Open interfaces, dynamic information exchange and numerous new providers: API banking is stimulating the market for payment and account information services. In particular, the EU Directive PSD2 is igniting an unprecedented dynamic in the banking world. Consumers gain sovereignty over their data and financial institutions make this data available to other market participants via banking APIs. But what exactly is a banking API?
Definition: What a Banking API Is
A banking API is an interface through which a financial institution provides data about customers, accounts and transactions. This means that users of payment services are no longer solely dependent on the direct services offered by their own bank. They can make use of third party financial services, which, in turn, access the data required by the original bank via the banking API. The banking world did not invent the API. The term comes from the software industry and refers to an interface that allows two separate applications to communicate with each other and exchange data. For example, online platforms such as Facebook and Google provide APIs to accelerate the distribution of their services by means of third parties.
Many large websites that require registration offer this via the user’s personal Facebook or Google account. Both the operator of the website and the two online platforms benefit from this: users find it convenient to register with an existing account. At the same time, Facebook and Google expand their services outside their own domains.
Following this example, financial institutions can use API banking to enter new business areas by opening up to third party providers. A well-known example of this is the processing of consumer credits via comparison portals, where the applicant allows the comparison portal to access information from their online banking account via a banking API. This way, the comparison platform gains access to the relevant account information so that it can carry out a credit check in real time and grant the applicant credit approval within a few seconds if the result is positive.
Benefit: API Banking Improves Customer Experience
From the customer’s point of view, the main benefit is that they no longer need to leave the context of a transaction to use a banking service. To return to the example of the comparison portal: once a user has opted for a consumer credit through the portal, all the remaining steps can be completed on the comparison portal itself.
Tedious paperwork, with which customers are all too familiar from the conventional lending process, is done away with! Whereas customers and lenders used to exchange copies of salary slips and account statements by email, banking APIs now step in and shorten the process to just a few seconds. This is made possible by third party providers that specialise in API banking and whose technology makes all data available for the credit check in real time.
As a third party provider, the comparison portal bundles all the relevant data and transactions for the customer under one interface and triggers all the necessary processes in the background via a banking API. There are benefits for all those involved that could not be realized without banking APIs:
- Customers – API banking improves the customer experience, since customers can conveniently complete all transactions in the respective context and under one user interface.
- Third party providers in the e-commerce sector – Online providers such as the example of the comparison portal can offer customers a better service that includes not only product selection but also additional services such as real-time arrangement of consumer credits.
- Third party providers in the technology sector – New technology providers in the API banking sector whose solutions create interfaces to financial institutions and thereby create the technological infrastructure.
- Banks – Financial institutions have the opportunity to expand the ecosystem for their payment services and to address new customer groups via third-party platforms.
Background: PSD2 Gets the Ball Rolling
The initial impulse for the API banking trend was the emergence of new business models for startups and FinTechs as well as a better customer experience. Since the beginning of 2018, PSD2 has given additional impetus to the opening up of financial institutions and parts of their data to third parties.
The revised and extended version of the EU Directive on Payment Services allows third parties to access online banking accounts and to use account details and functions with the express consent of the account holder, which were previously only available to financial institutions. PSD2 defines how banks make customer and account-related data as well as functions available to third parties via banking APIs.
This should be clear even for sceptics who have so far been critical of API banking as a trend topic. Once the legislator intervenes in such a significant way, there is no turning back. PSD2 creates the framework within which the opening of banks to new providers will take place in the coming years.
With the Payment Services Directive PSD2, the European Commission is strengthening consumer protection in payment transactions. At the same time, the directive that has been effective since 13 January 2018 increases competition among payment service providers. We have summarised all the background to and details about the PSD2 in this blog post.
Outlook: Banking APIs Soon to Become Standard
API banking has a profound influence on the business models, structures and positioning of banks and financial institutions. Newcomers from the startup and FinTech scene have new opportunities to participate in payment triggering and account information services and to decisively influence and shape their further development.
On the other hand, established financial institutions benefit from a refocusing on their core business in the backend – and an expansion of their playing field with access to new customer groups and application scenarios. “Banking has to work when and where you need it”, said Brett King, founder of Moven. To put it simply, the customer no longer comes to the bank, but rather the required banking service is brought to the customer via a banking API.