Jurassic times call for Jurassic measures. Bank and credit unions can no longer afford to allow dinosaurs — legacy technology — to hinder their tech transformation, given the demands of today’s digitally-consumed customers and encroaching competitors. Application programming interfaces (APIs) offer the capacity to connect banking technologies and allow financial institutions to evolve and to stay competitive within a changing landscape.
Many traditional financial institutions find themselves caught between the proverbial rock and a hard place, that is competition from fintechs and neobanks displaying next-generation open systems capable of accessing and dispensing data as needed, and proprietary systems holding tight to the financial institution’s data.
It is not getting any easier for banking institutions. The trade finance software market size projects to grow from $1.57 billion in 2021 to $2.92 billion by 2027, according to a report by The Insight Partners. The report points to its worldwide growth propelled by technological innovation in the form of digitization of products and solutions, switches in enterprise behavior and expectations, and growing market competition.
In order to capitalize on fintech growth and availability many community and mid-size financial institutions must first figure out how to incorporate a fintech strategy using APIs that does not threaten structural integrity, interoperability, compliance and security of their system.
Banks Struggling to Transform
In an EY survey, two-thirds of major banking executives held an organization’s ability to renovate is extremely important to its future existence. “That transformation means a fundamental change in how a bank operates and the products and services it provides. It is absolutely necessary for long-term survival in the face of the disruption brought by digital-first challengers and evolving stakeholder and customer expectations.”
Many traditional financial institutions understand the need to adapt faster, and many have fast-tracked innovation speed and delivery. But banks and credit unions have a proverbial fossilized bone to pick... they typically are hindered by technologically inflexible back-end core banking systems.
Yielding consumer data to a third party to benefit customers was never an option for many financial institutions until it became a competitive weakness. The drive toward online channels during the pandemic fast-tracked open banking needs and deliverables. The shift toward a more open banking setup was especially beneficial to consumers seeking help with their personal finances in the areas of budgeting, credit building, debt reduction, short-term savings, spending behaviors and financial goal setting and crisis.
Some leading banks are now unlocking proprietary data to offer dynamic customer experiences that offer embedded credit products at point of search, and real time or on demand decisioning, as well personalized product selection, portfolio analysis, and service delivery.
Open Banking Inevitable
To accommodate more data-intensive strategies, financial institutions are modernizing their core banking systems technology according to an Insider Intelligence report on U.S. banking technology, expected spending to hit nearly $86 billion in 2022 and grow to almost $112 billion by 2026. In another report, Bank Director's 2021 Technology Survey suggested U.S. regional banks, community banks, credit unions, and neobanks — will make up 48.5% of total U.S. bank tech spending in 2024.
Don’t be an anxious dino (or a nervous Rex)–join the other financial institutions and fintechs that are gearing up for the inevitability of open banking as a standard as more U.S. open banking schemes, supported by APIs, advance and more consumers become aware of personalized banking possibilities. In planning technology investments, many financial institutions have deprioritized renovating their core systems in favor of updating technological front ends, including websites, mobile apps, and channel experiences, according to a McKinsey report.
The open-banking trend indicates financial institutions no longer have exclusive rights over data management and approved fintech companies can plug into people's accounts and offer them a range of services. The intent was to inspire innovation and let customers take more control of their financial interactions and information.
As a result, many financial institutions increasingly offer banking-as-a-service (BaaS) and embedded banking services such as payment processing; and open finance to enable third party providers to access customers' complete financial data. That is because data held within some proprietary legacy banking system is enormously hard and expensive to access, especially for many regional and community based financial institutions.
Opening Up Data Access
Why did the dinosaurs go extinct? I dino what to tell you, but as for financial institutions, McKinsey suggests the open-architecture approach is predicated on the financial institution’s ability to make discrete components of their core systems available to other systems. It cites as examples U.S. Bank’s partnership with State Farm, Goldman Sachs’s deal with Apple, and Stripe’s integration with Shopify. Another, Capital One’s DevExchange enables the use of APIs.
Many credit unions and banks seek a fintech partnership to improve areas such as their mobile banking and payment channels, personal digital assistants, saving and investment tools, fraud mitigation, payment processing, and artificial intelligence/machine learning capabilities (including chatbots).
They may also seek to upgrade their digital banking platforms to provide real-time and same-day banking services, big data access through open banking to provide customers with personal and actionable insights; and robotic process automation (RPA) to power existing processes.
APIs allow fintech firms to help financial institutions overcome technical issues and benefit from previously untapped revenue-making opportunities. API usage increased for fintechs as well with the upsurge of open banking, whereby financial institutions allow third-party developers to access data stored by financial institutions to deliver enhanced services and functionality.
Avoid extinction. The key to fintech partnerships and API usage lies with a proper integration. Data integration services using APIs can also release captive information in novel ways to please digitally-savvy banking customers desiring more access to personal data.
NXTsoft offers several secure routes to free up and connect banking data:
- OmniData enables financial institutions to access its data quickly and securely when a financial institution is involved in a core conversion, legacy data migration or other data event. The OmniData solution can assist financial institutions that have data stored on legacy systems.
- OmniConnect, the vendor agnostic premier open banking marketplace for all API needs, uses cutting-edge cloud technology to securely connect fintech solutions to financial institutions, ensuring a safe and reliable integration, and providing an open banking marketplace for all API needs. NXTsoft also provides connectors for as many as 40 different banking core accounting systems including systems from Fiserv, Jack Henry and FIS, with many of them requiring connectivity to multiple core versions.