Quite often people talk about the fabulous opportunities that open APIs at banks will create for small, innovative fintech startups. What has been less discussed, particularly in the early days of PSD2 (Payments Services Directive), was how large internet companies like Google, Apple, Facebook and Amazon (GAFA) were likely to respond.
Icon, a payments consultancy and technology provider, knows a bit about GAFA plans in this area. Tom Hay, head of payments at Icon, said: "We have always said, wait a minute, look at organisations like Google, Apple, Facebook, Amazon. Do you think those guys are just going to sit back?
"They are going to be right in there. They are going to use it as a platform to make their payments bypass the card companies that they rely on at the moment."
Come the 13 January 2018, banks will be forced to open up their APIs to any authorised payment initiation service. It is an absolute fact that as soon as this happens the GAFA guys are going to be targeting the big European banks and pushing payments through them rather than going via the card schemes, because PSD2 initiation is going to be much more cost-effective for the merchants and for themselves, says Hay. Icon has provided consultancy to many banks and other players in this field about how they will meet the technology demands of PSD2. IBTimes UK asked him for any detail about what we can expect from GAFA.
"I have probably shared as much as I can," he said. "Let me put it this way – there are definite plans in place, not just to do small scale organic migration – so letting people choose, am I going to pay with my card or am I going to pay directly from my account?
"For these guys (GAFA), it's going to be cost effective to have people paying directly from their accounts; they've got plans in place, if not to force, then certainly make it very easy and desirable for people to move in that direction."
Banks have been notoriously slow to support any kind of innovation in the world of payments. A lot of banks have started incubators to support fintechs; they are very happy putting up new front ends and so on. But when it comes to making changes to their back office systems, which actually handle the payments, they are only going to do that with a gun to their heads. PSD2 is that gun. And this also presents a market opportunity for GAFA to move in big time. Banks may be skittish about allowing any tinkering under their bonnets and the sharing of their data, but the card networks look like the real losers from PSD2.
"Yes it certainly looks that way," says Richard Dear, Icon's business development director. "I think that's one of the reasons why Mastercard acquired Vocalink because it gives them a kind of foot in the door for the non-card payments world. Vocalink is well known in the UK, but it also has an instant payments product which it's installed in Singapore, and they are also installing it in the US.
"So having fingers in that pie at least mitigates the risk of the cannibalisation of the card business. I think Mastercard are now not styling themselves as more of a payments business rather than a cards business, so hedging their bets," he said.
However, it's not entirely clear how banks will monetise their open APIs. "A lot of banks are struggling to see how this will happen," notes Hay. "You hear some fintech companies claiming you can wave a magic wand and it will become profitable. If you look at the regulation, that's not the case. Those services have to be opened up and you can't insist on contract between the bank and the payment initiation service that's using it.
"So I think the mandatory APIs that PSD2 says the banks have got to stand up, they are kind of doing that with gritted teeth. Compliance has forced them into this world of open banking, but the technology base that they are building out will enable them to compete in the API economy and that's where I think the golden future lies for banks."
Grown up fintech
It should be said, Hay and Dear, who were demoing their Instant Payment Framework (IPF) at Finnovate 2017, are not your typical fintech startup. Their suits are grey and so is their hair; their backgrounds include helping to build Faster Payments in the UK and overseeing large scale infrastructure projects for the likes of Vocalink and tier one banks. This is grown up fintech.
Icon has built a global product IPF which is designed to thread its way through the variety of legacy systems that have evolved and been merged between banks over time. Immediate payments, as the name suggests, means the payer gets an immediate confirmation from the payee's bank that the payment has been received and credited to the account. Instead of sending batches of multiple payments, IPF sends messages that carry a single payment. This is the same approach as the card networks, albeit in the opposite direction – card messages are "pull" payments, initiated by the payee's agent and responded to by the payer's agent, while immediate payments are generally "push" payments, initiated by the payer's agent and responded to by the payee's agent.
The primary focus of the product is to address what is called SCT Inst, which is the credit transfer instant scheme which is rolling out across Europe and goes live in November this year, and then next up and associated with that is PSD2.
"We think the two are very closely linked together because an API which is the key part of the PSD2 is a request with an immediate response – and that's exactly what an instant payment is. So putting an API front end in front of a SEPA payment, which is a next day payment, is nonsense; it's like buying a car and then having it pull your donkey cart along."
There may be a tendency to view these regulations through a pan-European optic, when really open API banking is a move underway in the US as well. Commercial reality is going to push banks and payment service providers towards instant payments.
"People like PayPal are really interested in payments because it allows them to make payments instantly to the merchants that use their marketplace and they see that as a big competitive benefit," said Hay. "Another recent example is Uber; they want to be able to pay their drivers on a day by day basis, so having to wait for batch payments to clear is not good for them.
"We have even seen a tier one UK bank lose one of their big customers because the customer needed to make these instant payments and the customer moved elsewhere.
"And when you've got a fantastic front end, if everything else is happening instantly, why on earth would you want to wait a day or two days or three days for your payment to go through?"