The open APIs of PSD2 and beyond

This entry was posted on Monday, July 31st, 2017.

Unlocking the true value of APIs

Herber de Ruijter, EVP Head of Digital for Transaction Banking at iGTB, recently penned an article for FX-MM about unlocking the hidden value of client data in open APIs. As Ruijter explains, regulations such as the EU’s new Payment Services Directive (PSD2) require banks to offer third-party providers access to their clients’ account information and payment services via APIs.

“With market forces driving this trend in geographies outside the EU as well, APIs are set to take the industry by storm,” he writes.

“There is enormous opportunity here for banks not only to comply with the latest regulations, but to seize new streams of data and channel them into value-adding services and improved user experiences for their clients.”

If harnessed properly, says Ruijter, APIs can provide banks with a rich source of information and be leveraged to drive innovation, enhance product offerings and cut costs.

“Open API business models can enable banks to move beyond simple utility service provision and become central to the lives of their customers,” he adds.

Facilitating collaboration with open APIs

Markos Zachariadis and Pinar Ozcan express similar sentiments in a recent Swift Institute working paper – emphasizing that regulatory changes in the banking sector will require traditional players to change their mind-set from a closed model to an open, yet secure paradigm. In practical terms, say Zachariadis and Ozcan, this means learning how to collaborate, share the customer with platform partners and restructure internally to become more agile.

“Putting on a strategy hat rather than a compliance one and taking an active role in the reconfiguration of the market space will surely have its rewards,” the two explain.

“Those who move early to establish an attractive platform will obtain a customer base that is increasingly unwilling to switch to competitors as more and more third party developers offer services as part of the platform. And in turn, their growing customer base will attract even more developers, turning this virtuous cycle of growth further.”

Although shifting gears may seem like a challenging proposition, Zachariadis and Ozcan emphasize that banks should be asking how firms and counterparties attached to their platform will benefit from the interaction – rather than focusing on their own profitability around open APIs.

“Short term plans to profit from open APIs may prohibit the development of an entire ecosystem which can be more profitable in the near future. Amazon spent years and billions in investments to grow their platform and increase their capacity to accommodate more products and services before making an annual net profit for the first time in 2015. For long-term benefits, banks should not see open APIs as a burden but as an opportunity to enhance connectivity with the customer and the rest of the industry,” the two conclude.

PSD2 and APIs: The Rambus perspective

PSD2 introduces a number of new roles, including Account Information Service Providers (AISP) and Account Service Payment Service Providers (ASPS). Specifically, Account Service Payment Service Providers manage the consumer account, while Account Information Service Providers are service providers with access to the account information of bank customers. Whereas customers had to be authenticated on different systems for each bank, AISPs have access to those accounts and acts as a portal to the customer. Moreover, the AISP has the overview of the behavior of the customer. This creates new business models as well the opportunity to move closer to customer needs.

In addition, because PSD2 offers support for Payment Initiation Service Providers (PISPs), the merchant can directly access the issuer using APIs to request authorization, cutting out all parties in between. This cleaner method of integration supports P2P payments, direct billing and reduced interchange fees.

As noted above, PSD2 is expected to pose multiple challenges for banks, including increased IT costs due to new security requirements and opening of APIs, as well as revenue reduction linked to interchange fees and reduced market share. Although banks will need to rethink and redesign their services and business models, financial institutions will have fresh opportunities to collaborate with FinTech companies to create a new generation of mobile payment platforms.

Interested in learning more about PSD? You can check out the official PSD2 directive on the European Commission website and our article archive on the subject here.