Open Banking APIs – Unlocking the Digital Transformation in Banking Industry

By: Sreekanth Lapala, Global Head of Transformational Outsourcing Solutions, Virtusa Corp

Application programming interfaces (APIs) is relatively an old technical composition, which has been around for a long time. It is a structured and predetermined mechanism where two systems can exchange data with each other. Essentially APIs were internally focused and were exposed externally only in a very private manner or only to pre-identified partners. Open APIs is a combination of API technology and contemporary thinking about open collaboration. It refers to new dialogues, connections, and ways of working between participants in emerging business ecosystems.

This composition is used widely these days by a lot of organizations in different fields and one such looming field is financial services and the emerging trend in the financial ecosystem which uses APIs is open banking technology (FinTech). It is based on using application programming interfaces (APIs) that enable third-party developers to build applications and services around a financial institution (FI). It facilitates greater financial transparency and helps financial institutions to innovate and create new revenue models. With the changing regulatory mandates, open banking has been gaining significant momentum across the globe.

This shift towards open banking APIs is also driven by regulations like PSD2 in Europe, the Monetary Authority of Singapore and the CMA in the UK, and these aim at fostering greater collaboration among financial institutions. Regulations like PSD2 mandates banks to open themselves, and the accounts of their customers, to external parties creating different types of new market participants thereby providing customers with more services. Effectively, the open bank API will allow for unbundling as well as bundling of traditional banks’ services by smart aggregators, be it non-bank competitors or other banks.

Today’s banks traditionally own their products, distribution and customer base and have a monopoly on their customer’s account information and services. While fintech’s have been able to develop some innovative approaches that accesses the huge client base of the banks, but it has been a challenge, whilst getting access to a bank’s data and functionality. The introduction of API in the banking service would give both customers and businesses the freedom to access all bank data in real-time, and basically providing them with more accurate and up to date information on their finances.

The new regulations like PSD2 will further spin the ball forward in terms of creating a more open banking environment. It will encourage competition and create an opportunity for new products and services in this domain and this could be one of the biggest and most transformational changes to hit banking since the advent of the Internet.

Currently, many small and medium-sized enterprises use commercial software for accounting purposes, but for the most part, these businesses have to add their daily transaction data manually. The introduction of API in the banking service would give both customers and businesses the freedom to access all bank data in real-time, and basically providing them with more accurate and up to date information on their finances. With this push, customers will be able to draw a clear comparison and save on their accounts and have access to more personalized resources for making sturdy banking decisions. In addition to this, customers will have access to better loan terms as lenders would then have access to historic transactional data to determine a borrower’s risk level.

An open API ecosystem will have to function on more layers than a bank-to-consumer model and function as distributed economy, especially with scrunched up applications where data can move in any direction. While this open API ecosystem provides the required flexibility, it also increases the risk of cyberattacks. Cyber threats are more sophisticated today than ever and they are engineered to steal the data and assets from the organization or even cause a major business disruption. Two key things for enterprises opening their API to the internet to keep in mind are understanding the ecosystem and ensuring right levels of data encryption and access methodologies are used alongside providing only required control to the API consumers.

These new developments will further spin the ball forward in terms of creating a more open banking environment. It will encourage competition and create an opportunity for new products and services in this domain and this could be one of the biggest and most transformational changes to hit banking since the advent of the Internet.

As of now, we’re still at the early stages of a new era in API-driven payments revolution. Banks, fintech companies, and merchants have so much to learn. This technology is not only a new way to meet compliance obligations, but it also represents a new way of doing business that must be embraced with open arms and put to work.