The age of open banking is still in its infancy.
For years, fintech companies have collected consumers’ bank data when they willingly hand over their bank credentials to use a service. However, only a handful of banks are sharing financial data with third-party developers through a more secure and modern method: application programming interfaces.
Some banks are moving in the right direction by making it easier for third parties to work with them. Bank of America, for instance, has made its API specifications accessible through its developer portal to clients, enterprise resource planning vendors and fintech companies. As more U.S. banks eventually open up their products and services via modern APIs, the industry will need clear standards in order to make the most of this opportunity. If banks don’t agree on how to share data, developers will face a difficult problem — a lack of standards or a proliferation of different ways to do common things.
Today, thousands of banks use disparate and customized formats to send and share information, employing different nomenclature for common terms. This can make for a long and expensive new account setup process where clients need to download and read extensive documentation, create custom code, test and await certification before being “live.” This delays time-to-revenue and places extra burden and friction on the largest corporations that operate globally and use multiple cash management banks. It can also inhibit the creation of market utilities, such as payment clearing systems, which inherently need standards to support communications among multiple parties.
Without standards, every time a developer tries to create a new app, he or she will have to modify that app to interact with each bank. With standards, however, a developer could make one app that would interact with countless banks without needing any modifications. A corollary to this need for simple, standard APIs is the desire to create accessibility via the preferred approaches, REST/JSON vs. SOAP/XML, which are technical protocols for data integration.
In Europe, the revised Payment Services Directive regulation, which went into effect in January, demands that banks open services to third parties so they can initiate payments and aggregate information for customers. The European Payments Council is encouraging banking APIs to conform to standards. In the U.S., there is no such regulation. But banks are creating APIs to develop new services, offer traditional solutions in a more efficient manner and support customers who do business in multiple geographies so they can work with global standards.
What’s at stake here is the evolution of payments and, more broadly, how banking services are consumed not just by consumers but by small businesses, large corporations, other banks and market infrastructures.
Innovators like Apple, Google and Amazon as well as fintech startups are nipping at the industry’s heels in the hopes of becoming the new face of banking.
A case in point is the card processing and software startup Stripe. It’s been reported that Stripe “turned seven lines of code into a $9.2 billion startup.” Stripe simplified how businesses can process e-commerce payments over the internet. It publishes its APIs openly so anyone can interact with its system easily and the young firm gives clients tools to test and start accepting payments in a matter of minutes. While these APIs are not necessarily standards, they represent an extraordinary simplification and distillation of a very complex legacy merchant acquiring industry. The days of 100-plus-page implementation manuals and business models dependent on high “switching costs” are numbered. Leading players are making it easy: Easy to sign up, easy to switch, easy to add new products.
Getting to a more open and interoperable banking environment requires a broad, industrywide push. Given its history and role in the payments ecosystem, Nacha — which supports the ACH network in the U.S. — has stepped up to help drive this change. It launched an API standardization industry group that has identified an initial set of 16 interbank services to be standardized and enabled via API that fall into three broad categories: fraud and risk reduction, data sharing and payment access. (Toward that end, at Accenture, we have partnered with Nacha to promote API standardization and the use of ISO20022, which is a global financial messaging standard.)
Indeed, use of APIs will play an important role in the future of banking. Standard, easy-to-understand and easy-to-implement APIs can help institutions combine their size and scale with the cutting-edge, disruptive technology that fintechs are developing. In a perfect world, banks will be able to innovate themselves with the same agility as a fintech by accessing and consuming their own APIs.
Banks must look beyond today’s fee revenue to developing services that will boost customers’ loyalty and address latent demand. Open APIs could yield the greatest banking innovation in a generation. But to get the most from this opportunity, the industry needs standards.