Monolithic Legacy Solutions Are Transitioning to an API-Based Ecosystem
The payments industry, in general, has been cautious implementing open solutions given its reliance on security and privacy. Traditionally, banks have built, owned and controlled the channels and applications through which customers access their payments services – be they a retail customer checking their balance online or undertaking a mobile transfer, or a corporation processing their payroll. Consequently, payments were inherently processed via monolithic point-to-point solutions, resulting in high processing cost and severely restricting the number of use cases.
Today, the market is largely characterized by payment providers using internal APIs that were built to support a move to SOA (service-oriented architecture) based payment platforms and a handful of new age players collaborating through partner based APIs. These developments have been supported by payments standardization like SEPA (Single Euro Payment Area) and common protocols like ISO20022.
While these initiatives are indeed a clear advancement from the past, the semi-open payment landscape limits innovation and does not allow providers to leverage the capabilities of specialized providers. Thus, business models of the incumbent players today rely either on internal capabilities (which are still offered by legacy backends) or selected custom-made partnership arrangements (which are difficult to realize and execute).
Given these challenges, payment providers are now looking for new value realization mechanisms. At the same time, regulatory forces, like the Revised Payment Services Directive (PSD2) and the ongoing move to real-time service experience, are driving the development of payment services based on open sharing of capabilities among partners. Product stacks based on custom-made partnerships is gradually morphing into business ecosystems where participants freely use other network members’ capabilities – thereby allowing greater specialization and tailored services for customers and merchants.
While these dynamics are still unraveling, this evolution will gradually lead to a payment landscape where any accredited service provider can access any account to perform any standard service via an API; and payments will transition from a restricted industry to one being completely open.
Leading Market Players Leverage Open APIs to Expand Across the Payments Value Chain
This ongoing move towards Open APIs among the European payment players has been a gradual process. The pioneers in this direction were the French lender Credit Agricole and Spanish banking giant BBVA. Both the banks offered third-parties access to its Open APIs and allowed them to leverage on core bank functionalities to develop financial apps, innovate new business models or simply improve user experience.
An early manifestation of the benefits of open APIs for BBVA’s customers is the bank’s partnership with the FinTech company Dwolla to offer real-time payments to BBVA users. While these initiatives qualified the possibilities for increased innovation, in recent times we see a clear move among European payments players to expand their value chain positioning through Open APIs.
Merchants payments value chain and Open API services
This is partly driven by the demand in the market. Consumers increasingly prefer loyalty, personal finance management integrated with payments wallets; while merchants prefer payment acceptance to be bundled with accounting, financing and analytics capabilities. At the same time, supply-side factors – challenger banks (e.g. Fidor, Bunq, Starling) and specialized fintechs (e.g. Transfer Wise, Funding Circle) offering API based capabilities – are supporting this evolution to integrated offerings.
Consequently, payment players are moving away a model where they would only deliver their core competencies (e.g. ‘Accept and Process’ payments), making credible attempts to enter a symbiotic relationship with other players to increase their breadth of offerings (‘Invest & Attract’, ‘Identification & Screening’, ‘Maintain & Analyze’).
Merchants payments value chain and Open API services
For instance, European card issuers have started using a VISA product API to offer “card control” features to customers so that they can set spending controls, receive alerts, and turn their accounts on and off. At the same time, challenger banks like Starling bank (UK), N26 (Germany) are making use of fintech APIs (like that of Transfer Wise) to enable convenient cross-border transactions from their mobile apps. Starling bank, for example, has recently launched a marketplace platform where fintechs can access the Starling APIs as well as publish their own APIs for other to use. Rewards and receipt platform Flux has become the first fintech to directly integrate with the Starling marketplace, allowing Starling customers to get itemized billings and automated loyalty points from partner merchants.
Dutch private bank Van Lanschot is using Fidor OS platform (built using Open APIs) to offer a range of payment services: an innovative and modern mobile payment app, on-us real-time payments, multiple accounts in multiple currencies, global money transfers, P2P transfers in addition to special services for the Dutch market such as iDEAL payments.
Open APIs Are the Digital Glue of Platform Economy – ‘Uberization’
In a way, similar to how Uber has created a market capitalization of billions of dollars (estimated at USD 70bn currently) in the car transportation business – without owning cars and carrying stock, new entrants are entering the payments business without providing payments account or liquidity. Therefore, the rise of this Open API economy is also acting as a catalyst for non-traditional players to venture into the payments market.
Technology giants (like Google, Amazon, Facebook), retailers (like Tesco, Carrefour, Starbucks) and telecom operators (like Orange, Vodafone, T Mobile) are increasingly encroaching on the payments value chain by offering competing financial services (payment wallet, tokenization, reporting, invoicing) using Open APIs. This encroachment is further enabling these players to augment their own customer data with the payment information available via Open APIs and thereby expand their service offering and share of wallet with customers.
The next step of an Open API economy for banks is to become an open platform that fosters a wider ecosystem of third parties – like fintech and retail partners. A digital ecosystem is a constellation of products, organizations and people that are aggregated on a digital platform. For example, Fidor Bank offers an open digital banking platform has designed its services to be implemented behind APIs which enables developers to white-label the bank’s operations. It also uses third-party APIs to facilitate services the bank had no desire to provide directly. Developers are merely required to build the interface – for which Fidor offers a set of templates as well. Another example in the financial services industry is the Solarisbank, which offers a white label banking platform for both financial services organizations (e.g., banqup and Cashlink) and non-banks (AutoScout24).
Open banking is currently finding its way to Dutch banks and financial organizations, which are starting to introduce their own APIs. ABN AMRO’s application Gradefix is a good example of an Open Banking initiative, which makes risk assessments based on payment data. Consumers and SMEs submit the data themselves for analysis and receive a complete summary of their financial situation. The consumer or SME decides whether or not to share the information with third parties. Even though Gradefix has been discontinued by ABN AMRO, the insights from this pilot have been used to develop a new SME digital proposition New10. Dutch digital-only banking start-up, Bunq, expanded beyond its native Dutch market to Austria and Germany with the launch of its open API. “Developers can integrate Bunq’s real-time payment system into their own apps,” the banks state. Bunq aims to be the Whatsapp of the banking world – quick to set up, easy to use, real-time and fully mobile.
Effectively designed ecosystems create value for all partners involved, including the bank, developers and customers. Firstly, banks can act more independently – creating their own products and services, making them available on their platform, and finding the customers for these services. Secondly, banks can drive to support open innovation with third parties – partner with a number of providers to create new products and services within a collaborative ecosystem. Platform models like Fidor and solarisBank – players using product capabilities and distribution of third parties – will eventually lead to ‘Uberization’ of payments.