Regulators and Competition Push Banks To Embrace Open APIs, Potentially Changing Payments

With a push from regulators and competitive forces, banks are stepping up their development of application programming interfaces to enhance their payment and other financial services.

APIs, which provide links so that disparate software systems, such as those at a bank and a financial-technology company that wants to offer services to a bank’s customers, can work together. On Sunday, financial executives working with an API standardization group under the auspices of automated clearing house governing body NACHA announced that two proposed standardized APIs for account validation and accessing contact information were ready for testing.

On Monday, payment technology provider ACI Worldwide Inc., which is a member of the NACHA group, reported results of a multi-national technology survey of 1,032 executives from retail banks, billing organizations, and merchants. Some 73% of the bankers queried were willing to let third-party developers access their APIs. London-based technology researcher Ovum conducted the research for ACI.

APIs have been around for years, but interest in them by banks, payment processors, and fintechs is rising fast. Herndon, Va.-based NACHA’s Payments 2018 conference is underway this week in San Diego, and the gathering has had several sessions on the topic, at least one of which was packed.

One reason for heightened banker interest in APIs comes from regulators, according to Gareth Lodge, a London-based senior analyst for U.S. research firm Celent. The so-called Payment Services Directive 2 in the European Union mandates that financial institutions implement APIs that give third parties direct access to customer account information and enable payment transactions to be initiated without any intermediaries. That aspect of the sweeping regulation took effect in January, though banks have until September 2019 to comply, according to Lodge. But 1,000 fintechs already support bank-related APIs, he says.

Regulators in Mexico and India also are pushing for open APIs, Lodge adds. The idea behind the regulators’ moves is “to help competition and open access to accounts to drive innovation,” Lodge tells Digital Transactions News.

And while foreign banks are the ones most directly affected, American banks are paying close attention because of the increasing globalization of commerce. The ACI-Ovum survey reports that though European banks, not surprisingly, are the most receptive to opening their APIs to third-party developers, some 70% of American bankers surveyed plan to encourage use of their APIs.

A second force driving heightened interest in APIs is simply that “banks know they need to innovate,” according to Lodge.

As an example of how APIs could change payments, Lodge says he is aware of several merchants considering enhancements to their loyalty programs that could enable customers to pay with their loyalty cards. APIs would enable the merchant to check demand-deposit account balances, after which a payment, even one in real time, could be initiated. “In that case the merchant is bypassing all the card networks, and all the fees associated with them,” Lodge says. At least one such system might go live this year, he says, though he cautions that various operational considerations remain to be settled.

In another payments example, APIs could enable a business doing a payroll transaction to correct any errors in the payroll order without getting its bank involved, reducing the bank’s expenses, says Trevor LaFleche, director of product management and marketing at Brookfield, Wis.-based financial-institution processor Fiserv Inc. APIs can produce a “huge, huge reduction in complexity,” LaFleche says.