Financial technology presents an enigma for the financial services industry. On the one hand fintech brings challenges as a competitor for banking clients but it can also deliver smart solutions that allow financial institutions to operate more proficiently and meet the demands of their customers.
No doubt fintechs, especially fintech startups, have disrupted the financial services industry in many ways. They have taken advantage of the capability to be more innovative and deliver services to customers more quickly and cost-effectively than conventional banking institutions.
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 driven 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 operate using application programming interfaces (APIs) that does not threaten structural integrity, interoperability, compliance and security of their system.
Fintech Leads to Open Banking
Open banking — a significant change in the way people interact with their finances — received a boost when the European Parliament adopted the revised Payment Services Directive (PSD2) in October 2015 to promote it. Throughout Europe and Latin America and in many countries, such as the United Kingdom and Australia, open banking mandates similar to PSD2 now compel financial institutions and service providers to implement open banking to allow customer-permissioned access to their data.
The open-banking trend meant 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.
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.
While a lack of rules has slowed a full-on open banking implementation in the U.S., and other countries including Japan and Canada, major fintech players and some financial institutions are still embracing open API models to improve transaction transparency. An Executive Order on July 9, 2021 even encouraged the U.S.’s Consumer Financial Protection Bureau (CFPB) to create rules that make it easier for consumers to transfer bank account data across financial institutions.
“Open banking best practices are coming to the U.S. In fact, open banking has already become mainstream in other countries because of the benefits it provides. Financial institutions need to prepare now so they can understand the opportunity ahead and not be left behind, and CIOs need to understand how to prepare ecosystems to support open banking models,” suggested a Forbes Tech Council article.
Desperately Seeking Fintech Partnerships
With the incursion of fintechs many financial industry experts questioned if traditional banking services was on its way out. Open banking along with embedded finance — the integration of financial services such as lending or payment processing – within a non-financial company's offering threaten the exclusive relationship financial institutions had with their customers.
Evan Bourke and Sarah Hedley Hymers in a Euronews write-up points out car manufacturer Tesla offers embedded insurance to customers so they can drive new vehicle off the lot, fully covered; rideshare service Uber presents embedded payments, accessing users' banking details (with their consent) to eliminate the need to provide card details every time they book a ride; and Swedish fintech company Klarna allows consumers to buy now, pay later (BNPL) with embedded credit – also known as embedded lending.
The introduction of open banking and embedded finance has given fintech firms the opportunity to restructure the international finance ecosphere, placing access to financial services in consumer’s hands via their smartphones and devices with accessible apps and sites.
Nevertheless, fintechs and developers also face many unexpected growing pains and challenges.
Federal Reserve Governor Governors Lael Brainard said in remarks before a conference on financial innovation, “‘Run fast and break things’ may be a popular mantra in the technology space; it is ill-suited to an arena that depends on trust and confidence.” However, Brainard added it would be a lost opportunity if fintech products did not continue to expand access in a socially beneficial way.
Fintechs and financial institutions can benefit by coming together rather than competing. Financial institutions gain technology and insights through mergers, acquiring startup companies, or mentorship programs. In the meantime, fintechs increase customer trust and market reach through such partnerships.
Making Fintech-FI Partnerships Work
Financial institutions today have customers’ consent to provide third-party providers access to personal financial information, allowing for the development of apps and programs that make consumers’ financial lives more efficient.
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 to power existing processes.
API usage increased for fintechs 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. APIs allow fintech firms to help financial institutions overcome technical issues and benefit from previously untapped revenue-making opportunities.
The key to fintech partnerships and API usage lies with a proper integration. NXTsoft’s OmniConnect Platform, for example, utilizes 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 numerous fintech systems including to 99% of U.S.-based core systems from Fiserv, Jack Henry and FIS and more.
