B2B Payments

What API Standardization Could Mean For Payments Fraud

API technology is opening new doors for the world of financial services, a trend that cultivates cooperation and collaboration between FinTechs and banks, once considered competitors.

With the speed of payments accelerating and Same Day ACH initiatives continuing to roll out, NACHA has pulled together a group of industry experts to explore API standardization as a way to facilitate faster payment speeds and greater transaction security, among other use cases.

The newest member of that group is Christina McGeorge, the chief product officer and vice president of product ownership at D3 Banking, a company that positions itself as a collaborator to other FIs by providing an array of banking technologies. McGeorge told PYMNTS recently that she is honored to have been invited as the latest member of the NACHA API Standardization Industry Group, and went on to discuss a bit about how the initiative may accelerate implementation of faster payment capabilities within the nation’s financial services community.

“I would say that there is real movement in the industry in terms of real-time payments and Same Day ACH,” she said. “APIs have been around for a long time and have been in existence in all of the vendors, banks and financial institutions that are participating in the leadership group of NACHA. Now, the key is to look at how we directly interact with each other in a standard messaging format that is well known to everyone.”

Traditional banks have taken some slack for being slow to innovate, but McGeorge said FIs, in this case, haven’t necessarily lagged in adoption and use of APIs. But newer technologies on the market are making it more difficult for everyone to get on the same page about how to use the tool.

“Now, what we’re really seeing is a movement in the industry that I would say stems from new technology, new architects that make it quite a lot easier to make technology like this open to everyone,” the executive said. But the industry is now tasked with finding a way to approach these technologies in a uniform way “so it puts people on a level playing ground,” she added.

APIs can certainly be used for a virtually limitless list of use-cases, but NACHA’s Industry Group will be examining how to standardize APIs for financial services providers to enhance faster payment capabilities. There are a few ways the technology can do so, McGeorge explained.

“For instance, in the ACH world, to determine if the funds are good on the opposing side of the transaction, you have to put that data through a file and submit it to the Federal Reserve. That’s the standard protocol for communicating between institutions,” she said. “Until that file is received there is no resolution of whether the payments move.”

Faster payments initiatives like Same Day ACH are changing how that process operates, she continued.

“There are things that have to occur both prior to and after those communications, and they have to do with verifying that the account holder truly owns that account, verifying the identify of the account holder,” McGeorge said. “And there are instances where, even if it is a legitimate account, fraud is occurring.”

There is a window of opportunity to catch the fraud of any invalid accounts or account holders, she said, and that window is determined by the mechanism by which data are transmitted across the parties involved in this transaction. APIs are all about opening up communication across those parties, McGeorge said.

Faster payments means faster communication, and while APIs facilitate that acceleration, they also demand that the industry reexamines how it tackles some of these issues like fraud.

The Group, which met for the first time last month, will be looking at these various facets and how to standardize processes like fraud detection and prevention and data sharing via API calls, which users of these APIs can invoke to run tasks like administrative or data query processes. According to NACHA managing director of network development George Throckmorton, who also leads the group, API standardization can be “transformative” for the financial services space.

A report released by NACHA of the inaugural meeting said APIs “can help improve the safety, efficiency and speed of communications. Despite the obvious benefits of APIs, adoption — particularly within the U.S. financial services industry — has been slow. The question remains … why?”

“There are a few areas we’ll be looking at,” McGeorge said, ”and we will be developing API calls that address each of those use cases. We’re beginning to pave out the technology in those calls, and then move from there, expanding and opening up the number of calls and use cases that we address.”

She said she absolutely expects API technology to continue to proliferate in the financial services world, as will the number of industry stakeholders that explore how to streamline the way financial services players interact with and deploy these APIs.

“There are many movements in the industry – the API Standardization Industry Group is just one movement,” she said. “But you’re seeing a collective force of vendors and institutions moving forward.”

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