INDUSTRY PERSPECTIVE
OPEN APIs PRESENT
FINANCIAL
INSTITUTIONS WITH
CHOICE AND A
STRONG BUSINESS
OPPORTUNITY
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Would you rather your financial company be similar to Ma Bell in 1984 or Google in 2016 - technology dinosaur
or innovator? That’s the essential question faced by North American financial institutions today as they consider
the choices and opportunities presented by open application program interfaces (APIs).
In 1984, the Bell Telephone Company
(a.k.a. “Ma Bell”) had a monopoly on
fixed-line phone service in the U.S.
and Canada, characterized by high
prices, poor customer service, creaky
infrastructure and a myopic business
model focused on maximizing the perminute charge on every phone call.
Phone service was a known quantity,
delivered and used in almost the same
way as when Alexander Graham Bell
founded the company in 1877. But
then, in 1984, everything changed.
U.S. federal regulators broke up Ma
Bell, opening up the whole sector
to competition from new, more
nimble startups (like MCI and Sprint),
which in turn, pushed the envelope
in innovation through pricing (MCI’s
low per-minute pricing and loyalty
programs), packaging (bundling phone
service with cable and Internet) and
technology (Sprint’s all-fiber network).
Eventually, openness and competition
spurred innovation in internet and
mobile phone services, paving the way
for a whole new digital ecosystem. The
result? The emergence of some of the
largest, most successful companies
to date, including Microsoft, Apple
and Google. And today, the delivery,
devices, packaging and pricing for
phone services look nothing like they
did in 1984 (never mind 1877).
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HOW HAS THE ADVENT
OF OPEN APIs CHANGED
THE FUTURE OF THE
BANKING INDUSTRY IN
NORTH AMERICA?
Like the old telecom industry, banking
tends to be characterized by high
prices, less-than-stellar customer
service, creaky infrastructure and
closed-system business models that
haven’t changed much in decades. It’s
locked in an analog world of siloed
departments, legacy infrastructure,
stilted fee structures and inflexible
payments schemes that (far from
being immediate) move on the order
of days, weeks or even months in
some cases.
Open APIs promise to shake all that
up. Just like the breakup of Ma Bell,
open APIs are the catalyst that will
accelerate innovation and enable a
wide variety of companies – from
fintechs and start-ups, to savvy global
banks, payment processors, global
merchants and credit unions – to
become strong players in the emerging
world of digital finance. Already,
the nascent open API experiments
performed by large forward-thinking
financial players like Citigroup, BBVA
Compass and Capital One are sparking
new ideas around pricing strategy,
financial product packaging and
payment technology, as well as new
business models that we are only just
beginning to get a glimpse of.
While no one knows where open APIs
will lead five, 10 or even 15 years down
the road, it’s certain that the payments
world – and its most successful players
– will look nothing like they do today.
The question now is: Will you and
your financial institution be ready and
remain competitive?
WHAT ARE OPEN APIs
AND HOW CAN THEY HELP
PAYMENT PROVIDERS BE
MORE EFFICIENT AND
INNOVATIVE?
Conventional APIs have been used in
other sectors, including banking, for
years to integrate disparate products
and services and enable them to
communicate and interact to develop
new functions and capabilities. In the
past, many businesses developed
APIs to provide partners and other
third-parties with access to internal
programs, but these were basically
one-to-one purpose-built connections
that required lengthy development
cycles, strict non-disclosure
agreements (NDAs) and more, just to
get up and running. Each time a new
business partner needed access, a new
API would have to be created.
However, open APIs, as the name
suggests, are designed to make
sharing easier by streamlining the
process, enabling any business to build
a single API to expose key functionality
and then publicly publishing its
availability so that anyone can use
it - no proprietary interfaces or NDAs
required. Open APIs significantly
accelerate the innovation process
because they go beyond simple oneto-one communications and instead
provide partners with true access
to the underlying code and also the
freedom to build upon it in any way
they see fit. While financial institutions
won’t be at this extreme of the open
API scale, the opportunity is there to
extend access to services and solutions
beyond their current reach today.
A good real-world example is Google’s
Android. Google created the mobile
operating system and platform, but
then made it publicly available for any
interested company or developer to
build on. In addition to a raft of mobile
phone makers like Samsung, HTC and
even BlackBerry, the Android-based
ecosystem exploded and now includes
everything from point-of-sale (POS)
systems and home security wares,
to TVs and car-based infotainment
systems.
HOW ARE OPEN APIs
DIFFERENT FROM
“SCREEN SCRAPERS?”
Open APIs differ hugely from today’s
finance-focused “screen scrapers,”
where static information is copied from
an account and shared between one
partner and another. Certain personal
financial management tools and credit
scoring apps use “screen scraping”
technology to pull static information
in from several financial accounts,
organize it and then ‘display it back’ to
help consumers gain better insight and
control over their finances. To make use
of the information presented to transfer
money or pay a bill, however, users
must log out of the “screen scraper”
and into a separate banking or bill
payment gateway – hardly a hassle-free
customer journey.
Open APIs, on the other hand, actually
provide access to the actual application
or solution in a way that could let
approved partners use the data and
information to perform new functions,
create new applications and deliver
new services. In other words, with
a service built using an open API, a
customer can log into their account on
a third party site or app, decide to pay
a bill from a financial account held at
a different institution, hit a button and
have their money move instantaneously
- no extra login required.
WHY IS IMPLEMENTING
OPEN APIs A PRIORITY
DESPITE PSD2 NOT BEING
ENFORCED IN NORTH
AMERICA?
Unlike Ma Bell in 1984, regulators
aren’t forcing North American financial
institutions’ hands with respect to
open APIs. There is no big regulatory
mandate, like there is in the EU, where
the revised Directive on Payment
Services (PSD2) is scheduled to take
effect in 2018 (see ACI Worldwide’s
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PSD2 whitepaper). While some larger
multinational banks will find their
businesses falling under the PSD2
regulatory umbrella, the majority of
North American financial institutions
can decide for themselves if, when and
how to make the move to open APIs.
As they make this decision, however,
they should keep in mind that
competition continues to drive the
sector and the financial landscape is
changing fast. If they don’t change
along with it, and take advantage of
the opportunities afforded by open
APIs to transform their business and
succeed in the new environment, they
run the risk of being left behind.
WHEN DO FINANCIAL
INSTITUTIONS HAVE TO
START THE PROCESS OF
IMPLEMENTING OPEN
APIs TO STILL REMAIN
COMPETITIVE?
Like Ma Bell and its reliance on perminute call fees, many financial
institutions and card processors today
are organized around maximizing pertransaction fees, primarily via credit
and debit card swipes. Unfortunately
for them, those fees continue to
decline, forcing many to chase volume
as a way to prop up their business and
stay afloat.
As open APIs take hold and more
players enter the market, this continual
quest for new customers will become
increasingly difficult to sustain – just
when per-transaction fees begin to
hit zero.
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Consider a merchant who can build
upon an open API to enable and offer
a new form of direct debit payment.
When consumers make a purchase
using the new payment instrument, the
transaction is settled right away and no
minimal per-transaction fee is involved,
saving the merchant anywhere from
1 percent to 3 percent vs. a typical
credit card payment. Merchants that
pursue such a strategy will soon find
that they are able to pass their savings
in transaction fees on to the consumer,
through direct savings or loyalty
offers, lowering prices without taking
a corresponding hit in revenues. Over
time, they will see both store traffic
and revenue increase significantly,
covering their development costs while
strengthening their business.
For the bank or card processor
supporting that merchant, a change
in the operating model is needed as
the current swipe model is replaced
with a data-driven direct connection
in the above scenario. With more
data directly available to the bank or
processor, the opportunity is there for
new solutions. The question now is
will they seize the opportunity, or be
displaced.
WHAT HAPPENS TO A
FINANCIAL INSTITUTION’S
OLD PAYMENT OPERATING
MODEL IF THEY CHOOSE
OPEN APIs?
The good news is that they don’t
need to be displaced, just updated,
to compete in the digital age. By
implementing open APIs and fostering
partnerships with a widening variety
of financial (and non-financial) firms,
financial institutions will be able to
break away from the analog-world
limitations of per-transaction fees
and instead pursue new business
models that have far better chances at
succeeding and prospering in the appdriven digital age.
WHICH TYPES OF PAYMENT
PROVIDERS CAN BENEFIT
FROM IMPLEMENTING
OPEN APIs?
RETAIL BANKS AND PROCESSORS
Consider the opportunities for retail
banks or processors to use open APIs
to link directly from a customer’s
account to their other service
providers, such as the electric or
gas company, online music service,
coffee shop and more. With such an
infrastructure in place, the bank or
processor can offer its consumers the
ability to make payments “just-in-time,”
and in real time, perhaps enabling
them to pay a bill online at 11:59 p.m.
the day before it’s due. Consumers
would be able to keep and use their
money until the last second, but still
not be at risk from being hit with a late
fee. What would a consumer pay the
bank for providing such a fast, simple,
convenient service?
Or think about the options for pricing
and packaging. Perhaps premium
customers would receive the “justin-time” bill payment service for free,
Level 1 customers would get two
transactions per month gratis, but pay
50 cents for each one after that, and
so on.
COMMERCIAL BANKING
OTHER FINANCIAL INSTITUTIONS
Similar services could crop up in the
commercial banking world as well.
Imagine using open APIs to give a
small business customer the choice
of dropping the old system of biweekly or monthly payroll, and instead
pay employees on an hourly basis,
deducting funds and depositing them
in the employee’s account in realtime. What would that small business
pay for such a service that enables
it to better manage its cash flow
while lowering turnover by keeping
employees happier and loyal?
Open APIs also present real
opportunities for financial institutions
to improve the way they do business
internally. Once siloed infrastructure
and business processes are opened
up via open APIs, banks have the
opportunity to rethink the products
and services they offer, enabling
formerly separate lines of business to
better communicate and collaborate
with each other and deliver
consolidated innovative offers.
Perhaps such a service could extend
to large corporations, enabling them
to pay a supplier within an hour of
receiving an invoice. What kind of
a discount could that corporation
extract from a supplier to participate
in such a service? And what kind of
premium could the enabling bank
charge for delivering this capability?
Consider how an internal loan
department that is able to build out
a set of open API calls into multiple
credit score and social score validation
companies can enable faster, more
accurate loan decisions than the
typical single point validation today.
That in turn, would increase the
number of loan candidates that
receive straight-through processing,
freeing up loan officers to focus on
higher-return activities.
The opportunities for a financial
institution to rethink its business would
actually accelerate as a result of the
implementation of open APIs.
WHAT ARE THE POTENTIAL
PROBLEMS THAT
FINANCIAL COMPANIES
MIGHT FACE WITH
IMPLEMENTING OPEN
APIS?
In the real world, several hurdles
currently stand in the way for most
financial institutions looking to
successfully embrace open APIs and
transform their businesses. These
include everything from legacy
infrastructures and vague governance
models to a lack of holistic, strategic
thinking.
For example, most banks use complex
core banking systems that have
evolved over time with a variety
of bolted-on solutions and less-
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than-elegant technology schemes.
Revamping those legacy systems to
get the right data exposed in the right
way in real time will be both costly
and fraught with risk, since anything
less than real-time insight into what’s
happening in accounts serviced by
third parties will leave them exposed.
In addition, banks are not only
notoriously slow to innovate, but they
are also often heavily segregated,
making the required cross-functional
push into open APIs difficult at
best. For example, who in the bank
is responsible for defining and
creating the open APIs? Is it the same
group charged with publishing and
marketing them? Who is responsible
for maintaining the open APIs and
evolving the resulting business models
over time? Is it the core banking team,
the payment software team, some
other division? Which department’s
budget will all this come out from?
Many will find it difficult to manage
such a complex governance process
across three or four internal teams,
all of which claim to have superior
knowledge on the implications of
implementing open APIs.
Finally, a lack of long-term, strategic
thinking plays a role. Many financial
institutions know that while their
customers may become enamored
of an innovative product or service
offered by a startup or competitor, few
are likely to consider unwinding their
entire financial relationship built over
the years just to try it out. Considering
how entrenched some customers are
in terms of automated bill payments,
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card-on-file services, direct deposit
payroll and more, the new entrant’s
offer would need to be very “shiny”
indeed to force a switch.
However, while that may be true
for well-entrenched customers,
what about the emerging millennial
generation or the coming-of-age of
Gen Z? Those “digital natives” are
just starting their financial lives. The
average 20-year-old doesn’t have
much of a financial relationship to
unwind, giving them far more choices
when it comes to choosing a financial
partner for the long term – and we all
know how much “lifetime customer
value” is touted at every management/
strategy meeting we attend.
Already, many use options like Quicken
Loans or Kickstarter to finance their
next car or business idea vs. going
to a traditional institution that takes
longer for loan approval and has the
potential for them to be penalized
with a high rate due to their lack of
financial track record. We also know
that millennials are the “in a rush for
everything” generation, where if you
can’t get it right now, then it isn’t
the right solution. In the world of
open APIs, what’s to stop them from
choosing a company that offers them
not only basic account services, but a
flexible, simple, just-in-time payment
option, instant merchant rewards and a
dashboard that lets them monitor their
entire financial life in one quick glance?
Once again, the parallels with telecom
come to mind. How many people
under 30 still use landline phone
service today, especially if it isn’t part
of their cable TV offering? How many
still haven’t cut the cord?
HOW CAN CHOOSING
OPEN APIs SET UP YOUR
FINANCIAL INSTITUTION
FOR A COMPETITIVE
FUTURE?
The acceptance of open APIs in
financial services is a rare opportunity
for banks to look holistically at their
strategy and really hone in on what
they want to achieve today and over
the long term. Do they just want to
continue along the analog road to zero,
or do they want to take advantage of
the emerging digital environment to
rethink and grow their business?
For new entrants, the choice is clear.
The best strategy is to embrace open
APIs and platform banking, accelerate
innovation and ensure they evolve
their business model along with the
changing digital environment.
For entrenched players, the choice is
more difficult. Embracing open APIs,
replacing siloed legacy infrastructure,
opening up core banking systems
to third parties, putting the right
governance in place and truly
transforming their business models
will not only be difficult, expensive
and time-consuming, but it will require
unprecedented focus and buy-in –
from the C-suite and top business-line
management, to the most far-flung
customer-facing admins and isolated
back-office staffers.
It will also require a strong technology
partner that is well-versed in today’s
legacy banking challenges, as well as
the opportunities inherent in open
APIs and tomorrow’s digital financial
landscape.
WHO CAN HELP MY
FINANCIAL ORGANIZATION
WITH OUR OPEN APIs
STRATEGY IN NORTH
AMERICA?
At ACI, we live and breathe payments.
It doesn’t matter whether you are a top
five bank, a small local credit union,
a start-up or even a non-financial
institution looking to become a thirdparty payment provider, we have the
expertise to ensure you can succeed
in this new open API environment. We
know financial systems inside and out
and are focused on helping all industry
players succeed by increasing digital
transactions, pumping up volume
– and growing revenues. Whether
that’s through BASE24, which enables
true real-time stand-in processing to
insulate legacy core infrastructure
from the demands of open APIs and
digital payments, or through our UP
Framework, which is built from the
ground up to ease the move to open
APIs by exposing key banking business
services in precisely the way API
gateways require.
We can leverage our deep, broad
expertise and long proven payments
track record to help ensure your
business makes the right choice
and is best positioned to exploit the
opportunities open APIs represent.
Make sure your financial institution
doesn’t get left behind and stays
competitive. Learn more now at
www.aciworldwide.com
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ABOUT ACI WORLDWIDE
ACI Worldwide, the Universal
Payments — UP — company, powers
electronic payments for more than
5,100 organizations around the world.
More than 1,000 of the largest financial
institutions and intermediaries, as well
as thousands of global merchants, rely
on ACI to execute $14 trillion each
day in payments and securities. In
addition, myriad organizations utilize
our electronic bill presentment and
payment services. Through our
comprehensive suite of software and
SaaS-based solutions, we deliver realtime, any-to-any payments capabilities
and enable the industry’s most
complete omni-channel payments
experience. To learn more about ACI,
please visit www.aciworldwide.com.
You can also find us on Twitter
@ACI_Worldwide.
www.aciworldwide.com
Americas +1 402 390 7600
Asia Pacific +65 6334 4843
Europe, Middle East, Africa +44 (0) 1923 816393
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© Copyright ACI Worldwide, Inc. 2016
ACI, ACI Worldwide, ACI Payment Systems, the ACI logo, ACI Universal Payments, UP, the UP logo, ReD, PAY.
ON and all ACI product names are trademarks or registered trademarks of ACI Worldwide, Inc., or one of its
subsidiaries, in the United States, other countries or both. Other parties’ trademarks referenced are the property
of their respective owners.
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