Open banking APIs: What are they, and how do they work?
Thanks to the magic of APIs, regulated third parties like Volt can initiate payments, or retrieve information, directly from a shopper’s bank account. But what exactly are APIs, and how do they work?
API stands for ‘application programming interface’. These interfaces, made up of codes and protocols, enable one software type to connect and share information with another. When you log in to Airbnb via Facebook, for example, Facebook’s API tells Airbnb which user is signing in.
APIs hold the keys to open banking
When PSD2 took effect in 2018, banks in the European Economic Area and the UK were required to create APIs that securely open up their customers’ data to third parties – hence ‘open’ banking. This enabled these third parties to provide customers with payment initiation or account information services (PIS and AIS).
PIS: Granting permission to a regulated third party to initiate a payment to a merchant directly from your bank account.
AIS: Granting permission to a regulated third party to retrieve information from your bank account (so a merchant can assess affordability, for example).
This is good news for everyone. For end users, it means being able to take advantage of services or apps that make their financial lives easier. For third party providers (fintechs), it means creating and monetising these services. For banks, it means staying ahead of the curve because they’re partnering, not competing, with fintechs.
Explosive growth of API calls
Data shows that these benefits are being realised at impressive speed. In the UK, the Open Banking Implementation Entity (OBIE) – which sets the standards for bank APIs in its jurisdiction – records successful API calls (in other words: when a third party provider requests data from a bank) month on month. The growth rate is startling.
In January 2021, there were almost 708 million API calls – nearly 23 million a day – made by third party providers using bank APIs. Remember, this is just the UK. By January 2022, there were over 847 million (over 27 million a day). In April 2022, the most recent month on record, there were almost 975 million (32.5 million a day). That’s a growth rate in excess of 40%.
APIs and open banking adoption
While APIs are evidently sparking a sea change in how we move and manage money, it’s worth bearing in mind that they aren’t built to drive adoption. They’re simply the means by which a third party provider can access banks’ customer data to provide a service. Adoption itself is dependent on:
- The reliability of bank APIs, which isn’t a given considering there’s no single global standard
- Third party providers creating reliable services that people want to use
Across Europe, industry bodies like the OBIE are few and far between. As a result, the quality of bank APIs varies across different countries. The obvious knock-on effect is that third party providers find it challenging to provide reliable, scalable services that offer end users a consistent experience.
Aggregating the aggregators
At Volt, we’ve addressed this problem by aggregating bank APIs – and, indeed, aggregating the aggregators – to provide merchants and payment service providers with a single API connection. It’s unique because it offers multiple connections to bank APIs in multiple territories.
What does this actually mean? First, that the payments we initiate are more likely to convert. Multiple bank connections means no single point of failure (we actually ‘smart route’ payments not just for resilience, but for speed). Second, that we can go some way to standardising the open banking payments experience – such is the reach and consistency of our network.
It’s not, however, a case of just providing a single API. A ‘successful’ API call can fail in practice, so for us it’s about how merchants use it. What does it enable them to do? We ‘productise’ our API to create seamless payment processes that use all relevant features of a given bank API – to deliver maximum benefit for merchants. It all boils down to our core mission: the creation of the world’s first real-time payment network. We can only do this by operationalising open banking payments to their full potential. And, while we’ve come a long way already, we’re only just getting started.