The revised Payment Service Directive (PSD2), which, starting January 2018, allows third parties to access banking data, is a big boost toward the era of API (application programming interface) banking that will claim bigger stature compared with how it exists today.
Banks must delve into API banking as an opportunity rather than regard it as a mere compliance milestone. As API banking forms the basis of the open banking era, it will help banks serve their customers faster and cheaper through third-party service providers versus how they would serve customers on their own.
One of the front-runners of API banking adoption is the payments domain. The advancement that we are seeing in terms of API banking in the payments domain makes it evident that the overall banking system is moving toward an open banking framework. However, the API banking strategy that a bank adopts (depending on its size) will ultimately determine its future success or failure.
Many discussions have taken place around API banking and the technology and associated opportunities and challenges involved with it. Yet its success lies in the core expectations of the most important stakeholders, “the customers.” If we analyze the contemporary trend of customer expectations, what we see is customers expect banks to seriously scale up in terms of approachability, availability, convenience and uniformity of experience.
Breaking the silos: Traditionally, the core architecture of banks has been products-oriented. The time has come to change this to a more service-oriented architecture (SOA) where the customer is the central focus of every decision made. Customers want to get rid of the approach barrier between them and their banks. A core architecture redesign will make way for smooth integration with the specialized systems of banks or that of third parties through APIs.
Banking everywhere, banking in everything: Customers expect their banks to render end-to-end services by integrating with third-party service providers. Similarly, customers expect bank options to be available on any third-party system to complete either financial or nonfinancial banking transactions. Under such a scenario, banks must expose their APIs to third-party systems and consume their APIs to extend services to the customers, giving rise to an open banking framework.
Faster and seamless processing: To process banking and associated transactions, banks need to open and expose their APIs to other banks. Customers are no longer ready to accept delays due to processing. A bank that can quickly manage to process transactions will be the one that’s successful in the long run.
More choices: By engaging with API banking, banks can make more choices available to customers by integrating with different third-party service providers — either for same service or through clubbing of services. Thus, banks will be able to increase customer loyalty and retain more customers.
Channel neutrality: Exposing APIs to the outer world will help banks achieve platform neutral service propositions. Customers can use any channel to carry out their transactions in a similar way. This will bring forth uniform service experiences and lessen overall customer complaints and dissatisfaction.
While there are enormous opportunities available for banks to serve their customers both better and at a lesser cost by integrating with third-party service providers, there may be challenges in terms of providing uniform customer experiences for all services involved. Customers may tend to compare the best features of a third-party service provider against those of a service provider who may be providing a different service. However, in the long run the situation will stabilize as banks will adopt a few and eliminate a few features.
It is reasonably indisputable that customer centricity will be the prime driver for the growth and evolution of API banking. Technology, products and processes will play supplementary roles in the journey. The complexity and interdependency of API banking will evolve as customers experience the elementary level first and then demand for more and more conveniences from then on.
The future of API banking is bright because it is backed by strong customer pull. It has already shaken up the market and is only expected to grow in stature because we can already see big investments in the banking sector mobilizing toward this trend.