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Discover more information in our monthly publication, the AXIS newsletter, including industry trends, product innovation, Fintech and more from our team of experts.

    How Payment APIs Are Enhancing Institutional Banking

    Financial institutions offering Banking-as-a-Service are highly focused on Payment API’s and enhancing their capabilities for institutions around the globe.

    The landscape of cash movement and liquidity management is changing. Technological advances allow individuals and organizations to access their cash from almost anywhere and at any time. Application Program Interfaces (APIs) are at the forefront of this technology, and Payment APIs integrate one payment solution with another. It’s the reason one can pay a home contractor via Zelle or reimburse a friend for lunch via Venmo.

    On the institutional side, Banking as a Service (BaaS) is becoming more prominent and enhancing the use of Payment APIs. In the BaaS model, a licensed, regulated bank can provide digital banking services to asset managers, fund administrators and other organizations that are not banks

    As institutions increasingly demand real-time payments, APIs can allow for instantaneous movement of cash between accounts. Similar to consumer demand for instantaneous payments, institutions want to see things moving faster. Many organizations use wire transfers to pay their vendors, for example, and waiting three to five business days for bank transfers to vendors is no longer going to be acceptable.

    While Payment APIs are fundamental to integrated banking services, however, the technology requires an ecosystem of consistent data, regulatory oversight and banking expertise in order to succeed on a global scale. We expect client demand will drive development across three major areas to make integrated banking connectivity more common in the institutional world:

    • Data standards within and across payment utilities, such as the adoption of ISO 20022 message standards for securities payments by SWIFT. It has been a long road for ISO 20022, but tremendous strides are now being made. ISO will continue to be rolled out and is also the format that will be used by the FedNow service launching later this year for instant payments. ISO standardizes the format that can be used across systems and borders, so ultimately we expect support for making cross-border more real-time as well.

    Standardization of data schema and formats are necessary for real-time payments using APIs and potentially central bank digital currencies (CBDCs) on distributed ledger technology (DLT) networks. Beyond payments, progress in standardization can promote efficiencies in the account opening process and regulatory compliance, including anti-money laundering requirements (AML), sanction review, and “know your customer” (KYC) due diligence procedures.

    • Regulatory alignment for cross border payments is progressing. For example, institutional clients that do business in multiple jurisdictions need to understand and comply with regulations ranging from the requirement for investment funds to have a local bank account in order to execute cross-border payments to enhanced AML/KYC screening in some jurisdictions, which can require significant capacity and technology to comply. Banking regulations can vary significantly between neighboring countries in a market like Europe which is a significant factor when assessing the development and expansion of Global Payment API capabilities.

    As banking technologies such as blockchain and DLT become more advanced and sought after by consumers and institutions, regulations on these technologies and services will only continue to grow, so it is critical to monitor for regulation and also to understand and realize the additional benefits and safekeeping that can come from regulation as well.

    • Instantaneous reconciliation tools or utilities to enable real-time payment capabilities.

    Institutional clients require efficient movement of cash and automatic settlements on transactions, and increasingly will demand real time autonomous cash delivery. To accomplish this goal, banks need to provide real-time credit and liquidity risk monitoring and reporting. We see a rising sense of urgency around monitoring intraday balances and activity. This is true for clients as well as banks themselves. For clients, the need for real-time reporting around balances and settlement activity is becoming imperative. Broadly, there’s a consolidation of trends in terms of real-time reporting and payments and settlements which is merging with the need for intraday liquidity exposures.

    An open API network gives banks the opportunity see into cash positions to determine what is available to meet obligations. We are starting to see that level of technology being deployed within some cross-platform ecosystems. Not only are transactions being digitized, but the technology adds an extra level of assurance.

    Digital assets have the potential to drive further efficiency and transparency in banking and payments, with the benefit of real-time settlement on DLT networks. This type of technology can help support not only instant payments but streamline reconciliations and enable the real-time reporting that all eventual network participants – banks and clients – are seeking. Central bank digital currencies (CBDCs) are digital asset backed by a Fiat currency and central bank governments. Along with this will come other safeguards as well – the benefits of regulation and the trusted banking network.

    In this fast-changing environment for payments and banking, institutional users of banking services need to ask themselves: how can we leverage digitization to move to a more efficient and transparent environment? As Payment APIs continue to grow in demand, more and more financial institutions will look to grow with it. As with all evolving payments technology, enhanced controls, real-time capabilities and an improved client experience are the keys to success.

    Peter Sanchez portrait

    Peter Sanchez

    Global Head of Banking and Treasury Services
    Peter is an Executive Vice President at the Northern Trust Company and serves as Head of Banking & Treasury Services, a global division which was formed under Peter’s leadership in 2022 to bring together business in Global Banking, Benefit Payments, Treasury Management, Corporate & Institutional Lending as well as Cash Operations to meet the evolving needs across banking, lending, payments and treasury for Northern Trust and its clients.


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