Faster, smoother, more-open payments systems are coming our way thanks to a little something called an API. That stands for application programming interface, which is what, exactly?
You can think of an API as an automated way to deliver data or processes from servers to clients outside the walls. The programming interface keeps everything automated -- which reduces friction, speeds transactions and makes new interactions and services possible as bank apps “talk” to other businesses.
Now that’s something everybody can understand — and appreciate.
Consumers, corporations, banks and merchants, connected
“In today’s banking environment, APIs can provide the connection to services that consumers, corporations and merchants expect from their financial institutions, enabling faster and more efficient access to a wide range of capabilities, including payments,” says Don Shaurette, director of market intelligence and strategy, payments management solutions, Fiserv.
“A key benefit of APIs is that they allow systems to talk to each other easily, avoiding the complexity that often goes along with integrating systems,” Shaurette adds. “This frees business and technology resources to focus on the value that a capability can bring to their business, rather than having to spend time sorting out technical details of implementation.”
Now, the exciting part: “This could create additional value for customers and potential new revenue opportunities for the bank as customers are willing to pay for a combination of capabilities they can’t get anywhere else,” he notes.
The API environment also allows for openness, says Joan McGowan, principal, global financial services strategist at SAS.
“API technology makes it much easier to launch payment and banking products, as the ‘plug-and-play’ approach offers increased agility and flexibility,” McGowan says. “Importantly, these products more closely match customers’ expectations. Payments is and will continue to be a top use case for APIs.”
In fact, “If banks want to stay relevant in payments, they have no choice but to develop an API strategy,” she cautions. “But first, the industry must engage in a collaborative effort to establish standards, lest this cool technology will become a developer’s nightmare.”
Payments get real via API
As payment tech evolves and accelerates, one key trend involves faster or real-time payment systems — including Same Day ACH and networks such as RTP and Zelle, says Jack Baldwin, CEO of BHMI, a provider of product-based software solutions for electronic payment transactions.
You’ve heard it before in other avenues of banking life, but now more than ever, the time is ripe time to listen: “The question of faster payments is no longer one of ‘if’ but ‘when,’” Baldwin says. “Today's bankers and financial institutions should pay close attention to how this technology is rolled out and implemented.”
The recently announced FedNow proposal—a national real-time payments network put forth by the United States Federal Reserve—only adds more momentum to the picture. The Fed sees a faster future, though some consumers may think it’s already here. Ah, but not so fast -- literally.
While platforms such as Venmo have become very popular, “Most users also assume their fund transfers occur immediately from sender to recipient,” Baldwin notes. “However, most of these wallet-based network transfers require additional time to clear due to settlement lag.” And that creates a disconnect in the actual availability of funds—which can lead, among other things, to instances of insufficient funds or fraud.
“Current and proposed networks such as Zelle, Real Time Payments (RTP), Faster Payments Service (FPS) and FedNow will help close the gap on immediate funds access, but it’s the associated banks that still guarantee the actual fund transfers,” he says.
But there is good news in that on the business-to-business front, APIs will have the biggest impact on payments over the next two to three years, says Bill Wardwell, vice president, strategy and product, Bottomline Technologies.
“If players in the payments space want to continue to eliminate the friction associated with paying and getting paid, they must think about leveraging APIs,” Wardwell says. APIs will ultimately serve “to create plug-and-play connectivity with the banking platforms, enterprise resource planning/accounting systems and other technologies core to business engagement with payment technology.”
API-first systems that last
And yet whatever banks want to or choose to do with APIs, much will depend on legacy systems playing nice—if such a thing is even possible.
“One of the major challenges faced by innovative companies using API technology to transform banking is the older technology that makes up the backbone of much of the financial industry,” says Fran Duggan, CEO of Payrailz. “While many of these older technology providers have added on an API, these integrations are often problematic and lack the robustness of APIfirst platforms.”
As an analogy, Duggan offers the example of “using Google Translate to conduct delicate business operations. You can probably get the job done, but there are probably going to be a lot of hiccups, confusion and frustration along the way.”
In other words, “Integrating with technology that isn’t API-first—meaning designed from the beginning with these integrations in mind—adds a layer of technology translation from one system to another that is usually clunky at best.”
So while the general talk in banking always returns to “of course, tech matters,” the marriage of APIs and payments offers a specific example where urgency meets opportunity.
“Within the payments industry, API-first technology is more important than ever,” Duggan says. “Not long ago we had cash, checks and cards, and that was about it. Now the only way financial institutions can keep up is to rely on platforms committed to API-first technology that integrate with each new channel as consumers adopt them.”
And so for banks, here’s a straight-talking way to apply the API acronym: A Powerful Investment.
Jeanne Pinder is the founder of ClearHealthCosts.com, an award-winning startup bringing transparency to the health care marketplace. She was an editor, reporter and human resources executive at The New York Times for close to 25 years, and has also worked at the Des Moines Register, Associated Press and Grinnell Herald-Register.