Application programming interfaces (APIs) are expected from any modern software solutions. They allow companies to integrate new solutions into their information systems and products more easily, enable easier, real-time data exchange and interoperability between different software, and give more flexibility to companies to adapt technologies to their specific needs. Most industries have embraced APIs for the software they rely upon.
However, many banks still do not have comprehensive API coverage for all the financial services they offer, particularly regarding payments, and rely on robust yet complex to apprehend connectivity channels.
It can represent a blocker for companies managing high payment volumes, especially fintech companies looking to build products on top of their partner banks that want to benefit from their robustness and access to payment schemes.
In CGI’s latest Transaction Banking Survey, banks’ business customers share various challenges and expectations regarding their banks’ connectivity. 59% are looking to improve the integration of their bank’s services into their systems. 51% declare that seamless integration of corporate-to-bank processes would improve their banking services. When integrating with a new bank partner, 52% of respondents cite file formatting issues as the biggest challenge, and 47% the ease of integration in their environment and processes.
Large companies using treasury management systems (TMS) and other cash management solutions can benefit from the built-in bank integrations these solutions offer when they exist for the banks they work with.
But often, these integrations are not end-to-end and will still require companies to export payment files from their TMS or equivalent and upload files on their banks’ servers. And vice-versa to collect account statements or payment status updates.
A wide offering of API connectivity across banks could enable companies to work with the tools of their choice with the banks of their choice and automate the cash management workflows they need end-to-end. 40% of CGI’s survey respondents reported automated payment remittance and receivables tracking would most improve banking services.
Fintech companies for which payments are core to their products cannot rely on solutions built for corporations. They are often left with no choice but to build their bank integrations with banks and the payment automation solutions on top of them. This is not an easy task. It increases their time-to-market and prevents them from integrating with multiple bank partners, which can represent a strategic risk in the current uncertain banking context.
While most banks still do not offer APIs for cash management channels or SEPA indirect participants, more and more do.
Digital native neo-banks like Qonto, Memo Bank, Starling Bank or Monzo do it for different types of audiences. Some new actors even specialise in offering fintech companies access to payment rails via modern APIs, such as ClearBank, LHV, or Banking Circle.
Some traditional banks are also catching up. In the US, J.P. Morgan is at the forefront of this trend. In Europe, however, options are limited.
While solutions exist for companies that want to connect to a bank via APIs, there are few. In a context where even well-established banks can undergo major difficulties, multiplying partner banks, both for safeguarding deposits and processing payments, is key.
In addition, strong banking relationships with traditional banks can ease access to financing and other financial services than payments. Working with a bank where you channel at least part of your payment flows helps build these relationships.
Of course, when discussing bank APIs, we need to discuss open banking APIs. Open banking APIs are the result of the Payment Services Directive 2 (also called PSD2). This directive mandates that banks should offer two types of APIs for fintech companies – and any other type of customer – to build upon:
Account information services APIs that enable third-party services to access a bank’s customer account information upon authentication from the customer.
Payment initiation services that enable third-party services to initiate payment from a bank’s customer account upon authentication from the customer
While a big step forward for many consumer applications, open banking APIs are not fit for companies managing large payment volumes, partly as the required strong customer authentication (SCA) prevents large-scale automation.
In addition, open banking APIs can be unreliable. In a report published in October 2022, API intelligence firm APImetrics noted significant differences in quality and latency among open banking APIs. Given that all players had to implement these APIs in less than three years, it is understandable that traditional banks operating on robust, proven, yet legacy systems could not achieve perfect implementations.
As discussed above, a key challenge for banks to build these APIs is that they sometimes rely on decades-old systems for their core operations, including payments. Furthermore, the interbank systems that allow money to flow between financial institutions and, ultimately, bank accounts are based on XML messages exchanged via not-so-modern connectivity channels. These systems are extremely robust and capable of processing payments at a very large scale. But it is complex to adapt them to modern APIs.
Banks are actually working on these topics, but it takes time. In a study run by research firm Aite Novarica, 28% of banks declared modernising payment technology represented a significant area of investment. But for 70% of them, integrating new payment products and services with legacy systems represents a technical challenge.
Rebuilding their entire core systems will not realistically happen in the next few years for traditional banks, and the interbank messaging systems might take even longer to evolve to newer technologies. But do they have to? Again, these systems are proven and robust. And customers’ expectations, both corporations and fintechs, are more on how they can connect to these systems to benefit from them than the systems themselves.
A viable solution for banks is to build APIs on top of their legacy connectivity systems. It would keep their core systems operating as they already do while providing companies modern ways to connect to them. The best of both worlds.
That is the approach we took at Numeral. Our API platform connects to banks’ existing connectivity channels while exposing modern APIs to banks’ customers. If you are a company looking to connect with a bank to automate payments, or a bank looking to offer API connectivity to your customers, contact us.