API

US Bank On Improving B2B Payments Via Open Banking

B2B payments are often complicated by incompatible systems that delay transactions and add additional fees. Embracing open banking can help, but many financial institutions have core systems that weren’t designed to support APIs, says Gareth Gaston, executive vice president at U.S. Bank. In this month’s B2B API Tracker, PYMNTS speaks with Gaston about how legacy systems have impeded open banking — and what it will take for banks to embrace APIs and accelerate B2B payments.

More than $25 trillion flows between U.S. businesses in the form of B2B payments each year, yet the payments industry faces a host of complications despite this impressive sum. The banks and payments providers that process these transactions often have difficulty interfacing with incompatible systems, slowing down the payments process and leaving the businesses involved to figure out how to make ends meet. This not only results in wasted time, but also excessive fees.

Enter open banking, a phenomenon sweeping the financial space that enables free and seamless data sharing between banks and developers via APIs, allowing B2B payments to be processed faster than ever before. The APIs that facilitate these transactions also provide superior payment security.

“Open banking integrates solutions into a seamless experience for business-to-business clients, and they can then use however many providers or solutions they would like rather than necessarily being married to one,” said Gareth Gaston, executive vice president and head of digital platforms at U.S. Bank.

Open banking is not a foolproof solution when it comes to streamlining B2B transactions, however. The U.S. is lagging regarding open banking implementation compared to the rest of the Western world because of legacy systems’ prevalence and conflicting goals between banks and third-party developers, for example. Countries around the world — including the U.S. — will need to quickly embrace open banking for it to have optimal success.

Open banking benefits in B2B payments 

B2B payments are often complicated by payment processors’ systems, which may not be compatible with the receiving bank. This forces the two parties to cooperate on an a la carte solution that would not necessarily work in any other circumstance. APIs ease such frustrations by allowing developers to fully integrate with bank systems and be ready to process payments at any time.

“You had your traditional players in the payment space, where they have their own systems and they may have relied a different interface [for each bank],” Gaston said in a recent interview with PYMNTS. “APIs give the ability to be much more fully integrated, either to send payments or do things around payments, like queries or data and reporting. It gives the opportunity to be much more integrated that ever before.”

APIs and open banking also help banks gain greater insight into customers’ needs by harnessing new data sources the banks could not previously access. It is important for banks to respect customer privacy when doing so, though, as they may not be fully aware of how many different data sources they are accessing.

“[We can] learn what types of products and services our customers are interested in, and if we discover that there’s a certain type of product that we don’t provide, that is great information we can use to help service our customers in another way,” Gaston noted. “At the same time, we can make sure that we give customers complete transparency and visibility into which third parties are connected to their data and the tools to revoke that access at any time.”

Data security goes hand in hand with transparency as well. Apps and products that access bank data often relied on screen scraping before the widespread adoption of open banking and APIs. This required customers to enter bank login information into apps, which can then access customers’ data.

“With screen scraping, the customer is actually sharing their credentials with a third party, which, of course, is no good because you don't really want to share your credentials with anyone,” he said. “By creating an open banking, API-driven solution, we can actually take the need for sharing credentials with the third party out by granting the third party a token or a key if the customer wants to give this third party access to [his or her] information.”

This myriad of advantages begs the question: Why does every FI not harness open banking for its ease of use, transparency and security benefits? The answer comes down to difficulty in changing legacy systems and a lack of cooperation between banks and third-party developers, according to Gaston.

Challenges facing open banking 

Creating an API is not particularly difficult, Gaston said, but the true challenge lies in integrating that API with legacy systems. Core banking platforms that were not initially designed with APIs in mind are likely to be utterly incompatible and require a complex and expensive core system rework.

“APIs themselves are actually not particularly complicated, but the challenge is in connecting that to the relevant back-end systems,” he explained. “Much of the industry is stuck on legacy platforms, so you have to find a way to connect that to your legacy platforms in a way that doesn't create all sorts of internal issues for yourself.”

The second major complication comes from cooperation with the third-party payments processors that banks hope will access their APIs. These groups may have different priorities when it comes to data security and customer privacy, which can be harmful to bank business if customers do not feel their data is being handled properly.

“You have to come to an agreement with data aggregators, for example, or individual FinTechs that enable customer information to be accessed securely and in the right way and manage all the appropriate risks that are part of all of that,” Gaston noted.

Both of these challenges are going to be incumbent on banks to address, as the U.S. lacks any sort of government authority pushing for open banking and APIs that can lay down concrete standards, as has been accomplished in the EU and the U.K. Open banking adaptation for B2B payments will likely continue to increase as more American banks understand the opportunity and decide to embrace it.

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NEW PYMNTS DATA: HOW WE SHOP – SEPTEMBER 2020 

The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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