The first generation of fintech companies focused on offering specific, isolated services. As banks struggle to update their legacy computer systems, however, both fintech companies and banks are discovering that true resilience comes from working together.
Connecting fintech offerings with banks’ digital infrastructures can pose challenges. By using the right digital tools and creating clear goals, however, both fintech organizations and banks can benefit from integration and partnership.
Challenges for Fintech-Bank Partnerships
Forty-two percent of organizations cited in MuleSoft’s Connectivity Benchmark Report 2018 ranked their legacy systems as one of their top hurdles to true digital transformation.
These systems pose multiple challenges for banks. “Since legacy systems contain immense value and are embedded across banks’ operations to such a large extent, the ‘rip and replace’ approach simply won’t work. However, continued reliance on these monolithic systems makes it difficult to innovate at speed,” writes Danny Healy, former financial technology evangelist at MuleSoft and current senior strategic architect at Databricks.
While banks have several options for updating their technology, none of these options are frictionless, writes Zeev Avidan, chief product officer at OpenLegacy. Creating new apps from scratch can ensure up-to-date results but consumes time and resources. Re-platforming may reduce operating costs, but it sustains the problems that legacy applications pose.
The 2020 pandemic created additional challenges for fintech companies and banks alike. Both organizations saw significant pressure to offer fully digital services that are highly reliable and accessible anywhere an internet connection can be made.
Government responses to the pandemic, like the Paycheck Protection Program, put additional pressure on banks and exposed problems with a lending system that hasn’t yet embraced the benefits of digitization, writes Keren Moynihan, CEO of Boss Insights.
Faced with a sudden increase in demand for comprehensive, fully digital financial services, both fintech companies and banks have scrambled to build the partnerships necessary to meet these demands. To do so successfully, they’ll need both strong goal-setting skills and certain key digital tools like APIs.
How APIs Bridge the Gap
Application programming interfaces, or APIs, make much of today’s digital connectivity possible. Their flexibility is changing the way fintech companies and banks work together, too.
Putting APIs to Work
APIs allow banks to take advantage of cutting-edge fintech software offerings without scrapping and replacing their entire legacy computer systems. They do so by allowing applications to talk to one another, even if those applications were not built on the same platform — or even in the same decade.
Using APIs, “banks can incorporate the technology from FinTech firms and vendors into the key areas ... simplifying the process of adding innovative technology services by piecing together building blocks of flexible services,” writes Hans Tesselaar, executive director of the Banking Industry Architecture Network (BIAN).
Samantha Barnes at International Banker gives the example of a shopper who pays for an item via their smartphone. The smartphone collects the payment information via the payment app chosen by the shopper, then sends that information to the shopper’s bank through an API.
“APIs make communication between relevant parties more convenient and efficient,” writes Barnes. By doing so, APIs are changing the way customers access and use their funds.
APIs can also change the way banks think about partnering with fintech companies. For example, APIs can be used to update the way customers interact with their bank in a more modern and efficient way, says Seán Jevens, head of day to day banking strategy and propositions at AIB.
By using APIs, a bank can avail itself of a fintech company’s hard work and up-to-date software offerings more easily. “The alternative is to lose potentially years in time-to-market while trying to revamp your entire architecture,” says Jevens.
A Future Driven by APIs
The digital revolution that has upended a number of other sectors is coming for banks, Angela Strange at Andreessen Horowitz predicts. Rather than acquiring technology and partnerships, banks in the future will be able to access everything from regulatory compliance tools to payment networks as a service. APIs make it possible for fintech companies to offer these services, which banks can then access regardless of the age or complexity of the technology they have in house.
The era of a true one-stop shop for bank customers, in which it’s possible for these customers to access information about every account, loan or other financial instrument in one place, has not yet been realized, Jevens sys. APIs currently make fintech-bank communications easier, but they have replaced neither fintech companies nor banks from the customer’s point of view.
Such a world may be on the horizon, however, and it may not be restricted to legacy banks.
“Affordable digital technologies enables companies of any size to leverage data, advanced analytics, and a cloud-first approach to redesign traditional business models,” writes Jim Marous, co-publisher of The Financial Brand.
As data becomes more accessible and the barriers to offering financial services drop, fintech companies and banks may find themselves fending off new challengers in the banking space. Strong partnerships will help these organizations maintain their early competitive edge.
Tips for Building Better Partnerships
APIs may drive the connections between fintech companies’ offerings and banks’ needs. Driving these digital connections, however, are the connections that fintech organizations and banks make with one another.
APIs and the Rise of Open Banking
In 2010, the Open Bank Project proposed a new model for banking: A financial system built on a single global standard, facilitating the sharing of information without exposing customers’ information to undue risk. APIs make such sharing possible.
While discussions of open banking have broadened their focus beyond APIs, APIs remain a key tool in creating a world with more accessible, yet secure, banking options.
Yet to date, APIs have been a means rather than an end, writes Chris Wood at Nordic APIs. “The truth is that the current phase is driven in most markets by regulation, not products, and banks have become API providers because they have had to.”
Strong partnerships between fintech companies and banks can be facilitated by the use of APIs. To address the challenges of the coming decade, however, these partnerships will need to focus on broader goals than mere regulatory compliance, which always lags behind technological and social change.
Rather, fintech companies and banks will need to set goals for growth, customer service or other outcomes, then work toward those goals using the tools at their disposal.
Integrating Fintech With Legacy Banking Systems
The first wave of fintech innovators focused on building companies that created and offered digital financial solutions. Today, many fintech companies are focusing on how to connect their products to banks’ existing legacy systems.
“Financial functionality is becoming a native component of the stack (both technology stack and as a business model), which means there’s a growing opportunity for embedded fintech rather than pure fintech,” writes Matthew Harris, a partner at Bain Capital Ventures. “In other words, we’re turning our attention to investing in companies that use financial technology as an ingredient versus a primary business model.”
Financial investors Sebastian Garcia, Stephen Rickli and Sid Sapru predict that APIs will eventually transform the entire financial marketplace. Banks will not become obsolete, however; rather, they’ll become cornerstones of the financial and regulatory infrastructure, or they’ll participate by developing their own APIs, the investors write. Both scenarios offer opportunities for fintech companies.
APIs already play a key role in connecting legacy banks with new technology. They allow banks to continue using reliable legacy systems, without sacrificing banks’ opportunities to connect with fintech companies exploring new modes of banking.
As fintech companies and banks work together, setting clear goals will be key to their joint success. APIs provide a tool to bring these shared goals to fruition.
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