In January 2018, the PSD2 (Payment Services Directive) came into force in Europe. European banks are required to open their application programming interfaces (APIs) to an unlimited number of payment providers. The main goal of this measure is to increase the convenience of payments for end users. Since then, the Open API principle is being tested in countries outside the European Union. Let’s find out what an Open API is and how it will affect the banking industry.
The main goal of PSD2 regulation is to drive competition in the financial market. Banks are obliged to give third-party providers access to customer data.
What is an open API?
To understand what an Open API is, let’s first describe an API in simple terms. It is a liaison between you and any service provider. It can deliver your request to the service provider and give a response back to you. Imagine, you came to the restaurant and want to order something. You need to call a waiter to make your order. He will deliver your order to the kitchen. After a while, he will bring you your dish. API works similarly as a waiter.
Open API is a technology that is publicly available for other developers. Simply put, many developers can get access to the proprietor’s web service or software.
Do you know how developers create apps for banks? Here’s the relevant post for you.
How Banks Use an Open API
The regulation of PSD2 about an Open API was adopted by a small number of banking institutions. However, this technology has a strong potential to change the entire industry. Most of the European banks are still thinking of how to implement this technology in the most efficient way while US banks are in the early stages of building a transparent open banking ecosystem.
If you come to a bank with a salary project, you will likely take some credits or open deposits there. Financial institutions will do their best to retain their customers. Those banks that opened their APIs have already got many requests to connect interfaces. Such connectivity can bring banks some benefits. For example, many companies solving customer relationship problems can appear. A bank will execute its core processes while these companies will persuade the bank’s customers to use as many services as possible.
Banks will also have the possibility to make a choice. Today, they have only one universal payment solution – card systems. So, if a bank wants to work with retail customers and corporate clients, it should connect to World, Mastercard, Visa, etc. However, a lot of smaller payment systems will appear. As a result, banks will have to compete with each other and look for powerful tools to do this.
Today, any financial organization needs a certain platform that will allow centralizing external data flows and integrating all internal systems of the company. These platforms are aimed to share data between external providers and internal systems. Such solutions are already available. They can be either bought as an out-of-the-box product or custom-designed and developed by a software company.
Why choose bespoke software for banking? Here are some reasons.
3 reasons why banks should adopt open API
Financial organizations are investing lots of money in cross-selling to clients and getting new customers. Instead, with Open API technology, they can delegate these tasks and proceed to increase their products’ value or customer deposits. The major part of value would inevitably move to front-end developers who know how to produce user-friendly and intuitive banking interfaces. And banks, in their turn, should grow their operational effectiveness.
Globally, open banking helps financial organizations reinvent the way they operate today. Here’s how it changes the banks:
- improves offerings
- enhances customer engagement
- increases revenue from different funnels
Benefit 1 – Open API improves banks’ offerings
By implementing and adopting open API, banks will be able to provide better services and improve their offerings. But on the other side of the coin is a threat. Providing access to their APIs, banks are giving fintech companies the opportunity to use this technology for extending their services, as well.
When a bank opens its API, it also gets the possibility to use other APIs available on the market. So, banks can provide their customers with different applications developed by fintech companies. This connectivity is good and bad for banks. Fintech companies can use a bank’s data to create a mobile app, for example. The app would have some features allowing users to manage their finances, monitor their debts, and see other real-time data.
Open API is a good opportunity for banks to see their services from the outside. It is a chance to stop and think if they are providing up-to-date services to their customers. And that’s the point where they should decide if they want to move forward or drown among competitors.
Benefit 2 – Open API enhances customer engagement
Open API adoption can attract more customers to banks. Moreover, banks will be able to meet the expectations of existing clients. However, the higher customer engagement will be, the more efforts traditional banks will commit to survive the fierce competition.
By providing financial organizations with their APIs, banks can show customers that they are up-to-date, they are innovative, and they want to offer better services. Additionally, banks can appeal to prospects who are looking for alternatives to traditional banks that haven’t yet embraced the changes.
Adopting Open API, banks can enable better customer engagement since people will be able to interact both with internal banking services and external platforms. This will definitely enhance customer satisfaction as clients will get access to more financial products and services.
Benefit 3 – Open API increases revenue from different funnels
Open banking capabilities will attract more entities to banks and as a result, will increase revenue. People may face incredible changes in payment methods, as well. In the future, for example, you would be able to pay through some social network like Facebook or use some fintech app instead of the traditional bank’s app.
According to Accenture forecasts, by adopting open banking technologies, banks can increase their revenue by 20% by 2020. Thus, they need to develop an open banking strategy not to miss that chance.
What about security?
When banks provide their APIs to third-party providers, they could face risks of data leakage, breaches, illegal actions, etc. Obviously, APIs could be misused. The shift from traditional authentication to open API will give financial institutions, customers, and third-party providers higher security.
Unlike the legacy authentication method that was ensured by scraping, open API is more secure due to the use of tokens for user authentication. Here’s how it works. When a user wants to sign in, a system generates a token that indicated the scope of data to be available to the third-party provider. It also indicates the services that are available and sends all this data to the provider.
Due to the token authentication method, users no longer have to use passwords. Financial organizations, in their turn, should constantly upgrade their applications.
Are you ready to invest in APIs?
Before banks and other financial institutions move forward to investing in various APIs, they should answer the following questions:
- How will Open API adoption help you improve customer engagement?
- What kind of software and tools do you need to provide high-quality open banking services?
- How can you partner with fintech companies?
- What can you learn from the successful use cases?
- What skills and specialists will you need to use new opportunities?
As you can see, you’ll need to consider your goals and opportunities first to move further. Then, you’ll need to develop an effective strategy to collaborate with third-party providers and get maximum profit from this cooperation. And finally, you’ll need to find the right skills to create and/or modernize APIs. This could be a software company with relevant expertise and experience in the banking sector.
DICEUS has 10+ years of expertise in banking app development. Here’s how we do this.
Here, at DICEUS, we develop apps for banks from scratch, re-engineer and modernize legacy systems, and provide other IT outsourcing services for the finance industry. Why cooperate with us?
- We have 8+ years of experience.
- Our developer database comprises 100+ specialists.
- Our teams have accomplished over 150 projects in 20 countries.
- All staff speaks English.
- We provide accurate estimates and detailed technical proposals.
Learn if you need to cooperate with us using a short checklist below:
- You have a legacy system and no expertise to modernize it.
- You can’t find the right developers.
- You have to immediately start developing an app.
- You want to replace an out-of-the-box solution with a bespoke one.
- You want to change a software development vendor.
If you have answered “yes” to at least one of these questions, let’s talk about your project.