Open APIs have revolutionised mobile technology, and regulators would like to apply the same principles to the financial services industry to make it more open and competitive. The European PSD2 Regulation and the open banking standards will require banks to offer access to account balance and payment initiation services to authorised third parties via APIs. Steen Jensen, MD Europe, Temenos, examines how banks can leverage the exciting opportunities enabled by ISO20022 standards and the advent of APIs in payments.
The importance of standardisation
Application Programming Interfaces (APIs) are the interchange by which customer-centric products can be built. The opportunities are ripe, both for established banks and for contenders in the space. But this exciting new world is not, thankfully, a free for all.
Without standardisation in this new landscape, each bank could potentially design its own implementation. Whether service aggregation or downstream compatibility with back-office systems, the potential for data to be misinterpreted or corrupted as it flows through the financial system would be great, meaning an increase in risk and cost for enterprises.
Several organisations have looked to standardise APIs for banks, with many referring to ISO 20022 as the standard to be used for data exchange. This follows a logical evolution as the financial industry has been progressively adopting the ISO 20022 messaging standard over past years in order to deal with increased compliance and data demands. In the next five years the standard will dominate high-value payments business, supporting 80% of the volume and 89% of the value of transactions worldwide.
ISO20022, APIs and the opportunities for banks
So that is the standard; now to the opportunity. Through the power of APIs, banks are part of a wider ecosystem. Thanks to open banking, many customers can already see the balances that they hold with other financial providers. By adding real-time payments into the equation, the bank becomes more than an information provider; it becomes useful and both retail and corporate customers are able to quickly balance their funds.
From an ISO20022 perspective, corporates can benefit as a means to simplify and standardize their treasury operations. Multinationals may benefit the most, especially those with operations in Europe given its pan-European SEPA payments system based on ISO 20022 and now from an API perspective. Specific benefits cited by corporates that have adopted ISO 20022 include: lower information technology support costs; easier maintenance and troubleshooting; increased straight through processing and visibility into cash balances globally; and mobility of cash across banks and regions. A bank that uses an agile payment system that is based on the ISO20022 colonical format built on open architecture is seen as smarter and more in tune with the times. This increases the loyalty factor and pre-empts cross sell and marketing opportunities.
In this respect, banks have a massive advantage over contenders in the space. On the surface, new players may have the ideal platform for the new digital world – free from a rigid infrastructure and data silos. But what they don’t have is rich customer data, and decades of customer trust. But that goldmine cannot be opened without technology: specifically, a payments software platform. So how can banks prepare for the journey?
We know from the experiences of those who have made a head start on their payment transformation journey that a payment systems investment case must compete with others from across the organization. Modernisation, for payments or otherwise, must be balanced against the need to stay compliant for example. Yet modernise they must, else be left behind. As a result, a payments systems transformation should address a range of business priorities, so it pays to widen inputs across departments and roles. Here banks should dig deep into the ways that real-time payments will increase operational efficiency, and provide flexibility for the future. Be prepared to scale up / down the investment pitch as required: a flexible business case framework allows all stakeholders to evaluate the potential outcomes under different scenarios.
Pick smart partners
With APIs, financial institutions are in a great position to innovate within their product line. After all, who knows the customer better than the bank? By coupling the expertise of new partners, specifically those with analytics / machine learning expertise, banks may work with the payments software provider to leverage the data within their customer and corporate base to deliver a personal experience akin to those provided by the likes of Google and Facebook. Thinking holistically can help here too. Does the institution have assets in another territory that can be leveraged? Pre-existing technology or apps? Resources with skills in cloud or machine learning, for example?
Prepare for agile delivery
After years of maintaining and updating on-premises systems, the move to real-time payments software may come as a sharp shock. The best real-time payments solutions are aligned with the real-time environment, so will likely favour a monthly release cycle supporting an app over quarterly milestones. Investing in an experienced interim software delivery team to deliver and manage the initial move to the payments system may be a wise move that pays off in the longer term.
The move to a real time payments environment will, by its very nature, replace the work involved in stock roles such as batch payments processing, so banks should prepare for redeployment of roles and plan informed conversations with staff. The move to a real-time payments hub may well be coupled with a move into a cloud environment too – freeing up further resource in IT that can be used to support a new development environment.
Build out the ROI model
Combining holistic thought with an ROI model will provide stakeholders with a reliable, consistent approach to test business scenarios, thus accelerating the effectiveness of the business case and resulting decision-making process. A discounted cash flow (DCF) technique enables stakeholders to calculate the financial impact of the project over three different factors. This is the time for banks to put numbers into the machine.
- How much are you paying people to manage your on-premise systems? Could this be achieved more effectively with a cloud infrastructure?
- What is the value of deploying resources into new digital roles?
- How much are you spending on direct clearing and agency banking revenues?
- What is the financial benefit of new/better products and services?
- What are the expected customer experience and service improvements? A reduction in complaints,or an improvement in Net Promoter Score?
If you would like advice on moving to payments transformation, APIs or real-time payments, plus guidance on our ROI model, please contact [email protected]