 60 percent of common queries are answered without human intervention.
Even Brazilian retailer ViaVarejo exposed APIs to partners through a marketplace proposition, and today it represents 25 percent of its gross merchandise volume.
Redesign customer journey for better value
Interestingly, connected societies tend to create greater demand for API-delivered online solutions and apps.
Statista reports that there are over 3 billion smartphone users worldwide and this is forecast to increase by several hundred million in the next few years. In 2013, 73 percent of internet usage was through computers and 27 percent of usage through smartphones. Now internet usage between both devices is at par.
The Global Digital Report says internet users grow by one million a day and over 125 billion devices are expected to connect to the internet by 2030. This prompts a competition shift, which suggests that in order to create new ecosystems and guarantee business continuity, companies will have to connect with other businesses.
New ecosystems are forcing companies to rethink strategies. For example, multinational corporations such as Google and Amazon are ecosystem players having hubs within a wide network of customers, suppliers and producers of complimentary services—in turn creating value through relationships and networks.
The next decade requires businesses to ascend and offer real time support to customers requests through smartphones. This can only be achieved through APIs. In essence, redesigning customer journey by putting in place event-driven architecture which responds to a sequence of events is imperative. And with customers becoming the real owners of their data, they will decide the best service providers and choose them within a more competitive and innovative financial services ecosystem.