The Transformation of Banking and Payments Through Open APIs

The Transformation of Open Banking and Payments Through Open APIs, commissioned by HPS and produced by Aite Group, analyzes the global trend to open application programming interface (API) banking and how banks can leverage the API economy to create value for their customers and generate new business. It is based on market intelligence and insights developed by Aite Group from previous research as well as available public sources.

Key takeaways from the study include the following:

  • The increasing use of APIs is a major trend in retail banking and payments. Banks are beginning to expose their data for use by third parties, in particular financial technology firms, through open APIs. This development is known as open banking.
  • Open banking through APIs is a global trend that, over time, will transform the industry in every region of the world. Open banking responds to customers’ demand for more choice, better customer experience, and control over their data.
  • Open APIs greatly facilitate collaboration between banks, other financial service providers, and technology companies. Banks can partner with fintech firms to deliver the best customer experience and get access to the latest technology. They can also partner with other financial service providers to quickly add new products for their customers. APIs allow banks to select the best products and solutions available in the market and avoid the need to build everything in-house.   
  • Open banking not only provides opportunities but also results in threats to banks. Open banking allows third-party providers to develop consumer banking services on top of the existing banking infrastructure, disintermediating banks. In Europe, as a result of the revised Payment Services Directive (PSD2), banks could lose payments revenue when third-party payment service providers (TPPs) start offering new payment services with free access to payment accounts. Banks should develop a strategy to provide other (non-PSD2 regulated) products to TPPs and charge for those value-added APIs.

The increasing use of APIs is a major trend in retail banking and payments. APIs provide a standardized way for developers to interact with the bank and get access to its data and services. For this purpose, the bank publishes a precise specification that must be adhered to by developers of software applications. The API describes what functionality is available, the format used to communicate, and the conditions for using the service. By publishing an API, the bank makes it easier for developers to build applications that use that service. An API is called “open” when it can be accessed—under specified conditions—by third-party developers.

In our digital world, the use of open APIs has been fundamental to the growth of digital-native payment companies. But for retail banks, the use of APIs is a more recent phenomenon. Banks are beginning to expose their data for use by third parties, particularly fintech firms, through open APIs. This development is known as open banking. In Europe, PSD2 is a strong driving force for the payments industry to adopt open APIs. Banks have to allow TPPs free access to payment accounts for payment initiation and account information services. In other jurisdictions, regulators are taking similar measures to foster competition and stimulate innovation.  

This paper analyzes the global trend to open banking and discusses how this trend will change retail banking and payments. The paper identifies the drivers for this global trend and examines how banks can leverage APIs and open banking to create customer value.