Application programming interfaces (APIs) are emerging as the key to improving payments between corporates and banks. And with new initiatives like the Revised Payments Services Directive (PSD2) in Europe, APIs are quickly infiltrating the psyche of businesses around the globe. But without standardization, APIs cannot be as effective as they need to be.
The new AFP Payments Guide, underwritten by MUFG Union Bank, explores why APIs can and will be so useful for corporate treasury professionals. It will also delve into why API standards are a necessity—and how a number of prominent players in the payments space are working to make them a reality.
OPEN BANKING INITIATIVES
A number of initiatives have been launched over the past several years that have brought APIs to the forefront. Some of these endeavors are centered on APIs themselves, while others apply them as a critical component to achieving a goal.
The use of APIs in treasury is a fairly recent development, largely following the adoption of the EU Directive, the Revised Payments Services Directive (PSD2) by the European Commission, which went into effect in Europe a year ago. The directive’s goal is improving competition in banking and payments in the European Union.
Similar open banking initiatives have also arisen in other regions. In the UK, the Competition and Markets Authority directed nine banks to allow their customers to share their data with other banks and third parties. In Australia, the four major banks are slated to begin to sharing information with other financial services providers next year as part of a government mandate. And in Japan, regulators have been taking cues from Europe and have amended the Banking Act, requiring at least 80 banks to open their APIs by 2020. Hong Kong, Singapore and Mexico have also embarked on API initiatives.
As for the United States, it is unlikely that there will ever be a mandate like PSD2. Nevertheless, U.S. banks have begun to migrate towards open banking, as it presents significant opportunities for them. As Magnus Carlsson, AFP’s manager of treasury and payments explained in a 2018 article, “there do seem to be some indications that U.S. banks are already realizing that this trend would actually open up not only their data, but potentially also new business opportunities.”
Open banking also presents opportunities for corporates; Carlsson noted that if corporate customers grant them permission to use their bank account details and receive the payment straight from the customer’s bank, they could bypass intermediaries. “In other words, this could mean that corporates could get paid directly, and potentially much cheaper,” he wrote.
In the United States, no organization has been more proactive on APIs than NACHA. Over the past year, the payments organization has made major strides in furthering the progress of API standardization.
In a recent whitepaper, NACHA made the case for standardization, noting that banks currently use “disparate and customized formats to share information, employing different nomenclatures for common terms and processes. Without standardization, every time a developer tries to create or update an app, changes to that app will be required to interact with each bank. With standardization, a developer could design and implement one app that would interact with countless banks without needing modifications.”
NACHA noted that if 1,000 banks enable a common service using 1,000 different APIs, that's far from efficient. Thus standardization—and standardization with the proper governance—is a “critical component to ensure consistency, compatibility, effectiveness, sustainability and interoperability.”
In the fall of 2018, NACHA took its biggest step in its push for API standardization with the launch of a new organization and three new APIs that could benefit corporate treasury functions.
The ASIG and IFM partnership is now known as Afinis, a membership-based organization that supports long-term standards and adoption. According to NACHA, Afinis is a collaborative venue for developing API products for financial institutions, technology providers, businesses and governments.
Janet Estep, president and CEO of NACHA, called API standardization “critical” for the financial services industry to achieve its full potential. “Afinis is a membership-based organization that collaborates openly with groups from around the world to share learning, reduce duplicative efforts, and create and adopt standards that lessen friction and improve the ability to bring innovations more quickly to market,” she said.
Download APIs: The Search for Ubiquity and Standardization here.