Open Banking, now more than a year old after debuting in the U.K., aims to open competition within financial services, bringing providers access to consumer data. Of course, Open Banking relies on technology, in part tied to open application programming interface (APIs) platforms, that provides access to third-party developers.
In a podcast with Karen Webster, David Samples, chief technology officer of TransCard, detailed the ways open API platforms are changing payments. At the highest level, Samples said API platforms can allow payors and payees to “refocus back on the business [they] are trying to accomplish.”
The last several decades have been marked by closed systems in financial services, partially focused on regulatory guidance and the mechanics of getting payments done. That focus, he said, has been on “how to make a payment and not why you are doing it.” With open APIs, payors and payees do not have to figure out how to link up the technical “plumbing” that enables transactions in the first place.
Samples delved into process, where, with an open API or Open Banking platform, “if the provider has done a good job, the first thing you would notice would be if the platforms are [built by] the person or the entities making the payment … here, the entity does not have to be an expert in KYC or the Patriot Act.”
The Open Banking platform can point the payor to the proper way to address payments and compliance issues within one or two API calls, as opposed to some of the heavy lifting to be done if an enterprise were to tackle such endeavors on its own. Such offloaded heavy lifting benefits the startup trying to introduce a new product or service to customers, which may have nothing to do with payments, “but payments is a part of it,” Samples said. “You don’t want people struggling with the mechanics of how to do those payments.”
What Must Be Considered
In offering a streamlined and secure API environment, providers publishing an API are talking to two separate audiences. For the side of the transaction making the payment (and there are individuals involved here, whether marketing directors, executives or accountants), “you need to speak to that person on the terms that they understand. They need to know how to go to market faster and how to get payments to recipients in the ways the recipients want,” Samples explained.
Then, there is the second audience, comprised of the development team doing the integration for the business side. “Even there, it is important to know that there can be a split,” he told Webster, where “it could be a development team that works for a company full time as part of [its] IT” or it could be a contacting agent.
In the end, the platform provider needs to help the business side of the relationship to tell the development side, as Samples put it, “‘I need to [have] these things,’ and have the technology side so apparent, and so well laid out, that the development team can do it without a lot of interpretation.”
Of course, Samples noted, good security protocols need to be built into the platform as well, open enough to be backward-compatible as the security landscape changes. He said certain types of transactions are riskier than others, but the “platform itself should always assume that it needs to ensure the highest levels of connectivity security and data transfer security, … even if you're just making a $3 [payment] for an incentive program or if you're doing $300,000 payments for mortgages.”
As companies explore open API capabilities as offered by third-party providers, they often ask if such platforms are safe and compliant.
“As a payor, you are accustomed to working with your local bank or one of the mega banks. There is an assumption that they are the experts in banking. That does not mean they are experts in the totality of payments,” he said.
Thus, the conversation may be one where the API provider must assure the would-be client that certifications, levels of standardization or compliance are in place. Call it a matter of reassurance.
When asked which industries are seeing traction for open APIs, Samples noted tongue-in-cheek that adoption is taking root “only among those industries that may process or accept financial payments.”
The Value-Add Proposition
In reality, enthusiasm is especially evident among real estate, insurance, healthcare and bill payment providers. The banking APIs, he noted, can add value, and reflect recipients’ desires to be paid in ways that move beyond the check or ACH.
“In a traditional payments mechanism, you typically see the payments execution itself,” he explained. Consider the check, presented on an 8.5-inch-by-11-inch page (perforated, of course), which has an explanation of a payment or benefit printed along the bottom-third of the page.
“The problem that we have had with electronic forms of [payment] in the past,” Samples said, is that descriptive data and payments have had to come as two pieces of information. The $500 ACH comes with a separate email, or even a paper statement, explaining transaction details.
Now, with open APIs, providers can embed meaning into the payment itself by setting up a platform that accepts not only the payment, but the documentation that goes along with it.
He offered up the use case of multiple signature endorsements (tied to real estate transactions), where three people must sign off on payments. “If the platform is designed from the beginning to walk through that workflow, then you simply replace the physical elements with virtual elements,” he told Webster, with additional layers of security in place to make sure each step is validated along the way.
Though use cases have proliferated, as noted above, there are still some holdouts. Samples said these recalcitrant firms span industries such as cable and telecom providers, which have been making business-to-consumer payments for decades and have invested capital over the years.
The trend may be one toward API adoption among these larger companies, he explained, “though it takes them a lot to move” toward new processes. “They have large print houses on the first floor of their buildings, and have been printing out hundreds of thousands of checks every day.”
Ultimately, these firms will have to overcome inertia to remain competitive. The platform providers can help shepherd them through the journey in piecemeal fashion — say, by replacing their ACH or check providers. “You take the mechanical difficulty out of this and lay out this buffet,” he said of the range of services that can be offered through a platform model.
As an API platform provider, he added, “you listen to your customers. They know what they need, and you have to be able to translate that into the banking and payments environments that exist, and come up with interesting solutions.”