Power Of Two

Banks are allowing developers, technology companies and fintech players to plug into their core banking systems to offer new products and services.

Illustration by Raj Verma Illustration by Raj Verma

Mutual fund investors have always found it tedious to get redemption money instantly credited to their bank accounts. It usually took a couple of days. That, however, is a thing of the past for investors of LIC Mutual Fund and DSP Blackrock Mutual Fund. These fund houses can now pay liquid fund unit holders right away. The entity that has made this possible is an old-generation private sector bank, RBL Bank, which, in collaboration with technology team of mutual funds, came up with a solution. It opened its core banking system via Application Programming Interface (API), a set of routines, protocols and tools for building software applications. The open API offered by RBL enabled the fund houses to give an integrated and seamless process to initiate payments for their customers.

Similarly, when a Mumbai-based travel and tours firm with a large number of sub-agents faced frequent cases of late air ticket issuance resulting from delayed information from sub-agents on fund receipts, YES Bank came to the rescue. It joined hands with developers to fix the problem and now facilitates quick ticket issuance and seat blocking by validating the travel company's sub-agents prior to real-time fund processing. YES Bank has also been proactive in helping corporate clients use APIs to connect banking systems to their Enterprise Resource Planning software. For the clients, this translates into a seamless and secure interface to manage cash payables and receivables. Here too, API is allowing the technology of the two entities - the bank and its corporate clients - interact without human intervention.

YES Bank and RBL Bank are part of a new trend where banks are opening up their core systems to allow developers and financial technology companies to plug in and improve the customer experience.

Bank App Store

"Think of a bank like an app store," says Ajay Adiseshann, Founder and Managing Director at PayMate, a business-to-business payment solutions provider. Google, Facebook, Apple, Amazon and eBay have been using the API route to work with developers to innovate and create customer-friendly products for almost two decades. "It is new for banking, but the direction is very clear; open APIs to developers, technology companies and fintech players to offer innovative products," he says. "The growing interest in banking APIs represents the first wave of transition to the Banking as a Service (BaaS) model," says Amit Kumar, Partner at consulting firm BCG.

This benefits both banks and fintech companies. Banks have a solid platform with huge investments in infrastructure, capital, compliance and governance. On the other hand, fintech players and technology companies, with their innovative products and services, offer a compelling proposition to customers. "API banking unleashes the full potential of the system," says Adiseshann. Many say the BaaS model of banking will give rise to a system of fintech players as aggregators with multiple banks and their products at the back end. A good example of aggregators are ride services such as Ola and Uber, or insurance aggregators Policybazaar and Coverfox, that sell products of multiple players. In banking too, multiple banks would reside at the back-end and enable fintech players to offer the best products.

SUJATHA MOHAN Head, Digital Banking, RBL Bank (Photo: Rachit Goswami)

Are Banks Ready?

Traditional banks have been struggling with digital services for long. A classic example is banks belated entry into the e-wallet space where many non-banking entities such as PayTM, Oxigen and MobiKwik moved in and captured a sizeable chunk of what would have been captive customers for banks. PayTM, for instance, not only made the digital wallet popular but also came out with the QR code payment solution. Banks, especially the larger private sector ones, did come up with e-wallet offerings later, but by then the market had shifted to bigger disruptions such as the United Payment Interface (UPI) and QR codes. The API is the latest in the series of disruptions. But here, RBL Bank, YES Bank and IndusInd Bank have the first-mover advantage, while larger groups are still working on what they will offer. "There is no doubt that progressive banks (especially those in the private sector) understand the disruption that API banking will cause," says a consultant. Banks are realising that it is difficult for them to keep up with market and technology innovations. "Many banks are already working on their legacy systems and plugging in to make them compatible," says a banker. For government banks, mired as they are in issues like asset quality, capital shortage and frequent changes in top management, the initiative needs to come from the top. "Once there is a realisation at the top, it is easy to fix the legacy systems and switch to API banking," says a fintech player. Amit Kapoor, Co-founder and CEO of AirPay Payments, a payment gateway solution provider, says: "It's a mould the PSU banks have to break."

Globally, banks such as HSBC and RBS have opened developers' portals offering APIs, software development kits and well-laid-out focus areas for innovators. Back home, RBL Bank recently conducted a hackathon to encourage the search for new solutions. YES Bank has lined up its second cohort of the Accelerator programme to bring technology solutions from around the world to India. In May this year, India's largest bank, State Bank of India, announced its "national hackathon" - an API hackathon platform - for developers and start-ups to suggest ideas and solutions to change the way banking is done. "We have identified niche areas such as payments, collections, account opening, prepaid wallets and account statements. The list is growing every day," says Sujatha Mohan, Head, Digital Banking, RBL Bank. Globally, there are banks that are talking of 100-150 APIs for developers to work on. Bankers say there is a huge opportunity in products, accounts and payments. There is also an opportunity to open up APIs for small and medium enterprises to help them with faster payments and receivables. India has 51 million small business units, of which 10-15 million are connected through the cloud. "That number is growing. These businesses haven't got great solutions so far," says Adiseshann.

In Europe and North America, there is a regulatory push also, with banking regulators asking banks to open up APIs for developers and technology companies. Unlike India, some major global regulators have taken a stand that traditional banks can no longer hold on to customer data and must instead offer developers access to create better products. In Singapore, the Association of Banks has issued an API playbook titled "Finance as a Service" for its members.

ASIT OBEROI Group President, YES Bank (Photo: Rachit Goswami)

Back home, the Indian regulator nudged banks to get into the acquiring business (Point of Sale acceptance) after demonetisation. "They have never done it. But there are partners who can help them," says AirPay's Kapoor. At present, only a few banks such as SBI, ICICI Bank, HDFC Bank, Axis Bank, and Citibank offer PoS infrastructure.

The Risk

API banking, however, does carry some risks. The opening up of a core banking system to hundreds of partners or developers increases the risk of cyber attacks. Recently, a third-party ATM services processor faced a malware attack, compromising millions of cards. "There are bound to be apprehensions, and they are well founded," says an expert. But Adiseshann contends, "There are systems in place and there are standards on how to manage, store data."

"It's a risk mitigant . It's a secured network to work with. In API banking , there is no possibility of duplication of files," says Asit Oberoi, Group President & Global Head (transaction banking) of YES Bank. Experts say there will also be continuous monitoring of API portfolios, as not all of them will work for a bank. Similarly, banks will have to continuously spend on their IT systems for upgradation; as any drop in transactions could impact the entire chain.