Application programming interfaces (APIs) are the underlying infrastructure that forms the technological basis for open banking initiatives. In fact, the terms open banking and API banking are often used synonymously, which in such underlines the importance of open APIs. Open interfaces are neither new to the business world nor to incumbent banks. However, with the emergence of financial technology third parties, their innovative service offerings and recent regulatory push in certain regions towards accelerating innovation and competition, APIs have gained traction. Incumbent players in the financial ecosystem need to define their API approach; how they monitor relevant API standards is an imperative to stay competitive and innovative.
Use of APIs in the financial services industry
APIs define standardised methods of interactions that govern and execute data flows between different systems. Technology companies have long been using APIs as core part of their strategy to integrate third-party services into their own product portfolio and to make their own products available in ecosystems of other companies. A common example is Google Maps API, which is used in a vast number of applications including Uber.
Likewise, APIs provide financial institutions the possibility to integrate complementary products to their offering (e.g. a bank adding third-party money transfer services to their banking app) as well as to allow their services to be consumed in the ecosystems of other companies (e.g. mortgage provider offering applicants connecting to their bank account and sharing data within the online application process).
APIs are indeed an essential building block to capitalise on commercial opportunities offered by open banking.
Three possible API approaches for financial services firms
Open banking has highlighted the need for an API strategy focused on the exchange of data and services with external providers, whereas in the past, financial institutions have mostly used APIs to exchange data internally.
We see three main API approaches for financial services organisations, indicating diverse strategies firms are taking to grow open banking initiatives into alternative revenue streams.
Acting as a supplier
What? Financial institution supplies own products via third-party platforms
How? Limited API investment, the focus is on integrating with APIs offered by third-party providers
Acting as a distributor
What? Financial institution offers products of third-party providers on its own platform
How? Greater API investment, the focus is on enabling third-party providers to efficiently integrate their products
Acting as a platform provider
What? In addition to the role of supplier and distributor, the financial institution acts as a platform provider for third parties to exchange data with other third parties
How? With significant API investment, the focus is on providing secure and scalable infrastructure for other market participants to offer their products
Current state of API standards in the context of open banking
Independent of the API approach that a financial institute choses, there is also the need to establish a common API standard. This allows all participants in an open banking ecosystem to exchange data in a harmonised way based on the same rules, with maximal interoperability and accessibility.
We are observing that in all regions, markets are developing in a similar direction: towards common API standards and platforms that offer API services to financial institutions. However, there are differences in terms of regulatory environment and commercial maturity. In some regions, standards are still being developed, and in others, implementation has only just started. Winning business models have yet to emerge, while significant commercial education, both on demand and supply side is still required.
What is the status in Switzerland?
It is fair to say that Switzerland has not been the frontrunner in the implementation of open banking initiatives, but the picture is changing.
The Swiss Fintech Innovations Association (SFTI) commissioned a working group comprising of most major financial institutions and financial software providers in the Swiss market to develop a common Swiss API standard. In September 2018, the group published a first draft of common API specifications for the business domains payments and accounts. The SFTI API standard emulates best practices from the Berlin Group, a pan-European initiative focusing on the standardisation of an API framework in the EU and EEA.
In parallel, SIX is leading a Swiss Corporate API initiative that is developing a common API platform aimed at providing secure and reliable infrastructure and reducing operating costs for financial institutions. First modules, account access and the submission of payment orders will be available by the second quarter of 2019.
The SFTI and Swiss Corporate API initiatives are working closely together, which is a good sign for a joint movement towards a common API infrastructure in the Swiss market to drive innovation in open banking.
EU and UK are further ahead
PSD2, in force since January 2018, mandates banks to provide APIs to allow third-party providers (TPPs) to access their data. With its NextGenPSD2 initiative, the Berlin Group presented the prospect of introducing one single API standard for Europe to reduce the complexity of the PSD2 access to accounts (XS2A) requirements. The draft version 1.0 is available since March 2018 and is based on the Regulatory Technical Standards (RTS), on customer authentication and secure communication under PSD2.
As for the UK, the API standard developed by the Open Banking Implementation Entity (OBIE) of the Competition and Markets Authority (CMA) has a broader functional scope compared to PSD2 in the EU, but it only applies to nine tier 1 private banks in the UK (the so-called CMA9). API standards for the retrieval of account information and the initiation of payments comparable to PSD2 are available since early 2018 with the latest version 3.0 published in September 2018. In general and compared to Switzerland and the EU, the UK market is further ahead in terms of the commercialisation of open banking use cases.
Other region are also progressing with APIs
The Hong Kong Monetary Authority (HKMA) published the Open API Framework for the Hong Kong Banking Sector in July 2018. The framework is based on prevailing international technical standards to ensure fast adoption and security. HKMA has decided for a phased approach to develop various open API functions, starting with product information function planned for January 2019, followed by customer acquisition, account information and transactions.
The Australian Competition and Consumer Commission (ACCC) has announced that by July 2019, all major banks will be required to make data on credit and debit card, deposit and transaction accounts available to customers.
In the United States, the US Treasury has urged market participants to adopt APIs, however no API standards have been agreed upon so far. Open banking is progressing as part of market evolution while regulatory role is less pronounced compared to EU and UK. Canada is mirroring the US approach in the sense that there is less regulation.
Regulators in Asia are predominantly taking a more organic approach, focusing on providing support and guidelines to market participants rather than putting in place implementation deadlines.
Initiatives on API standardization and design are clearly moving ahead both in Switzerland and globally, not only due to regulatory requirements but increasingly also due to customer expectations.
It is imperative for financial institutions to invest time now to consider different API approaches and their relation to open banking business models. In addition, they should closely monitor how the API standards relevant to them are developing over time.
The API economy comes with a fair share of challenges, the largest one being the impact on competitive positioning and cyber security. That said, we think that the Swiss market is well underway in proactively addressing these challenges and is well positioned to capitalise on the opportunities that the API economy brings.