Payment optimisation continues to be one of the dominating forces in the financial services sector today. Historically banks have owned the international payments space. For businesses, banks used to be the only institutions who offered an accessible route to international payment gateways such as SWIFT. In today’s marketplace, the consumer has many more options available to them to execute their transactions. Payment providers and banks alike now offer alternative payment pathways focussed on speed, transparency and cost, all of which contribute to a better consumer experience. One of the cornerstones of these technological advances is APIs.
What is an API?
API stands for Application Programming Interface. The Interface part tells you that it allows interaction, in this case for one program can interact with another program. The API defines a set of rules or methods about how software can interact with it to get specific information.
Why are APIs important?
In financial services, many providers who prioritise their fintech offerings are using APIs to make it easy for developers to provide customised third party applications for their products. Take for example the multiple plugins and add-ons that are available for accounting applications like Xero and Quickbooks. By offering an open API, they are able to keep pace and grow their market share by offering access to complimentary third-party application providers. This approach is very much customer-centric. The more functionality and data they can provide to their customers within their platform, the more likely they are to keep their customers happy…and subscribing.
In addition, APIs make it possible for Fintech providers to integrate their applications with their clients’ existing business systems without affecting the security or integrity of those systems. According to a recent global survey, 42 percent of organisations cite legacy infrastructure and systems among their top three challenges to digital transformation. Additionally, 36 percent of respondents believe that modernising legacy systems is the most important initiative that they will work on to achieve their organisation’s business goals.
From a business’ operational perspective, to upgrade a legacy system can be cost-prohibitive. An API is a much more cost-effective method of integrating these systems, and doesn’t come with the barriers of organisational change, IT development time and re-training.
So why haven’t traditional banks offered APIs?
Offering open APIs goes against the main business practice of most traditional banks – namely, that they place importance on maintaining a 1 to 1 relationship with their account holding customers. An open API would make that relationship 1 to many. For example, after reviewing a customer’s financial situation, a bank may decide to offer that customer a personalized loan. An open API could give the customer the choice of loans from multiple alternative providers. Banks see this as a risk factor and the potential to lose revenue and reduce customer loyalty. Although there is a number of major banks announcing foray into B2B API for their payment and FX in 2020, this is more of an exception than a rule.
The good news for businesses and consumers is that since the introduction of open banking regulations in January 2018, EU banks will be are required to make customer data more easily and securely accessible. This is achieved by opening up their data via secure APIs to regulated providers. Whilst this does not currently apply to banks outside the EU, according to some sources countries like Canada are exploring it. This is all thanks to the Payment Service Directive 2 or PSD2 for short, has been forcing the financial institutions to digitize their solutions with a primary focus on B2C products. B2B should benefit from this wave of innovation as well.
How can businesses benefit from international payment APIs?
Legacy bank payment platforms have often lacked the functionality and usability of consumer payment options such as contactless and mobile payments. This is primarily due to the complexities of SWIFT messaging and banking regulations in different jurisdictions. Sending an international business payment often requires the use of IBAN, SWIFT, routing codes and even additional AML documentation.
Global organisations often need to send 1000s of these payments at once, so ensuring accuracy by drastically reducing error from manual input and instead automatically validating the payment details all add extra layers of complexity to the platform. For instance, providers who are able to offer file upload capabilities provides one such solution, but is still reliant on an element of manual intervention to conduct investigations on delayed or returned payments. Reconciliation of payment data also poses a challenge, particularly where FX rates and currency market volatility are concerned.
For many consumers, APIs present an effective solution. International payment providers can access data held within an existing business ERP and/or accounting system through an API, which allows them to by-pass the bank altogether. Once an invoice is approved and marked for payment, APIs offer international payment providers the ability to:
Additionally, straight through processing (STP) has become much more accessible to businesses. Removing manual intervention dramatically reduces payments processing costs, streamlines A/P processes and reduces the opportunity for errors and payment fraud.
The future of international payments is looking bright for businesses. APIs are offering quick and simple access to third party payment providers’ functionality via existing business systems, along with adding improved efficiency, reduced error rates and associated costs. The introduction of open banking will enable many more businesses to start looking beyond their banks for more efficient and effective payment solutions.
If you would like to find out more about how you can streamline your international payments and reduce costs, download our free guide.
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