The Limits of API Aggregation—how ‘interoperability’ can solve the fragmentation challenge
Open Banking is a powerful opportunity for both established banks and new fintech market entrants to develop and deliver impactful and empowering payments and financial services to consumers and businesses alike. It has been estimated that PSD2 has the potential to create a revenue opportunity of at least £7.2bn by 2022 across retail and small-business markets.
The opportunities across Europe provided by Open Banking for banks to enhance their existing service portfolios and deepen their engagement with customers are however being hindered by the lack of a single established API standard for all participants to adhere too.
This lack of a clearly defined singleAPI standard threatens to obstruct the very core objective of Open Banking to create a unified, innovative, pan-European digital ecosystem for financial products. The PSD2 Regulatory Technical Standards (RTS) stop short of defining a single communal API, resulting in the creation of region- or country-specific API standard initiatives – like UK’s OBWG, Berlin Group’s “NextGenPSD2” with participants across Europe such as France’s STET, and other national versions being launched across the continent. Additionally, many large banks are also exploring the development of their own proprietary set of APIs.
To fill this gap, a number of ‘API Aggregator’ solutions, or embryonic API ‘Hubs’ have been developed or suggested. Typically, these provide a single and often proprietary API that banks, TPPs or fintechs must adopt, and the aggregator hub handles the technical API conversion and integration with different APIs. This single point of implementation obviously has many benefits and removes the need for an organisation to integrate several APIs with their own environment. This ‘aggregator’ approach can provide speed to market for both small TPPs as well as larger financial institutions looking to provide TPP services themselves.
Aggregation Risks and Limitations
This ‘narrow’ aggregation approach does however have its drawbacks. For banks, selecting the right ‘single’ API protocol, or opting to develop their own, can be a risky and strategic gamble – one which they can’t afford to get wrong. ‘Aggregation’ does solve some immediate tactical problems of integrating with multiple APIs; but a decision to restrict development to just one API could limit an organisation’s prospects for growth and tie them to a vendor’s proprietary API standard. For organisations with a need to publish different APIs across different business lines or locations, a proprietary ‘aggregator’ hub approach can also be restrictive.
So, do organisations simply need to adopt all of the emerging common standards across Europe? Or should they gamble on selecting a single ‘aggregator’ API and hope for the best? There is another option, however.
In the absence of a single settled API standard, the ideal solution would be a platform that could provide full seamless interoperability between all accepted formats—a platform that acts as a conversion ‘switch’ and that has the ability to harmonise and hide the differences between various APIs, making the whole interface simple and frictionless. Such a solution would support the multiple APIs foreach existing regional, national or individual standard— enabling a bank to be accessed not only by its own published APIs—whichever standard(s) they chose -but also via other APIs in a transparent and interoperable manner.
In this ‘interoperable’ scenario, there is no need to be limited to standardising to a single ‘aggregator’ API. With true API interoperability you can both bypass the friction caused by multiple standards, while also avoiding the need to gamble on selecting a proprietary API standard in the hope this remains relevant and doesn’t quickly become the ‘Betamax’ ofPSD2. Organisations could choose one of the popular domestic API standards, and simply deploy this across all European countries via a truly interoperable Open Banking hub.
Open Banking presents great opportunities for financial institutions, and enormous promise for consumers and businesses. This is being undermined however by the current fragmentation of API standards. While ‘aggregator’ solutions certainly provide tactical benefits in the near term, a platform providing true API interoperability is a future-proofed approach to delivering on the strategic promise and goals of Open Banking.