Nearly every financial institution understands the need to change quicker to adapt to emerging innovation. Trailblazing fintech and digital challengers are rapidly advancing consumer-friendly models, compelling traditional organizations to reconsider their business and tech strategies to become a part of the new banking environment that incorporates fintech through application programming interfaces (APIs).
However, many financial institutions must first liberate themselves from legacy core systems, which traditionally operate all business functions but can be difficult to alter and adapt. That is why the banking industry is pushing away from closed systems, where financial institutions provide services directly to its customers, toward open models functioning as part of a newer fintech environment.
A significant advantage of open banking compared to closed systems is the capacity for financial institutions to offer customers enhanced financial services, share data with third-party providers and offer consumers better control over their information.
What Financial Institutions Face
Seven key technologies will drive banking business model reinventions while shaping the financial industry’s competitive landscape over the next 10 years, according to McKinsey analysis:
In summary, McKinsey, noted:
- Artificial intelligence (AI) will drive massive value creation. McKinsey estimates that AI can generate up to $1 trillion additional value for the global banking industry annually. Financial institutions need to adopt an AI-first mindset to better resist encroachment onto their territory by expanding technology firms.
- Blockchain will disrupt established financial protocols. Distributed ledger technology (DLT), which allows the recording and sharing of data across multiple data stores, and for the recording and sharing of transactions, will increasingly underpin financing by allowing the storage of financial transactions in multiple places at once.
- Cloud computing will liberate financial services participants. McKinsey research shows that by 2030, cloud technology will account for EBITDA (earnings before interest, tax, depreciation and amortization) in excess of $1 trillion across the world’s top 500 companies. Also: effective cloud use can increase the migrated application development and maintenance efficiency by 38%; raise infrastructure cost efficiency by 29 %; and reduce migrated applications’ downtime by about 57 %, thus lowering costs associated with technical violations by 26%.
- Internet of Things (IoT) will drive a new era of trust in finance. IoT and its three layers – perception and smart sensor systems, wireless communication networks, and application and operations support —is finally coming of age. RFID labeling still has broad untapped potential to automate item identification and logistics management but embedded-system and smart technologies are developing fast, enabling more intelligent communication with objects. In banking, IoT-based inventory and property financing is refining risk management.
- Open source, software-as-a-service (SaaS) and serverless will lower barriers to entry. Speed and scalability are critical for new businesses and financial innovation, particularly amid the intense competition and “winner-takes-all dynamics” of the digital economy. Open-source software, serverless architecture, and SaaS have become must-haves for technology players and traditional financial institutions launching new fintech businesses.
- No-code and low-code will redefine application development. No-code development platforms (NCDPs), and their close relation low-code platforms, allow app development through graphical user interfaces and configurations (e.g., drag-and-drop) instead of traditional computer programming.
- Hyper automation will replace manual work. Hyper automation refers to the introduction of AI, deep learning, event-driven software, robotic process automation (RPA), and other technologies and tools that improve decision-making efficiency and work automation capabilities. These key technologies and trends are becoming increasingly intertwined and integrated, giving massive impetus to fintech and financial industry innovation.
Banking Open to Embedded Finance
The introduction of open banking has given fintech firms the opportunity to put access to financial services at people's fingertips via their smartphones and computers with user-friendly apps and websites.
Open banking allows traditional financial institutions to share data via APIs. As a result, traditional financial institutions no longer have exclusive rights over data management and approved fintech companies can plug into people's accounts and offer customers a range of services.
Open banking has also facilitated the rise of embedded finance, which can stimulate consumer engagement and boost sales. Essentially, embedded finance is the integration of financial services – such as lending or payment processing. It allows non-financial brands to integrate banking and payments services into their apps and ecosystems through the use of APIs.
Many financial institutions in order to expand their banking reach need a strong partnership with fintechs through APIs to gather analytics, offer personalize services, allow funds transfers funds and much more.
Some industry experts also encourage open banking go further than data sharing, and expand the functionality of core financial services. Especially as more effective and user-friendly procedures develop and consumers learn better ways to access banking services.
Selecting the Correct Fintech Partner
The use of APIs has allowed a new fintech generation to flourish. The versatile nature of APIs has also enabled an assortment of companies to offer them. Because many API providers are cloud-based and designed to mix-and-match, they support adoption virtually or physically.
The first wave of this new fintech generation focused on unbundling consumer banking offerings, providing tech to financial institutions, and allowing neobanks to compete against the slow-moving incumbents.
A number of financial institutions have starting to work with, or invest in, fintechs to create more revenue streams or more personalized customer experiences. Juniper Research also anticipates acquisitions and partnerships to intensify so vendors can meet evolving requirements quickly. This will also create the need for financial institutions to find stabilizing technology and the right fintech allies.
NXTsoft, for example, provides a best-of-breed API connectivity solution for financial institutions and fintechs. Financial technology suppliers can close deals quickly with pre-built API integrations into so many existing applications; and the capability to connect fintech solutions securely to banks and credit unions, using the strongest technology foundation and the most cutting-edge cloud-based technology; and following the uppermost industry and regulatory standards.
NXTsoft’s OmniConnect Platform, which ensures that its clients have safe and reliable integration, is an open banking marketplace for all API needs. NXTsoft has connectors built for as many as 40 different banking systems including systems from Fiserv, Jack Henry and FIS.