APIs, open banking and the changing face of financial services

Application Programming Interfaces, or APIs, are the lingua franca of open banking.

Data makes the world go round

Without APIs, the various fintechs, banks and other financial institutions looking to tap into the possibilities offered by open banking would not be able to communicate with one another.

APIs also hold substantial advantages for the consumer as well as financial institutions, and their usage across the industry has been increasing over recent years. But despite this, the move to open banking has taken some time, albeit boosted by the Covid-19 pandemic.

Steve Everett, managing director and head of payables and receivables at Lloyds Bank, says that while open banking has been a “really positive development” for the UK’s corporates, adoption has been slow.

But the UK is now seeing significant growth in its use. Since Q1 2020, the number of open banking payments has increased by an average of 365% every quarter.

Which is good news, believes Everett, as “ultimately, it will be the combination of open banking frameworks, APIs, cloud technology and instant payments that will continue to spur real innovation and growth.”

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The global pandemic has played a substantial role in boosting the adoption and proliferation of open banking and APIs in the financial services sector. But how many of the various changes and developments will be permanent, at least in the medium-term, as we return to ‘normal’?

Everett quotes research conducted by Lloyds Bank that suggests more than three-quarters of senior leaders in UK financial institutions said that technology, automation and digital investment are a top strategic priority for the year ahead.

And when asked what their top technology investment priorities for 2022 were, the same proportion said APIs were at the top of their list.

“The pandemic has fundamentally accelerated a shift to digital for businesses across the UK, and the financial services sector is no different,” Everett notes.

An increasingly digital environment and growing consumer expectations for end-to-end digital journeys is certainly behind the investment and attention towards APIs, which offer speed, convenience and flexibility.

New normal

So, while the pandemic has certainly incentivised a digital-first approach from financial institutions, in which APIs play an integral part, much of the pivot to online is here to stay.

For example, the charity sector has been hit hard by the pandemic, with face-to-face fundraising put on hold and, subsequently, donation levels reduced considerably.

Mental health charity United Response has utilised Lloyd’s PayFrom Bank Solution which uses API and open banking technology to let people make donations straight from their bank account online, without the need to enter any payment details.

“This significantly streamlines the process for donors and helps the charity to cut costs and deliver nearly instant settlement of funds,” Everett says. The solution runs through the UK’s Faster Payment service, meaning there is also no need to pay a percentage of each donation in card processing fees.

As APIs allow banks to communicate with fintechs, just how much of a threat, or opportunity, are the adoption and use of APIs and open banking to incumbent banks? What exactly do banks stand to gain, or lose, from the sharing of data with more nimble upstarts?

“APIs and open banking have huge potential to deliver better user experience for customers and help solve payment pain points, and banks and fintechs each have a role to play in making this potential reality through new services and propositions,” Everett believes.

Better together

While these financial institutions and fintechs can achieve this independently, there’s a lot to be said for partnerships.

Partnerships can help banks accelerate the adoption and development of new tools and propositions, which reduces both the cost of change and time to change. Conversely, fintechs can benefit from the significant scale and test opportunities that a large bank can offer.

If investment is a barometer of the level of cooperation that exists between incumbents and upstarts, then the signs are good.

Recent research from Lloyds Bank found that more than two fifths — 46% — of financial services firms plan to grow investment in their fintech capability through acquisition and partnering in the next year, compared with a third — 32% — in 2020.

While APIs and open banking aim to offer benefits for institutions and customers alike, the shift to open banking in the UK had originally been somewhat slow. But the pandemic has turbocharged adoption of digital channels in financial services, creating a surge in usage of APIs and further adoption of open banking.

Some things may return to pre-pandemic normality, but the pivot to open banking and the need for APIs looks set to be the new normal.