Application Programming Interfaces (APIs) can help banks do more than comply with the Payment Service Directive (PSD2). APIs can help banks evolve into the digital age.
• Expanded Revenue Sources
A 2016 study by Accenture found that UK banks risked losing 43% of their payments-based revenue by 2020. The study attributes this to PSD2, regulation on interchange fees and competition from fintech players. In the EU market, Payment Initiation Service Providers (PISPs) who initiate payments directly from shoppers' bank accounts, threaten significant revenue losses for banks according to a 2018 Mckinsey report.
Using APIs that facilitate account aggregation and building of third-party products on top of banks' legacy systems, banks can not only protect but also widen their revenue base. Additionally, since banks can also access account data from other banks, they can build products to offer tailored services to their existing clientele.
• Launch Competing Products to Fintech
Bankers usually look at the PSD2 requirement for banks to open up to third parties as an inconvenience that makes them vulnerable to competition. However, they usually ignore the fact that banks can act as third parties too and access functionalities as well as data from other banks.
This not only diversifies revenue sources but keeps banks in direct contact with customers, thereby protecting their brands from being eroded by fintechs who would otherwise relegate them to white label service providers in the background.
• Provide Richer Offerings
As banks embrace advanced APIs that can “think”, they are better placed to provide richer product offerings with less effort. By working with third-party tools and platforms that can analyse, manipulate and get insights from customer data, banks can develop an unmatched role as advisers.
Open APIs can also make integration to corporate systems seamless, leading to new value-added services for corporates such as reconciliation of transactions, payment rooting, automated payments, cash pooling etc.
Banks don't need to build from scratch to take advantage of PSD2. There are tools already available. If one wants to connect to other banks for account aggregation, technology is already present that connects hundreds of banks via a single interface.
Moreover, banks should be receptive to partnering with fintechs to acquire speed and technology. We are in a banking revolution where the fastest and most efficient innovator wins. Instead of struggling to build new bleeding-edge technology - something that is not always native to banks, they can focus on leveraging existing customers relationships and their financial muscle. Then couple that with technology from third parties to win.
On another front, banks can look at collaboration with fintechs through APIs, as a means of distributing products into unreached markets. Some fintechs, through savvy marketing and tailored user interfaces, have managed to capture the attention of Millennials. A bank interested to open up to new demographics would benefit from such a partnership. The same could be said about fintechs wanting to reach banks' customers.
PaymentComponents has helped a number of banks worldwide to move into the digital age through smart APIs.