Modern payments and banking APIs

Modern banking is not limited to banks anymore. It’s not only about online or mobile banking, it’s about all the things you would do in your banking system, but now you can do in apps or other solutions provided by third parties, not banks. Payments are one of such functionalities.

For years, if you didn’t want to pay with cash, you could use either cheques, credit/debit cards or wire transfer. With the dawn of e-commerce a need for easy, fast and reliable payments emerged, and the answer came from PayPal. Their solution was innovative, simple, and secure. But PayPal was limited to online shopping, so it couldn’t work as a cash replacement in everyday situations.

Mobile revolution opened new possibilities for universal payments. Mobile devices, especially smartphones, can be used as e-wallets. Both banking apps and third party solutions enable classic transfers as well as POS payments, particularly with the most promising NFC (contactless) technology.

Transfer in a flash

One of the examples of modern payments is an instant transfer. When you can’t wait for the next clearing session and need to transfer money within seconds, in most cases you have to use a third party solution. Some of them, German Sofort or Swedish Trustly for instance, are based on a banking API: you log into your bank account with your credentials on the payment service provider’s website rather than your bank’s. Since revealing your bank credentials to anyone is not a very secure practice, these kinds of payments face customers’ reluctance, not to mention objections articulated by banks or national regulators.

Dwolla is a more advanced and promising solution, although at the moment it is available only in the US. This startup partnered with two financial institutions to set up a system that would rival credit card networks and cut their fees. Dwolla offers APIs for banks and merchants willing to join the platform, so the implementation is fairly easy. Payments between parties are executed in real time, and the only fee is a fixed transaction fee regardless of the amount of money transferred.

Mobile is the new black

New payment systems from mobile phone vendors – Apple Pay, Android Pay and Samsung Pay – they are all very comfortable and easy to use, since they rely on the existing smartphone customer base as well as POS infrastructure, yet they are limited in one, very important aspect: they require a credit/debit card. For those who don’t own one, it’s useless – for now, at least.

This is why some other solutions, which are card-independent, can be more attractive. British Zapp allows online shopping with direct payments from the user’s mobile bank app (this resembles a classic pay-by-link method and therefore requires cooperation with banks to provide this feature in their mobile apps) and early next year will offer in-store payments.

BLIK, an initiative of six biggest Polish banks, started as a system of mobile payments and ATM cash withdrawal, but now also offers instant money transfers among BLIK users and soon will enable contactless NFC payments, thus eliminating the need of carrying a card in your pocket (until then BLIK users have to show the cashier a code generated by the mobile banking app; the cashier then enters the code in the card reader and the user confirms the transaction in the app).

The power of banking APIs

It’s easy to see that all solutions mentioned above have one common flaw: they are limited to selected banks or card owners. Or, in the case of Sofort and Trustly, they raise security concerns. These payment methods would be much more universal and would have a much bigger impact, if they were based on banking APIs that allow using accounts in vast majority of banks.

There would be no need for partnerships or alliances with financial institutions: banking APIs would enable access to almost all accounts, so clients could use new payment options right away, without any extra efforts. Nothing is more confusing than registering at or signing for another service just to do a simple task such as transferring money.

Fortunately, the growing appetite for access to client data in banks resulted in fundamental changes in law – at least in the European Union. The revised Payment Services Directive supports third parties – payment initiation services and account information services – in their efforts to use client information stored in banking systems, by offering them a standardised banking API and opening account data in all banks throughout the EU. This will enable new, innovative payments for all bank account owners in a secure, yet universal and comfortable manner.

By Konstantin Rabin, head of marketing, Kontomatik