Perspectives

Open Banking APIs – Unlocking the Digital Transformation in Banking Industry

Virtusa Corp
Article

Application programming interfaces (APIs) is a relatively old technical framework. It is a structured and a predetermined mechanism where two systems can exchange data with each other. APIs were internally focused and exposed externally in a 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.

APIs are used widely today by many organizations across industries. One looming field is financial services and the emerging trend in the financial ecosystem. Here, APIs are used for open banking technology (FinTech). This 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 is gaining significant momentum across the globe.

This shift toward open banking APIs is also driven by regulations like PSD2 in Europe, the Monetary Authority of Singapore, and the CMA in the UK. These aim to foster greater collaboration among financial institutions. Regulations like PSD2 mandates banks to open themselves and the accounts of their customers to external parties to create different types of new market participants that provide customers with additional 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 to access the huge client base of the banks, it comes with challenges. The introduction of API in the banking service would give both customers and businesses the freedom to access all data in real-time and provide more accurate and up-to-date information on financial data.

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. 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 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 provide 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 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 historical transactional data to determine a borrower’s risk level.

An open API ecosystem will have to function as a distributed economy and on more layers than a bank-to-consumer model, 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 cyber attacks. Cyber threats are more sophisticated today than ever before, and they are engineered to steal valuable data and assets from the organization, which can cause a major business disruption. Two key components for enterprises opening their API to the internet to keep in mind are understanding the ecosystem and ensuring proper levels of data encryption and access methodologies are used alongside. This provides control to the API consumers safeguarding data and assets.

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. This could be one of the most significant and transformational changes to hit banking since the advent of the Internet.

As of now, we’re still in the early stages of an API-driven payments revolution. Banks, FinTech companies, and merchants still 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.

The article was originally published on Dataquest and is reposted here with permission.