Open banking APIs vs. Commercial APIs

Open banking APIs vs. Commercial APIs
Open banking APIs vs. Commercial APIs


There is a long-standing debate in the financial development community, as open data trading platforms offer a tabula rasa which puts large entities and small startups at the same entry level. Open banking "is set to be the most seismic shift in financial services since online banking," according to Dankse Bank.

As this reality takes shape, most strategies focus on commercial APIs and solutions that change from entity to entity. Commercial APIs are here, and it doesn’t look like they’ll be going anywhere in the next few years, despite the mass arrival of open banking APIs.

Commercial APIs will continue to be needed to operate with entities outside the regulatory framework that requires open banking APIs to be implemented. Most financial companies are adapting or have already embraced open banking systems, but commercial APIs will remain the most important in the short term. “Forward-looking banks will start opening application programming interfaces as a competitive tool to collaborate with their corporate clients,” according to a recent study by Aite.

Two-thirds of the customers consulted by the group state that they are placing “high priority” on working on APIs for real-time payments and 29% state that they are working on managing cash deposits through programmatic software with the same level of urgency and prominence.

Support and service availability are key factors. Although banking systems allow collaboration, many companies may choose to continue to opt for existing and familiar commercial solutions. In critical infrastructure or those whose operations are expensive to maintain, many will not be able to afford to adopt new open banking systems until it is not legally imposed or a serious financial risk.

“Many financial institutions and important infrastructure players rely on older computing systems that limit their ability to implement and manage new technology such as APIs,” according to the Center for Financial Services Innovation (CFSI) in the United States. This fact could be one of the reasons why some large institutions, especially outside Europe, would keep their eyes open to well-known commercial services. This will keep the commercial APIs among us for an indefinite period of time when open banking arrives with its APIs.

According to Ahmed Badr, Head of Legal at one of the UK’s largest financial startups, some large institutions could push to limit access to the status of the accounts. For the CEO of Klarna, Sebastian Siemiatkowski, all this means that open banking would subsequently need new regulations to take-off. “The current law [ referring to PSD2] will not allow open banking as it was originally envisaged.”

Many decision-making chains will prefer to be able to pay extra for existing commercial services without having to worry about adopting new protocols, maintenance systems, education and hiring staff. Especially if the current commercial system “keeps running” and customers remain skeptical about the new framework. “Two-thirds of consumers in the UK say they won’t share their financial data with a third party,” according to Accenture. Even though each access would be regulated and personally approved by the customer.

This does not mean that open banking will not have a profound impact on all financial companies worldwide. Once their competitors can lower costs by using the same set of rules to interoperate between them, the parties that continue to exclusively or mostly use commercial APIs will be at a competitive disadvantage. “[In the United States] we are far behind in terms of the regulatory framework compared to the UK’s open banking standards,” admitted Jean Donnelly, of Boston-based Sandbox. They will continue to be not only at a methodological level in the future; postponing an adaptation or migration, but it will also be increasingly difficult to find work talent willing to continue working on commercial systems.

But access to data or the exchange of data that homogenizes open banking systems is only the first step. The decision and choice of storage platforms and data management security measures may make many companies prefer to continue to manage this issue through existing business systems.

In this case, the irony could be that an entity or platform uses a commercial API from a platform that interconnects with the rest of the world through open banking APIs. For these companies there will be no major operational changes a priori. But as time passes, they’ll have to adapt.

Each quarter that passes without adapting to the systems and methodologies of open banking and its APIs, the clock will be ticking. Each year, the pressure and difficulty of making the leap will increase as competitors, suppliers and customers who have previously adapted to open banking APIs will enjoy their advantages and lower costs. “It’s a battle between the banks and the banking data aggregators,” states Donnelly.

Finally, almost no financial system is monolithic. “Banks need to decentralize their internal structures and open their eyes to external opportunities to source components of their value chain through APIs,” explains Chris Skinner, independent financial market analyst. All rely on interconnections to multiple platforms. When several of these “arms” operate with open protocols and APIs, the system will have to adapt. At that time, the same entity will be divided between open and commercial systems, but under pressure to add resources to open systems. Financial institutions “need to gradually identify what to replace, when. There’s no big change here, but lots of small swap-outs.” According to Skinner, who points out that for 10 years there will be a gradual shift from monolithic systems and current systems to a world of pure financial APIs.

This pressure will cross all links of the financial industry and could cause a chain reaction in favor of open banking. By then, adapting to new open methodologies will be like a game of musical chairs, where the music will stop by surprise and those who are left standing will be the big losers. 


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