Application programming interfaces (APIs) have taken the financial industry by storm in recent years. For instance, NACHA has recognized the value in APIs and is currently collaborating with various companies in the payments industry to develop standardized APIs. Financial services organizations have acknowledged that consumers expect a more digitalized banking experience that mirrors the high-tech services offered by companies like Google, Facebook and Amazon. Today’s consumers demand such services in real time with seamless interfaces and more personalized user experiences, which are all things that APIs can support.
For the payments industry, developing APIs that support real-time payments remains a major focus. In fact, a recent study by Aite Group revealed that 67 percent of global financial institutions reported building APIs for real-time payment functionality is a top priority. However, APIs can support use cases beyond real-time payments. The most effective use of APIs will allow the financial services industry to push past the current banking and payments ecosystem, engage a customer base across multiple channels including mobile and find new ways to provide value.
With APIs, it is much easier for outside developers to engineer new products or services and enable financial institutions and payments providers to quickly meet the current needs of their customers. Instead of creating a purpose-built solution with only a few use cases, organizations can use APIs to assemble various solutions from several vendors and provide a seamless customer experience that delivers true value.
In short, the future of banking and payments has the potential to mirror a smartphone business model, where the financial services organization acts as the smartphone while the products and services act as the apps on that smartphone. This means each customer can personalize the relationship with their financial services provider according to their unique banking and payments needs at any given time.
Several financial institutions and payments networks providers have already taken steps to prepare for an API-driven industry. For example, some banks are publishing APIs to encourage fintechs to build applications that enable customers to invest in their savings based on various contextual variables. Mastercard and VISA offer numerous APIs to third parties as a part of its developer platform. These are just a handful of examples.
Other financial services organizations will surely take steps to offer their own APIs to remain competitive, especially as additional use cases are revealed. For instance, banks can use APIs to access multiple payments networks and channels, which enables customers to initiate payments via APIs. Banks can also selectively open APIs that consider contextual factors when transacting payments and as the Internet of Things becomes a reality, in which more devices feature internet connectivity, this ability will become a vital functionality and can be applied to several different use cases.
For example, by incorporating APIs into the bank account structure, which is machine learning-enabled, the account can be configured to automatically pay recurring bills only if they are within the upper and lower limits set by the customer. For amounts outside of those parameters, the customer would be prompted to approve the transaction. Coupling APIs with real-time machine learning and taking it a step further for deep learning with artificial intelligence empowers financial services organizations to anticipate customer needs and therefore, improve the customer experience and capitalize on new revenue opportunities. To illustrate, an API-enabled bank account can determine that a customer has extra cash this month and then notify an AI system like IBM’s Watson. The AI system, which knows the risk profile of the customer, would then present appropriate options to help the customer generate income by allocating the extra cash into savings or other investments.
On the business side, APIs can enable companies to directly integrate into a bank. The bank can leverage machine learning to detect any changes in payroll payments and flag exceptions to electronically request authorization via API. For example, a corporate bank account can use an API to identify a new payroll payment on the account and request confirmation, whether via chatbot or email, if a new employee has been added to the system. It can also recognize if an existing employee has a new bank account as a destination and stop to request confirmation. These are just a few examples of how APIs can add value to the banking and payments ecosystem.
However, as more banks begin incorporating APIs into their service models, standardizing APIs will become increasingly vital. Without a common standard in today’s open architecture world, APIs are less effective, requiring different interfaces for each organization using them. By standardizing APIs, like how NACHA is doing, software vendors would follow a specified set of requirements. This standard would enable faster integration of new solutions while reducing integration costs, ultimately fostering more efficient innovation.
For an industry that has traditionally been slow to innovate, APIs are changing that, making it easier for outside developers to help banks and other financial services organizations deliver value in new ways. According to a 2016 report from FinLeap, nearly 75 percent of the top 50 global banks are opening APIs to fintech companies in an effort to provide customers with more access to financial services. This trend will continue and organizations that fail to take steps toward establishing an API strategy will be left behind. With consumer expectations that are higher than ever, financial institutions and payments providers must recognize the value in leveraging APIs to expand the variety of services they can offer. This approach empowers the development of banking and payments services that make customers’ lives easier, which is ultimately a win-win for everyone.