In what has become a classic story in the financial technology space, the start-ups that were born out of a professed desire to disrupt the banking industry have evolved to rely on and partner with incumbents for distribution, access to investment and loan capital, and scale.
In areas as diverse as lending, investing, deposits, and merchant services, FinTech companies have demonstrated value by innovating quickly and operating flexibly. Those are attractive features for bankers struggling to keep up with customers’ increasing expectations for their digital services – according to Ian Benton, Analyst, Small Business Banking, Javelin.
But the challenges of integration are always looming, with bankers facing issues like brand recognition and volatility and security experience of a potential partner, and determining issues like level of access granted.
That’s why a handful of FIs have led the way in building APIs. As the industry moves into 2017 and beyond, consensus is building among forward thinking bankers for a change in the partnership model toward one based on positioning the bank as a platform on which a plethora of third-party services and customers are able to connect through an API.
Javelin expects that the industry will see an explosion in the number of players involved and use cases explored.
APIs will facilitate streamlined sharing of data, quick onboarding and integration of third-party services, and better customer experience APIs solve a wide range of issues, from streamlining internal processes and partnerships with third-party developers to allowing tech-savvy customers to design their own digital banking experience.
Because APIs enable third parties to access bank processes and data by using open protocols, they provide the ultimate flexibility to personalize the experience. This trend has the potential to revolutionize the distribution model for FinTech companies and provide a source of revenue and cost savings for forward-thinking banks.
Until now, much of the API development has been through internal applications and limited, highly controlled third-party relationships. Banks and FinTech providers have just scratched the surface with regard to how APIs can be used to responsibly open up access to data and processes that will ultimately make life easier for FinTech companies and bankers alike.
APIs have the potential to revolutionize the distribution model for FinTech companies, enabling banks to serve as a platform for distribution of innovative digital services that will ultimately result in happier customers and more efficient processes.
Now the challenge for banks has become one of determining key use cases and strategic partners with which to target the largest areas of opportunity.
- Bankers should begin determining what processes and data they might open up to make existing partnerships and internal processes more efficient. APIs are set to expand at other FIs in the near future — first through developer exchanges, events, and innovation labs, and next through open API products being made available to outside developers. For example, if a bank has small-business customers using a third-party accounting system that is screenscraping for data, that area looks to be ripe for an API, allowing for authentication without transferring identifying information about the business customer to the third party and reducing the burden on the bank’s servers. European banks will be required to offer these capabilities under the revised Directive on Payment Services (PSD2) in January 2018.
- Explore “banking as a service,” similar to the way in which banks such as WebBank and Cross River Bank partner with online lenders today to allow the FinTech company to use the bank’s regulatory position to offer higher interest rates across state lines. Because banks hold a privileged position with regulators and a trusted position with consumers, there is an opportunity to leverage that position and provide account and transaction services to FinTech companies for which those services would be inefficient or wholly unavailable.