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DT, May 2017

Why the Secret Sauce Isn’t So Secret Any More
May 1, 2017

By John Stewart

With the rise of APIs and the race for consumer loyalty, payments players are under pressure to innovate as never before. The result? A new openness to outside developers.

If anything in the payments business can be said to approximate a company’s crown jewels, it’s the code that controls, uniquely for that company, how a transaction works when a consumer starts the process with a swipe, dip, tap, or click. Once closely guarded, those jewels are increasingly open to hotshot developers who work for themselves or other firms.

The speed with which such open access is spreading has taken some long-time payments executives by surprise. “It’s happening fast and furiously,” observes Mimi Hart, chief executive of point-of-sale equipment and software vendor MagTek Inc.

In many ways, the trend has been developing for years. Armed with software development kits offered by payments processors and networks, outside coders can use application programming interfaces to hook into an existing payment service and integrate it with a new Web site or mobile app the developer is working on. PayPal, for instance, was offering this kind of platform as early as 2009. But now, open APIs and open developer portals are spreading at breakneck speed.

“I don’t know when the tipping point was, but it feels like it was over the last 12 months,” says Ben Milne, chief executive of Des Moines, Iowa-based payments-technology firm Dwolla Inc. “And it’s super-exciting to us.”

‘Jumping Onto the Bandwagon’

Milne’s sense of timing isn’t far off. Just in the past 15 months, Visa Inc., Mastercard Inc., and American Express Co. have launched formal programs that expose some of their most popular code to outside developers. And this is no privately arranged access for a favored few. These companies are throwing open the gates amid much fanfare.

To launch Visa Developer, for example, the network in February last year live-streamed a press conference featuring top brass and a panel of banking executives. The new program from the start offered access to an array of 155 application programming interfaces, including code for such services as Visa Checkout, Visa Alerts, and Visa Direct, a person-to-person payments service.

Visa’s archrival followed suit in September with Mastercard Developers, opening access to outsiders to work with APIs for critical payments tools, including the Masterpass wallet and tokenization product set, along with Mastercard Send, the company’s answer to Visa Direct. “It’s a new model of engagement. We’re more open, more transparent,” says Oran Cummins, senior vice president, API, at Mastercard.

A month later came AmEx with its AmEx for Developers, which widened access beyond what had been a closed loop of programmers.

After visiting the Centurion’s developer portal, techies “should be off and coding” within 30 seconds, says Sathish Muthukrishnan, AmEx’s vice president for API engineering and digital partnerships.

Nor are these payments giants alone. Scores of smaller shops have joined the race to enlist the brainpower of outside developers. “Just about everybody is jumping onto the bandwagon,” notes Tim Sloane, vice president of payment innovation at Mercator Advisory Group Inc., Maynard, Mass. “They either open it up or cut their losses and run.”

‘First in the Device’

For some of these companies, such access is simply a means to speed up innovation at a time when the payments business stands on the threshold of huge new markets, such as mobile payments, messenger commerce, and the Internet of Things.

To reach their goals, these companies have found that tapping the energy and brainpower of outside talent via software development kits and APIs could be more cost-effective than buying entire firms.

“The only way to get the good developers is to let them join an open platform,” says George Warfel, general manager for fintech and payments strategy at San Francisco-based consultancy Haddon Hill Group. “Many of the best developers are working for themselves or on the side.” Warfel writes the “Payments 3.0” column each month for Digital Transactions magazine.

And openness can benefit developers as much as payments platforms, observers say, so long as the platforms are willing to share the wealth. “Instead of me trying to find the startup out there, we flip it around,” says consultant Sloane in explaining this thinking. “You develop for me on my API, and if we bring it to market maybe you’ll get rich.”

Nor does this approach really cost that much for payment companies, since failures shouldn’t get beyond the sandbox. “It doesn’t involve risk,” says Sloane. “It’s a recognition that they don’t have to pick a winner.”

This new open-mindedness extends to connections with other payments firms, as well, to apply and leverage what their sandboxes have yielded. “Five years ago, they wouldn’t let me talk to their engineers, but now I’m getting calls from the development teams they didn’t have five years ago,” says Dwolla’s Milne.

Indeed, opening access to the skunk works may be the hip thing to do these days, but it’s also very possibly the way to greater market share. The best payments technologies are the ones that will win consumer allegiance, experts say, as payments move from plastic cards to wallets built entirely with software. And that allegiance, once won, isn’t likely to change.

“We’ve always talked about top of wallet, but now we’re going to have to talk about first in the device,” says George Peabody, a partner at San Francisco-based consultancy Glenbrook Partners. Those default cards or payment methods, he says, “are going to be very sticky. Once you provision your card in NetFlix, you never see it again.”

‘A Button on Every Web Site’

The payments business may change in fundamental ways, but one dynamic never changes: networks must add volume to drive down unit costs. Adding volume these days means getting the network’s applications embedded in as many third-party apps as possible. Think of the volume generated just by ride-sharing apps.

“The APIs we deliver on behalf of banks gives us broader distribution,” says Mastercard’s Cummins. “It creates opportunities for more volume, and more revenue.”

Emerging technologies like the IoT, say some observers, present especially inviting opportunities for volume. After all, dozens of everyday devices could potentially be harnessed across millions of households and businesses to handle a steady flow of data, including payment information. That potential is hard for a network to resist. “The IoT promises to add billions of payments,” notes Peabody.

Indeed, opening APIs to outside coders has an efficiency no organization, however large, can hope to replicate on its own. American Express Checkout, for example, works by autofilling AmEx credentials in purchase situations on sites that accept the card but otherwise have no corporate relationship with AmEx.

The way it’s done is not with one-on-one sessions with potential merchants, but with the magic of open APIs and the developer portal. “We want the American Express Checkout button on every Web site,” says AmEx’s Muthukrishnan, “so you can imagine the sales force that would be necessary to do that. And if I didn’t have a portal, I’d have to have my engineers talk to everybody who calls.”

But developer portals may have a social purpose beyond increasing volume and extending reach. For PayPal Holdings Inc., which started exposing its APIs to outsiders earlier than most payments companies, the purpose now is to democratize payments. Through integrations, for example, PayPal hopes to bring digital payments to populations that use mostly cash.

“What we’re driving toward as a company is allowing those populations to have the same capability the rest of do,” says Jon LeBlanc, head of developer operations.

‘It’s Like Oxygen’

Still, “open” may not be as open as everybody would like, especially younger developers weaned on the digital age. Payments companies for their part may have realized they need to expose some secret sauce in return for the benefits outside developers bring, but that doesn’t mean they have let outsiders crawl all over the vault without restrictions. There are limits, including non-disclosure agreements, at some places.

“We try to be open. We’re trying to keep the APIs open, and keep adding new ones. But we’re not 100% open API. We still get non-disclosures,” says MagTek’s Hart. Sometimes these requirements may seem minimal, but important nonetheless. At AmEx’s portal, for instance, developers don’t have to log in but do have to enter what Muthukrishnan calls “minimal ID.” “We want to know who’s doing it,” he says.

That seems reasonable enough, but some observers express skepticism about how far payments companies have really come in shedding 20th Century ideas about protecting secrets. “They’ve simply moved the defensive line back a couple of yards,” says Sloane. “Instead of blocking the innovators at the front gate, they’re letting them into the front yard. But they’re not getting into the building.”

The “innovators,” though, bring enough value that the trend toward exposing code to outsiders isn’t likely to slow down. And companies that still shun the idea may have to rethink their position.

“You either need to be part of that [developer] ecosystem or sit on the sidelines,” says Rob Lee, chief product officer for banking and payments at Fidelity National Information Services Inc. (FIS), which runs an incubator program for startups. “It’s like oxygen. There isn’t a binary where we’re not going to do it.”



The Short History of Open Developer Portals


November 2009

PayPal introduces PayPal X, a development platform open to outside developers working on payment applications


May 2010

In a “philosophical shift,” Mastercard unveils a plan to open its payments platforms to developers via a limited range of open APIs


October 2010

Visa introduces a developer center for its Authorize.Net online-payments gateway, allowing developers to create apps and link to VisaNet.


February 2016

Visa launches Visa Developer, granting access to 155 APIs, including those for Visa Checkout and Visa Direct


September 2016

Mastercard announces Mastercard Developers, opens developer gateway to critical payments tools


October 2016

American Express launches AmEx for Developers, opening its closed-loop developer network to a wide range of developers

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