The rise of APIs in banking and FinTech can unlock greater usability of innovative solutions but also presents some difficult questions for the space. As banks, FinTechs and a variety of software development firms explore the waters of payments and information exchange and collaboration, NACHA says there is a new idea to consider: API standardization.
NACHA is exploring the issue and last month announced that it completed a research project, supported by Accenture, to examine potential impacts of API standardization on the U.S. financial services space. George Throckmorton, managing director at NACHA, said the aim was to assess whether standardization would be able to address some particular pain points for users of the ACH Network — and offered insight into what’s next.
“When you think about standardization of APIs, first and foremost, it’s really around the solid, consistent agreements made between participants,” he recently explained to PYMNTS. “API technology is not new, but if you have bilateral agreements, it’s very hard to scale.”
To demonstrate this challenge, he pointed to the ACH Network itself. Its ubiquity, he explained, allows for a central set of rules and agreements to which all participants adhere — the basic elements of an ACH transaction will function the same way regardless of participants. But today, when an API connects a bank and FinTech, for instance, those participants all have bilateral agreements between each individual collaborator for each API.
For developers, Throckmorton said, standardization allows for far greater efficiency — especially those that have to code for thousands of APIs. But there are other ways he said API standardization could solve for some critical pain points experienced in the ACH Network today.
“There are some processes within the ACH Network, regarding how the banks talk to and work with one another that are still quite manual,” he explained, “and they can definitely be improved. We hear that from financial institutions and businesses.”
For instance, a corporate client may alert its bank of an erroneous ACH transaction. That’s when the clock starts ticking, Throckmorton said, for not only the corporate client’s bank, but also the bank on the other end of the transaction, to communicate and sort out the issue.
“Today, that’s a very cumbersome process for financial institutions to know exactly who to call to resolve the issue. For 12,000 banks, it’s not an easy thing,” he said.
An API may be able to facilitate and accelerate communication from one bank to another, but API standardization can also work to expand that benefit across all banks and FinTechs.
A Collaborative Effort
To reap the full benefit of standardized APIs for the industry, there is a need for collaboration. NACHA’s Payments Innovation Alliance has formed the API Standardization Industry Group, welcoming all players from financial institutions, FinTechs and the developer world to collaborate on what these standards should be. It’s going to be a process that includes a wide variety of organizations, Throckmorton said, but one that will be diligent in ensuring value for all industry stakeholders.
“It’s going to be a large effort and a large group,” he said. “We certainly see roles for many API participants who have knowledge in various areas, whether that be security specialists, technologists, business professionals, program managers or product managers.”
He added that NACHA is currently in the process of identifying and inviting these participants, and the next steps of the group will be to begin developing the API Playbook — a document to guide the industry as it develops and eventually implements API standardization.
The group will meet regularly and maintain ongoing conversations with the industry to continue to gather recommendations on the Playbook and how to proceed.
It’s in this process, he continued, that the industry will really begin to formulate its approach to the opportunities for APIs in the financial services sector. The opportunities are great, and the potential for the API Standardization Industry Group is even greater, Throckmorton said. As the group forms and begins its collaborative effort, the ecosystem consisting of banks, FinTechs, regulators and corporates will all begin to see how API standardization may take shape and what impact API technology will have on the nation’s financial services sphere.
“NACHA’s Payments Innovation Alliance has taken a broader-brush approach to this and said, ‘We’re excited to see how API standardization can help ACH Network users and make the network even safer and more efficient,’” he noted. “But we think API standardization can do much more than that, and we’re eager to tap into the full potential for the entire payments ecosystem .”