Opening Financial Institutions to an API Economy

Category: API
Author: NXTsoft

An economy based on application programming interfaces (APIs) continues to grow as digital transformation evolves across multiple industries including banking, finance and payments. Similar to retail, the financial sector is moving towards an omnichannel ecosystem where customers can choose between a selection of service to satisfy their immediate needs. 

“The idea of an ‘API economy,’ in which APIs create new value for companies, is over a decade old, and many established enterprises correctly view APIs as a key to unlocking their digital transformations. But it is not just the digital giants that can benefit from application programming interfaces,” suggested the Harvard Business Review. 

The HBR went on to point out companies do not need a tech foundation to reap the benefits of APIs, the opportunity exists in every industry. “Some sectors are being compelled to offer APIs due to regulation (like healthcare and banking), whereas others are prompted by industry interoperability (like telecommunications) or disruption (like retail, media, and entertainment).” 

FIs Enter the API Economy 

Initially, fintechs and digital-only banks, enabled by nimble microservices dominated banking’s digital transformation but traditional financial institutions saw the market restructuring and strategized on how to fit into this new API-enabled digital economy: 

Now financial institutions realize they can take advantage of tighter integration and connectivity between data, apps, algorithms, and people, to unleash new potential revenue streams.  

Two types of distribution mechanisms developed as well. 

Banking as a platform (BaaP). Enables third-party developers to build products and services for banking customers. Bank and credit unions can supplement their customer product portfolio via partners’ financial APIs to move into new product verticals, expand into new markets, or re-engage customers with upsells and cross-sells. 

Banking as a Service (BaaS) — Allows non-banks to offer core financial services to their customers by integrating with financial institutions via APIs. Non-banks (like fintech and even non-fintech businesses) build products on top of the traditional banking infrastructure. By embracing BaaS traditional financial institutions can also embed finance and BaaS services to retain customers and increase their significance by offering a better experience.  

Finastra’s “Financial Services State of the Nation Survey 2021,” surveyed 785 global financial institutions and found 85% of respondents at global financial institutions believe BaaS will continue to make an impact; and 40% believe the effect will be significant. 

The Finastra study also found 81% of financial institutions see BAAS as a means to grow business, enhance their distribution channels, shorten time to market and streamline operations.  

Enabling the API Economy 

Numerous financial institutions still operate outdated fragments of legacy technology — including core systems — that are not compatible with innovative fintech. This can be a big issue in implementing the BaaS model as it would hinder third-party integrations.  

This has helped fuel the open banking movement. In order for financial institutions to modernize they must tap into an extensive variety of banking enablers helped considerably by open APIs.  

A brief from the Federal Reserve Bank of Boston specified the emergence of open banking grew out of a global trend driven by innovation, regulation, the pace of financial technology (fintech), and consumer demand for more control over the use of personal data. “Open banking allows for the secure transmission of account data authorized by the customer to a third-party service provider (TPP).” The Boston Fed also noted that while regulation is driving open banking in many countries, the emergence of fintech and financial institution innovation initiatives are the key drivers of U.S. open banking  

A key benefit of open banking versus closed systems is the ability for financial institutions to offer customers enhanced financial services, share information and provide consumers greater control over their data.  

FIs use APIs in collaboration with third-party providers to enable new services and connect the financial institution app to merchants, consumers, and companies. Some link users to their banking information, and allow them to experience newer banking products and services within the traditional banking systems. For example, third-party personal financial management tools to track spending and streamlined lending. 

Connectivity as a Service (CaaS) - API for FIs

Connecting Fintechs and APIs Securely  

Opening up a financial institution through APIs is no minor achievement. Producing an API approach should center on ease of integration and the capability to deliver maximum business value. The operational processes and business capabilities need optimum exposure. In this scenario the API-based BaaS layer requires constant monitoring to enable secure operation.  

The new breed of third-party APIs frees developers from locking onto any particular platform and allows them to bring their applications more efficiently to market. They can also benefit from partnerships that already have access to ready-made solutions. 

Consequently, developers can focus on their particular specialty and surround it with fully functional, distributed processes developed by other specialists, which they access through APIs. Another advantage is third-party APIs generally work better and provide more flexibility than internally built APIs. Third-party API developers have more volume and access to a larger data set that creates significant network results. 

There remains widespread agreement by global financial services institutions that fintech collaboration has made their businesses more efficient, has been a driver for success, and that the benefits of collaboration outweigh its costs; according to 80% of Finastra survey respondents.  

Many questions remain about the security of BaaS. There are still valid concerns over the safekeeping of information passing through them. Issues such as anxieties related to cloud security and an upsurge in cyberattacks are also important to consider when entering the open-banking API marketplace.  

NXTsoft’s OmniConnect Platform, which utilizes cutting-edge cloud technology to securely connect fintech solutions to financial institutions, ensures that its clients have safe and reliable integration, and is an open banking marketplace for all API needs. NXTsoft has connectors built 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 multi-core versions. 

NXTsoft delivers connectivity to over 700 financial institutions with 2,000 connections in place. The company provides links to active partners through it OmniConnect API Marketplace They have connected with financial services systems, customer relationship management (CRM) platforms and other banking systems.  

May 17, 2022
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