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  • user 10:00 am on February 6, 2017 Permalink | Reply
    Tags: api, , , ,   

    Will the API Economy breed a Credit Card/ACH hybrid after PSD2? 


    is creating a new distinct species for retail digital payments in the EU. Shared by account servicing and third party payment initiators, there will be a customer-triggered Credit Transfer for transferring funds from a customer’s account to that of the Merchant providing the goods or services. Upon receipt of payment, the merchant ships the goods/releases the service. By relying on bank security, this method of payment is hard for fraudsters to replay elsewhere, the speed is moving to “immediate,” and there is an irrevocable payment to the merchant. Unlike a credit card, the method does not offer any repudiation mechanism and does not facilitate reversals or refunds. This new species will only live in the EU. Much of the underpinnings for PSD2 comes from the SEPA elements of the Economic and Monetary Union project in the EU.

    This newly bred species faces entrenched competition from a dominant older Card species that has ruled the consumer payments Savannah globally for over 50 years. The DNA of this species is from the US. There are US firms in leading positions globally in the main elements of the payment card value chain. US-born VISA and Mastercard as Card Schemes are effectively the franchisors of the card payment ecosystem.

    Although banks across the globe issue payment cards to customers, the highest volume issuers are typically US banks. Issuers introduce consumers into the card payments ecosystem, under license from the card payment schemes. Acquirers are responsible for capturing the POS transactions and submitting these transactions to the card scheme for authorisation. If the consumer has the funds or the credit, this process leads to the merchant receiving the value of the goods or services sold. There is also an extensive and distinctive value chain supporting Merchants.  Acquiring Processors provide sub-supply for Acquirers, and US firms are global leaders in this activity. There is a deep sub-supply value chain for Acquirers, with US expertise often to the forefront. The Point of Sale (POS) or Gateway providers offer hardware and software services for the secure capture of payment card details. POS or Gateway providers often innovate in adjacent categories to card payments such as retail inventory management and cash register software. US-led investment is also to the forefront in this area.

    Within all these moving parts, there are processes that are relatively unique to the card schemes, such as , rules, penalties, standards, procedures, brand guidelines, financial settlement platforms, security protocols, chargebacks, holds, stand-in processing, reserve accounts, minimum monthly payments, interest-free periods, etc.

    It is interesting to speculate about what Merchants would ask for if they could pick and choose their best possible combination of features from both species.  Here are a dozen simple and crude requests that a Merchant might make if they could define a hybrid payments collection service between ACH and Cards:

    1.      “If the customer pattern moves to bank-to-bank credit transfers after PSD2, as a Merchant I want to see the same share of my sales being funded by unsecured consumer credit as when I saw a Debit Card/Credit Card split. I want customers to have still the same opportunity to buy on credit if some or all of my product range is priced at high values. “

    2.      “Even if banks start to provide credit through unfunded bank accounts rather than card limits, I want my customers to have still the type of structured credit agreements that they liked with Cards, such as minimum monthly payments and interest-free periods. Ideally, they should get to choose the optional elements of their credit agreements.”

    3.      “I reluctantly accept that I have to carry the overhead of a trusted dispute resolution mechanism for higher value purchases. I want my provider to educate the customers properly on when this protection exists and when it does not exist. “

    4.      “I do not want any repudiation mechanism for the consumer for small value transactions. I have my statutory obligations built into my complaints and refund processes.”

    5.      “I want the low-value purchases made without credit paid to me immediately.”

    6.      “I want the simplicity and predictability of ACH pricing, not an array of fixed, variable, tiered and once-off card charges.”

    7.      “I do not want “holds” put on my money if the business is unexpectedly good compared to projections nor do I want to have money retained in “reserve accounts” in case of chargebacks. My bank should do all the due diligence on my activities, and that should be enough.”

    8.      “I do not want to store the digital credentials of my customers, and I do not want to have to comply with a “PCI” security standard that could bankrupt my business with fines and penalties. I am a retailer, not a professional cyber-security company or a bank.”

    9.      “If the customer is buying from me remotely on a mobile phone, I want minimal delays and friction but also strong customer authentication with the minimum of variation for transaction size and payment type. These security controls should be so elegantly designed that only thieves and fraudsters abandon transactions.”

    10.  “I want value-added services that come with my point-of-sale payment collection services, such as inventory management software, cash drawers, and an App Store, especially for retailers. I want these value added services to work with all payment types.”

    11.  “I want working capital finance opportunities that capture all my trading process delivered seamlessly to my business at POS. I don’t want offers of finance that are specifically confined to Cards traffic or some other specific payment mechanism ”

    12.  “I want payment schemes with great brands that are recognised globally and entice consumers from all locations, not just EU.”

    Producing a hybrid scheme of this agility and desirability is a very tall order, given that the most important suppliers tend to have their capital, infrastructure and knowledge tied up in one of the two models. The biggest EU banks that will handle most of the PSD2 payment initiation volumes are very mature organisations with monolithic software platforms. The major card processors and platforms are also large and mature organisations with monolithic software platforms. They also have very distinctive knowledge bases, focused on either Cards or ACH. They look out at the world from within this history, with a perspective of customer needs influenced by their current model.

    Given these rigidities, is a hybrid model that might delight Merchants a pipedream? Perhaps not, if the theoretical promise of the “ ” becomes a reality. The API Economy is a set of business models and channels based on secure access to functionality and exchange of data between businesses through Open APIs.   An Open API is a publicly available application programming interface. It provides third-party developers with programmatic access to a proprietary software application. APIs can also be used within businesses to clearly define automated methods of communication between various software components.

    API advocates make many claims about their usefulness. They argue that APIs lower barriers to entry for programmers. They make designing complementary programs easier and faster. Modular design, enabled by APIs, allow software designers to create, modify and remove components. Modularity combines the standardisation needed for high volume processes with customisation required for bespoke design. APIs also enable measuring and metering the third-parties that are accessing and using these resources.

    Both Banking and Card Processing specialists are in mature industries with many monolithic systems and divisional organisational structures. All mature industries face a range of challenges adapting to Open APIs. They will have to modify performance management and measurement systems. They have complicated and expensive investments to make to develop modular software with a microservices architecture. Open APIs are entirely different to own-brand products in mature industries. The monetisation goals for Open APIs will have to reconcile with the goals of own-brand products. Mature industries with very established patterns of pursuing profits at divisional level might struggle to see where they will capture value from Open APIs. Older businesses that were not born in the networked economy can be excessively focused on the downside risk of data travelling out to third-parties.

    By definition, all of the service domains required for the market to assemble the Merchants wish list for “the ideal hybrid ACH/Card scheme” must already exist. In general, these services are locked inside the software architecture of the respective service providers, either banks or major card specialists.  These service domains have Machine to Machine and Human to Machine interactions.  Machine to Machine interactions has content suitable for data fields that can be passed between applications. The level of detail in the interactions influence the potential for Open APIs. These interactions contain identifiers and depictions that can be explicitly mapped to a data structure. The standard of detail is very high. Human to Machine interaction includes structured forms of information that are completed by a person during a service exchange. The API Economy has the potential to capture the Human input through more applications and more convenient applications.

    In crude conclusion, notwithstanding the difficulties for mature firms in changing their business models, Open APIs could revolutionise how data and services are distributed. Given the regulatory intervention, the Card specialists in particular seem to have an incentive to make some or all of their characteristic and value adding service domains available to all models, whether there are 3 or 4 parties involved in a scheme. It could be a 2-model world with tighter margins, so they need to profit from both models. If the reality of the API Economy matches the theory, we could see some hybrid species in the future.

    [linkedinbadge URL=”https://www.linkedin.com/pulse/api-economy-breed-credit-cardach-hybrid-after-psd2-paul-rohan” connections=”off” mode=”icon” liname=”Paul Rohan”] is Author, “PSD2 in Plain English” at Rohan Consulting Services Ltd.

  • user 4:29 pm on August 27, 2016 Permalink | Reply
    Tags: api, , , , ,   

    Why should bank boards care about APIs? 


    The discussion around digital transformation in has long revolved around the nexus of technologies that are globally driving this change. Technologies such as mobile, social, big data and cloud computing are surely impacting significantly all industries, but for financial services there are other silent technological revolutions taking place that, at the very least, can massively accelerate the technological disruption occurring in the sector.

    If mobile, social, big data and cloud computing are the core technologies of digital transformation, for financial services the emerging underlying substrate are APIs (Application Programming Interface). Now, APIs have been around ever since someone wrote a piece of computer code that was meant to be reused by someone else and are common parlance in IT. However, the threat of fintechs and regulations such as the revised Payment Services Directive (PSD2) are elevating the IT lexicon to board-level discussions. Bank boards, in many cases for the first time, are being exposed to IT concepts and jargon that, not only they cannot afford to dismiss, but in effect they need to deeply understand as it becomes a key part of the future of competitive advantage in a digitally transformed industry.

    Why should care about APIs?

    APIs expose banks’ products and processes for use by third-parties. Since banking products are inherently digital and processes already are or can largely be automated, the development of an strategy drives three key advantages for banks:

    1. it enables banks to become a part of an integrated and larger value-chain;
    2. it offsets the threat of new entrants by establishing from the onset a “coopetitive” position for traditional banks;
    3. it drives from within.

    I. Vertical disintegration of banks and ecosystem integration

    The various impacts of globalization and in the financial services industry led to the emergence of niche providers, specializing in key activities of the banking value-chain. Most traditional banks tend to be vertically integrated organizations with relatively fixed cost structures and, as transaction costs decline, some of the key activities in the banking value-chain suddenly become cheaper to procure externally than to execute internally. As a result, we see a move to vertically disintegrate these activities and outsource them.

    With the threat of fintechs and neo-banks looming, an API strategy enables banks to streamline their internal value-chain, becoming at once leaner and more focused, while at the same time, transparently integrate themselves into a broader ecosystem exploring new revenue streams and business partnerships. For instance, consider the ability of a car dealership to provide an immediate loan for a customer at the point-of-sale. In this scenario, the cost of sales would be handled by the car dealership. From the dealership standpoint, they would be able to close a sale on the spot providing great value and a great experience to the customer. Also, consider the fact that this is a contextual sale, where additional products, such as auto insurance with multiple coverages, can (and should) be recommended with increased probability of acquisition by the customer. Now, I’m not naïve to the point of disregarding the many existing hurdles of this or other similar scenarios, such as compliance and legal issues. However, even compliance and legal are prone to disruption by APIs and automation as well as by self-regulating technologies such as distributed ledgers and smart contracts (but that’s a topic for another post).

    II. Healthy coopetition with fintechs and neo-banks

    There’s no longer any question about the threat that fintechs, neo-banks and non-banks pose for the future of traditional banks. After the boom of late 2014, the “movement” came of age during 2015 and is now competitive across all categories – lending, personal finance, payments, retail investments, institutional investments, equity financing, remittances, consumer banking and more. CB Insights reports that global fintech investment is rising and that Q4 of 2014 was the busiest of the last 5 years with a total of $3.1 billion invested across 214 deals – that’s an average of $14.5 Million dollars per deal. There’s also increased acquisition activity, mostly by established fintechs rather than by traditional banks.

    Additionally, regulations such as PSD2 will inevitably push traditional banks into the playground of fintechs and neo-banks. Strategically, it’s a dangerous place to be in for traditional banks, since most of them are not yet ready to compete with these new enterprises in their own ground. However, with the right invesments, such as APIs and open banking, banks are starting to develop the resources that’ll be a key part of the answer to long-term prosperity in an evolving and growing eco-system. Here are four key areas of cooperation and competition with fintechs and neo-banks that banks can explore in the course of their API/open banking strategy:

    1. Replace costly parts of the bank’s value chain with services provided by fintechs and neo-banks – this can reduce the bank’s cost structure and improve cost-to-income ratios;
    2. Increase the reach of the branch network through partnerships with non-traditional and specialized players (car dealerships, realtors, etc.) and increase the breadth of products by integrating specialized products from fintechs and neo-banks – this can increase share-of-wallet and sales;
    3. Provide OEM financial products and services, acting as the backbone for neo-banks – this can improve operating income;
    4. Traditional banks still have a lot of infrastructure that fintechs and neo-banks don’t have and do not want to have as it will hurt their business model. Banks can provide back-office services that are too costly for fintechs and neo-banks to develop – this can increase the interdependency of these players on the bank, mitigating the risk of their threat.

    III. Looking within for innovation

    It’s true that when talking about APIs and open banking, we usually address it from the standpoint of an outward-facing competitive advantage that can enable incumbents to compete and/or partner more effectively with fintechs. However, looking within traditional banks, we can also find areas where APIs and an open platform can help drive increased performance and efficiency.

    To be fair, through the years banks have made significant investments in IT and in services platforms, primarily driven by interoperability and modernization rationales. The problem with these approaches is that they have mostly been IT-led and for a long time there wasn’t really a great business justification for them so they weren’t typically discussed from the business standpoint as a key strategic investment. Where these investments occurred, banks are now taking a new look at their IT assets and resources and realizing that they are better off than they actually thought. Some of those past IT investments have become key in this new digital economy, particularly when it comes to simplifying business processes and products.

    Internal APIs are also key to driving innovation from within. They can work as a sandbox for internal development of ideas before external exposure to partners and others. In this area we see several banks hosting internal Hackathon events, pairing business and IT people in the development of new digital products and in the automation and simplification of internal processes. Internal innovation is key as the rate of change accelerates in the industry. Simpler processes, new innovative products, and a leaner organization will drive growth and efficiency for traditional banks. I believe that in the short term, we’ll see an increased focus in using APIs to build resilience into the banking business model, whether through innovative products and services, or through the ability to replace internal processes and services with external providers.

    [linkedinbadge URL=”https://www.linkedin.com/in/josealmeida” connections=”off” mode=”icon” liname=”José Almeidaos”] is digital advisor at Microsoft and this article was originally published on linkedin.

  • user 8:20 pm on July 16, 2016 Permalink | Reply
    Tags: api, , ,   

    The role of APIs in the unbundling (and rebundling?) of financial services 


    Constantly reinventing the wheel is a barrier to innovation

    We’ve added “aas” to so many functions and products, from Software to Platforms to Backend (there’s some joke to be made here, but I’ll refrain…). If you started building products or services in the last few years (like me), you might take for granted that you don’t have to reinvent the wheel every time you want to access basic infrastructure and functionality; you probably rely on AWS for hosting, and use a CRM in the cloud to keep track of your customers.

    But when it comes to , building products & services is still largely on-premise, and most product managers and developers are reinventing the wheel.

    Development and product teams can focus on what they’re good at

    Let’s say you have a great idea for a new savings app based on behavioral economics. To build an MVP and get your first 100 users on it, you’ll have to have a mechanism to move money and you’ll have to be compliant with KYC and AML regulations. Neither are easy tasks, and neither one is core to your product or competitive advantage. They’re simply table stakes for getting off the ground.


    APIs are the way to make viable financial ecosystems and the key to making Financial-Services-as-a-Service possible. A variety of well-designed, easy-to-integrate APIs will let you launch faster while staying focused on your product and customers. You may integrate Plaid, Dwolla, Twilio, or some combination of the three. Think of the developer hours you’re saving by not building those functions yourself.

    Big financial institutions can become platforms (the American dream!)

    On the other side, big financial services companies are also getting into APIs, and for good reason. They don’t just want to use the services, they want to be the platforms upon which those services are built and distributed. They want to be ecosystems. Be Apple, not Tidal.


    Without APIs, , and financial institutions are siloed. Few users want to process a payment through their bank or make a trade through an archaic brokerage online when they can use Venmo or Robinhood. But banks have trouble building this themselves — for one thing, as one of my favorite VCs put it recently, “banks think they’ve hired developers, when in fact, they’ve just built IT departments”. By embracing APIs, they can take advantage of innovation without doing it all themselves, by opening themselves up.

    Open platforms and initiatives are allowing bigger financial services institutions (e.g. BBVA, Capital One, Barclays) to have innovative products and services built off of their platforms, bring exciting experiences to customers, and get talented developers connected to their banks without completely renovating their core banking systems.

    [linkedinbadge URL=”https://www.linkedin.com/in/laura-spiekerman-7306065″ connections=”off” mode=”icon” liname=”Laura Spiekerman“] is the cofounder and CRO at Alloy, which offers an identity and onboarding API for financial services companies. To send feedback, questions, or simply connect with Laura: Twitter, LinkedIn, or email [email protected].

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