The global economy, brought to you by APIs
Roberto Medrano, Akana: PSD2 is a great example of how the EU is encouraging a pairing of technology innovation with market opportunity.
The Brexit unrest aside, Europe is taking initiatives to make a sounder, more user-friendly economic landscape. By using technology solutions and digital innovation, the European Union (EU) is encouraging greater transparency, usability and higher standards of security for all manner of web-based banking and financial transactions.
Irrespective of any governmental re-organisation, and the trickled-down impact to markets, some of the EU’s advancements will lead to improvements in how organisations and society work, and it’s encouraging.
The Revised Directive on Payment Services (PSD2) is a perfect example of how the EU is encouraging a pairing of technology innovation with market opportunity, with the goal of opening up more financial institutions to be able to interoperate, share data and make users’ lives easier. It is a sensible directive that will change how the world conducts business, and it is creating opportunities for technology companies that provide the connective tissues among applications, data repositories, and other sources of information.
Application programming interfaces (API) are the primary component in the PSD2 strategy because they are, by design, built to connect multiple applications to create incremental functionality. Because they are so important to PSD2, APIs will enable banking, financial services and insurance companies, as well as other organisations, to drive billions of units of currency across the globe, all in a PSD2-compliant manner.
The significance of PSD2 is that it will connect financial organisations to provide a better experience for all in the financial ecosystem. Any financial institution that wants to conduct business with European banks, brokerages, insurance firms, or any company or government group that handles financial data, will have to comply with the PSD2 framework in order for their data to be shared and used. It promotes an openness not normally seen among the banking industry, and because it leverages innovative technology, it is unique in how progressive it is.
At its core, PSD2 is about enabling payments. It will create a shared, common experience for both banks and users that ensures data protection and customer privacy. It is based on common standards that encourage sharing of information between and among account information service providers (AISPs) and payment initiation service providers (PISP). Think of the bank as the AISP and the goods or services provider as the PISP.
The access to accounts and payment information is provided by the Access to Accounts (XS2A) rule. This is the heart of what PSD2 actually does, because it requires service providers to offer APIs that enable the sharing of user and account information. With that information, digital payments and transactions can happen and be PSD2-compliant. APIs are the conductor of all these transactions and the objective for financial institutions right now is to develop and implement APIs that will be secure and agile. APIs will be put to use in every situation where banks must share data.
This may sound like fairly rudimentary stuff; isn’t that how any transaction works with Amazon, eBay or any online store right now? Well, yes it does and anyone familiar with making an online transaction probably won’t notice any change in how they interact with commerce and banking applications. Yet, for banks, the change creates a network effect of interoperability, which is both scary (it requires a lot of work), but also delivers huge opportunity.
PSD2 removes friction and layers of middlemen who charge transaction fees for delivering customers, or in some cases are black hats intent on using a fractured system to dig a hole into highly valuable customer information. PSD2 also forces banks to wrap their transactions in strict security protocols, which is intended to prevent hacks and more closely track interactions among banks and users.
Without the right API architecture that adheres to the constructs of PSD2, and is open to the specifics of individual financial companies, doing business with, or in, Europe will be impossible. If payments cannot be initiated or accepted, if customers cannot be granted necessary access, and if banks are unable to develop innovative and marketable solutions to deliver to customers, they will be essentially cut off from a region that accounts for roughly 24% of the world’s economic activity.
In a sense, the global economy is being carried into the new digital financial economy on the back of APIs. It’s an interesting thought, but also quite accurate because there is no other technology that can perform all the tasks that PSD2 requires. Banks have received a huge push in the direction of digital innovation because of APIs, yet while the emphasis used to be on institution-to-institution transfers, APIs now make it possible for applications to interact and share among multiple banks and users. The result is the same: the AISP provides information to the PISP, or, someone pays and someone else gets paid. The increasingly complex nature of how this is done is made much more convenient because of APIs, which are conducting all that data and user involvement.
PSD2 will cause disruption and a great deal of work for any financial organisation that wants to operate in Europe, and that’s pretty much all financial organisations. Yet, unlike Brexit or attempts to regulate economic activity, this is the right kind of change. This directive creates a mesh of connectedness that, with the help of APIs, will change how information is connected, shared, secured and created across Europe and throughout the world.
By Roberto Medrano, executive vice-president, Akana
