Published in PaymentsJournal on August 13, 2019
If you keep up with the payments industry, you’re bound to have heard about APIs. It seems like every day brings fresh articles covering the newest APIs in glowing terms. From improving digital banking to facilitating Same Day ACH payments, APIs are having a major impact on payments and the wider financial industry.
But what are APIs and how exactly are they changing the payment ecosystem?
APIs 101: a crash course on communication
API stands for application programming interface. Great, but what does that actually mean?
“An API, very simply put, is a set of programming instructions that allow one software application to ask another to form a task or a series of tasks,” explained Christina McGeorge, VP atD3 Banking Technology and board member of Afinis group, a collaborative industry group focused on API standardization.
Put another way, APIs enable direct communication between different software systems, allowing them to communicate in real time. Additionally, the communication can be continuous. This forms the basis of many apps that we use all the time, perhaps without even realizing the role APIs play in the process.
For example, if you have ever used Uber, you relied upon APIs. The Uber app seamlessly communicates with Google Maps and whichever payment method you choose, so you can select a location, hail a ride, and pay for the service, all in one place.
As consumers, we’ve come to expect seamless experiences like those offered by Uber. And behind these seamless experiences, there are APIs.
APIs in banking
The banking industry is no different. “Banking actively uses APIs, just as we have seen in other industries,” said McGeorge. “The customer experience that people use and expect every day [with Uber or AirBnB, for example] are influencing banking.”
The biggest influence is that APIs are moving banking from physical, brick-and-mortar banks to digital only ones. “There is a pressure [from consumers] for banking in real time,” said McGeorge.
Customers want to be able to do more with their apps, whether that be making payments, learning more about specific bills, or keeping track of their finances. Moreover, customers want to do all these things whenever they want and wherever they want. APIs allow financial institutions to provide the desired features to their customers.
Fidor, a digital-only bank, embodies how APIs are changing banking. In fact, APIs are so fundamental to the company that its website says, “Our strategy had technology at its core, and we bet on APIs from the start.” But Fidor is not alone, as there are other banks in the United States setting up digital only banks.
APIs also help smaller banks who might not have the technology or the IT necessary for specific features to partner with fintechs who do. By partnering with companies that can provide improved functionality, the smaller banks can increase their brand awareness, while improving the customer experience.
The need for standardization
As APIs feature more prominently in the banking industry, the need for API standardization grows. There needs to be common rules and guidelines that govern how APIs are made and communicate with one another for innovation to occur.
“Standardization for pulling that experience together is the key to success,” said McGeorge. People want more features and functionality, and this requires apps to communicate with each other. Apps communicating to one another requires the companies behind the apps to do so, too. She likened this need to how, in order for Uber to work, the company needed to bring together Facebook, Google Maps, and payment capabilities.
In order to facilitate collaboration and standardization in the API space, groups such as Afinis are coming together.
Afinis is a good example at how this process is unfolding. The group is comprised of numerous companies, software developers, and other relevant players, and its mission is to understand the issues around creating standards, while finding solutions that work for everyone involved. Participants include companies ranging IBM to Bank of America, so the group can consider not just the technological challenges, but also business ones as well.
If Afinis and others are successfully able to standardize APIs “every bank, no matter the size, can communicate on equal ground,” said McGeorge. “If they have access to the API, they can quickly integrate based on that standard, allowing them to introduce an increased and enhanced experience to the customer.”