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INDUSTRY PERSPECTIVE

OPEN APIs PRESENT FINANCIAL INSTITUTIONS WITH CHOICE AND A STRONG BUSINESS OPPORTUNITY

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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 per-minute 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).

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).

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.

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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 one-to-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 per-minute call fees, many financial institutions and card processors today are organized around maximizing per-transaction 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.

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 app-driven 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 “just-in-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.

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COMMERCIAL BANKING

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 bi-weekly or monthly payroll, and instead pay employees on an hourly basis, deducting funds and depositing them in the employee’s account in real-time. 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?

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?

OTHER FINANCIAL INSTITUTIONS

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.

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,

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

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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 third-party 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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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 real-time, 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.