Open Banking has come about as a result of the EU PSD2 directive – a piece of legislation devised to standardise payments services across Europe, protect consumers and improve the speed and cost of cross-border payments in the EU. APIs (or Application Programming Interfaces) allow third party developers to build apps, websites and services around banks and financial institutions. These APIs are used as a secure method of communication between Trusted Third Parties (TPPs) and online banking systems.
What exactly is an API?
Typically, these APIs are developed by FinTechs in order to offer their own technology and services to traditional financial institutions, as well as to their own customers. In effect, the API gives these third parties access to account information, as well as balances and transactions, at the customer’s primary bank.
While there are three types of APIs: Private APIs, Partner APIs, and Open APIs; it’s the Open APIs that are responsible for making data available to third parties. At their most basic, APIs allow different computer programs to talk to one another in a language they both understand. This is vital for banks, as it allows their older systems to integrate with newer ones developed by FinTechs, so they can offer more products, and ultimately, more value to their customers.
In fact, APIs have been around a long time, but it’s only really since January 2018 when PSD2 came into effect that their usage has increased among the financial institutions, as they see the need to keep up with the services offered by FinTech.
Benefits of APIs
While banking institutions benefit from being able to offer more services to their customers, these APIs can mean big benefits for businesses too. This is because banks are able to offer access to third party services making it easier for businesses to carry out certain transactions, such as making and receiving cross-border payments. The benefits don’t stop there. Platforms such as KoalaPays are developing new tools that can help businesses in terms of reporting, cashflow, payroll management and other functions.
While the move to Open Banking has been great for start-ups and FinTechs, it’s online businesses and their customers that are seeing the advantages. Typically, this has meant faster, more efficient and secure services, especially in terms of cross-border payments. SMEs are now able to accept payments from across the world quickly and efficiently, at less cost, so cashflow moves faster through the business.
A good example of this would be a Payment Initiation Service Provider (PISP) connecting directly to a customer’s bank account to make a transaction. This means an online retailer can take a payment directly in real-time rather than authorising a credit card.
The future for APIs and Open Banking
APIs are driving industry innovation, disruption and connectivity. Here, at KoalaPays, we’re using the technology to make it easier for customers to do business with our own clients’ ventures. But there’s much more to come. APIs will continue to evolve and incorporate additional features that will offer more functionality and usefulness for businesses in every sector.
Even though PSD2 is a pan-European initiative, other developments are taking shape outside of Europe in places such as South America, the United States and Australia. These should lead to further co-operation between financial institutions in other regions of the world, affecting services like cross-border payments.
APIs transfer information securely and conveniently and therefore enable financial institutions to connect with businesses and consumers instantly. This allows banks and financial service providers to boost the scope of products and services they can offer.
When bank accounts were invented, they weren’t built for an online world. APIs are making that happen and, ultimately, will have a profound transformative effect on the future of banking. For businesses to reap the rewards, companies should look to payment solutions providers such as KoalaPays to understand the real business benefits these platforms can offer.