04 January 2019
How APIs and AI can transform financial services
Open Banking, APIs, and Artificial Intelligence tie in very closely to a lot of what we’re working on at Vocalink in the UK and worldwide. We’ve been supplying APIs since 2003 with our Bacstel-IP product which connects over 120,000 British businesses to the UK’s core payments infrastructure. Our parent company Mastercard has over 70+ APIs available to the world via a market-leading developer portal which was begun well ahead of competitors.
Ultimately, APIs are just another step in the payment industry’s journey. We’ve always striven to make connectivity easier. In the 1960s this meant motorcycle couriers with pannier bags full of magnetic tapes – a massive leap forward from paper clearing. In the 1980s, it meant moving to Bacstel telephone connectivity – incredibly slow by today’s standards, but still vastly easier than bags full of tape. And in the 2000s, it meant a move to direct computer-to-computer connectivity with Bacstel-IP. APIs have advanced since then and are now an industry standard way to connect, for reasons which are clear. They allow for scale and scalability - lots of connections, lots of users - just as Bacstel-IP has done for 15 years. They allow for very strong security and resilience. And they make it easier and safer to connect into payments. All of this goes back to Vocalink’s aim of thoughtful innovation – building and delivering solutions which function in ways that are more resilient, more secure, and more functional.
As you can tell from the above, APIs are not new – they are essentially a standardised way for one system to talk to another system (internally or externally) with no human intervention. Aggregation of bank account data, and access to payment initiation is not in itself new either – whether via direct connections such as FTP (File transfer protocol) for corporates, or via screen scraping for consumers. The big change - driven by Open Banking in the UK and by PSD2 across Europe - is that banks are now required to surface payments functionality and data via a standardised method, to any licenced third party provider a customer (not necessarily a consumer) has instructed to act on their behalf. To get an idea of how powerful a change this could be, you can look to other industries. Firms such as Salesforce and Experian are quoted as generating well over 50% of their revenue via API channels. Or look to other markets – such as the Nordics, where a leading bank’s Chief Digital Officer has talked about 20-30% of his customers now accessing the bank via a single third party app. Open Banking therefore has the possibility of revolutionising both how firms go to market, and how customers manage their finances.
This change in go to market approach goes beyond partnership. It means – at the extreme – openness to an approach which takes the best bits from around the market to deliver a solution. Alongside this, successful businesses have demonstrated a willingness to share assets with others in order to monetise them more effectively and serve more customers more easily. In payments and banking, this is not without challenges. The regulations cover only ‘payment accounts’ at present. That means if I want to see all of my finances in one place – including my pension, or my investment account – I’d have to rely on my app of choice either using screen scraping, or hope that the app company can secure agreements with the stockbroker or pension firm I use. If something were to go wrong, I’d find that key elements such as standardised dispute and fraud management services have not emerged yet. And if I wanted to get a licence and run an app myself, it’s not certain how long it might take me to connect to banks to get market coverage – especially given there are about 4500 banks in the EU. That’s why Mastercard is developing market-leading infrastructure and services to underpin, enable and safeguard the new Open Banking ecosystem, including 3 initial solutions that will help to shape this new landscape and ensure Open Banking’s success for consumers and businesses.
Alongside APIs and Open Banking, Artificial Intelligence (AI) is another massive trend impacting the payments industry. The concept goes back to the dawn of computing and the pioneering work of people like Alan Turing on how computers can think more like humans. But it is only now that we are beginning to be able to look at AI as a viable means of powering new, cutting-edge solutions.
The first generation of assistants – Siri, Alexa, Cortana – would clearly not pass a Turing test. But the idea of machines that think like people is becoming entrenched and consumers are getting more comfortable with the idea than ever before. Machine learning it is an example of how AI is being implemented, and is highly relevant to the current revolution in financial services, where consumers and businesses seek more and more automated and actionable insights, and look to partner firms (such as ourselves) to provide this. Vocalink and Mastercard provide great examples of how these technologies have been leveraged to solve specific problems:
- Vocalink’s Corporate Fraud Insight solution uses advanced machine learning to identify potential fraud such as invoice redirection and flag it to banks’ fraud teams who investigate further and contact their customers to either validate or stop a transaction.
- NuData NuDetect – a behavioural biometrics product from Mastercard – works out how you use your device and can spot if it’s not really you, and then invoke higher levels of security such as requiring a password or further verification.
What these solutions both have in common is that they supply actionable insight, not just information. To look at how the experience of using financial services might change, and how APIs and AI can work together, think of how Google Maps works, compared to an A-Z map. Both are indexed and searchable – just as current online/mobile banking delivers right functionality. But Google Maps also gives you insight – and that’s what AI brings. How to get where you’re going; what restaurant to eat at when you’re there; how long it’ll take. If I take the Tube, it has a feed from Transport for London’s API – meaning it can provide live information. This is a perfect example of how APIs can enable thoughtful innovation. As a user, it’s an innovation that actually increases resilience and utility - by supplying the most accurate and relevant data, in an actionable way, reducing the risk I’ll get the wrong information or take a route that makes me late.
We can see the benefits of this combination of AI and API in financial services and fintech, too. Things like behavioural economics-driven nudges for consumers in the new range of third party apps. Without some form of AI, Open Banking is helpful. Giving a consumer all their accounts in one place is a useful way to save them time and make banking easier – a bit like an A-Z makes getting round a city easier. But telling them how they could save money, in a tangible, actionable way, is a very different and far superior proposition – much like giving live traffic and transport information and planning a route that can update dynamically if you make a wrong turn. This presents a massive opportunity for financial inclusion if done right, by helping those who most need it to manage their money better. Already, with UK banks moving to account aggregation and promoting financial management apps, we can see the first green shoots of a potentially very positive revolution for consumers.
And ultimately, this all comes back to partnership. When you work with providers who have the best technology, when you combine the potential of market-leading APIs, AI, and machine learning, you have the recipe for something very exciting. A world where developers and firms can build all sorts of new, smarter, consumer-focused solutions. The early signs of this are already here – not least the innovations launched in the trade and consumer press every day by banks, fintechs and tech firms – a notable recent example being the Lloyds Banking app upgrades which embeds Google Maps, so you can see not just how much you’ve spent, but where you spent it. This is just the start. Looking on the Open Banking Implementation Entity’s website, or across the trade press we are at the start of a truly exciting time with Open Banking and PSD2 regulations acting as a game changer to access to payments and data. This also means, however, that firms must focus on their areas of greatest strength. For us, the answer is clear. We continue to focus on innovating and partnering with the industry to maximise resilience, safety and positive consumer experiences, not just in our Open Banking and Analytics solutions, but in everything we do.