The European Union’s revised Payment Services Directive (PSD2) came into effect in January. Yet despite notice from regulators for banks to be ready for the advent of Open Banking, many incumbents have asked for an extension to the deadline for the first phase of the implementation, as they were not ready for the new world of API-driven access.
APIs provide the technological means for banks to connect their payments and data services to third parties, which is the core intent of PSD2. This collaboration enables incumbents and challengers alike to use customer data and innovations to create new revenue streams and more contextual services. But there are obstacles to overcome in developing these interfaces.
The level of interaction of APIs with incumbents will depend on challenges around interoperability and payloads, as well as the complexity of banks’ existing backend systems. The latter is one of the most problematic areas for API development and integration, says Hans Tesselaar, executive director at Banking Industry Architecture Network (BIAN), a not-for-profit fintech industry body. He says: “The real challenge for banks is that they have to connect to their complex back office environment before they are able to work on implementing open APIs. This is something that fintechs do not have to do, resulting in a much faster and more efficient integration process than banks.”
Tesselaar says the legacy status of much of the IT infrastructure at established banks is a real problem:
“API is a short acronym, so there’s the potential for misconceptions that these interfaces are somehow already ‘packaged up’ behind the scenes, ready to be declared ‘open’ for use. The reality is much more complex, due to banks’ tangled up and archaic core infrastructure.”
Once processes have been mapped, Tesselaar points out that banks still have to address the question of whether to keep these various business capabilities in-house, or simply consume them off the cloud as and when required. In addition to these well-known issues, there’s the problem of lack of global rules for APIs.
The lack of standards issue
As well as the issue of integration, having a global standard and model for API development will be crucial in taking innovation further. Even though most banks are now working very closely with fintechs that specialize in both API development and deployments – and tend to use many of the same large vendors – there is no single set of rules. Tesselaar explains:
“It is essential that all parties speak the same language and respect the agreed [IT] boundaries in order for accelerate progress towards a truly open environment.”
He believes a serious issue that can be seen across the industry right now is that every bank is shaping its own set of APIs. This in turn limits openness and defeats the principle of collaboration and standardization that sits at the heart of PSD2 and Open Banking.
“This problem persists because there is not currently a universally adopted reference model or taxonomy for standard definitions of all the various banking business functions.”
The lack of standards is a huge obstacle to making progress on opening up access to account information and transactions, he adds:
“Without [standards], it’s almost impossible for banks to visualize the different information flows of every single banking capability within their models, let alone understand how these capabilities are connected and how they can be reconfigured using APIs.”