The pandemic rapidly accelerating digital transformation within financial institutions across the country. This shift led to major changes in the competitive landscape for banks and credit unions. This included drawing attention to the need to continually innovate their technology platforms, quickly bringing new products to market and refining them based on customer insights.
However, in today’s banking ecosphere, incumbent financial institutions seeking a digital transformation must first come to grips and understand the dizzying assortment of technology terms and acronyms (such as APIs and BaaS), new competitors challenging them and allies that could help equip them with the right processes.
Understanding Fintech Terminology
Some bankers react with glassy eyed looks when confronted with evolving financial terminology.
Even the expression fintech, a shortened version of financial technology, now defines not only the technological underpinning of the banking industry but a wide-ranging assortment of tech used to assist and, in some cases, transact financial business.
Fintech was already transforming financial activity digitally due to the mobile internet/smartphone revolution, but the pandemic rushed many financial institutions and their customers online to conduct transactions remotely.
Examples of fintech applications include robo advisors, payment, lending and investment apps. Activity includes money transfers, remote check deposits, and credit and lending approvals.
Other New Age Banking Terms:
In an effort to bring legacy-based thinking and technology more up to date here is a glossary of some new fintech terminology needed to understand digital products, services and processes.
Application Programming Interface (API) — allows different applications and programs to communicate. In the fintech realm, APIs connect all the dissimilar functions used in a transaction or process.
Banking as a Service (BaaS) — A vital component of open banking that boosts financial transparency. BaaS allows financial institutions to open up their APIs for third parties to develop new services.
Buy Now, Pay Later (BNPL) — These types of loans are rising in popularity as they give consumers the ability to pay for any purchase in smaller installment payments. Typically, interest free payments are made on time, unlike a credit card which charges interest on balances.
Decentralized finance (DeFi) —a system that describes financial products available on a public decentralized blockchain network. DeFi allows anyone to use the financial products without having to go through a financial institution or brokerage firm.
“Know Your Client” Or “Know Your Customer” (both known as KYC) — refers to an investment industry standard that helps ensure that consultants know what they need to know about their clients’ investment knowledge, risk tolerance, and financial positions.
Neobanks –also known “challenger banks” or online-only banks, are fintech firms that offer apps, software and other technologies to streamline mobile and online banking. The customer interacts with their financial service organization through a digital interface. Often this interface is accessed on mobile devices.
Open Banking – refers to financial institutions securely sharing account data with third-party applications through the use of APIs. Integrating consumer bank accounts to fintech apps generates a personalized user experience that permits consumers to make payments and execute other financial functions.
Payment Card Industry or PCI – Fintechs and banks need to offer products and services that are PCI-compliant, signifying they collect and transfer payment card data securely to mitigate the fraud risks.
Real-Time Payments or RTP — Payments that a consumer initiate and settle almost immediately. Characteristically, real-time payment networks can process transactions 24/7.
Robo-advisors — digital platforms that provide automated algorithm-driven financial planning services such as account setup, goal planning, account services, portfolio management, and security features, with little to no human intervention.
What’s “Best” for the Financial Institution
Another facet of assembling the right financial technology for a specific financial institution is understanding the differences between best-of-breed, best-of-class and best-of-suite.
Comprehending the variances can not only save a bank or credit union from over-spending for bad tech but from integrating the wrong system for the organization’s needs.
Best of suite is usually describes what the core vendor offers. In a best-of-suite software model, the developer releases a full software suite that performs various business functions. In legacy systems integrating ancillary products from different vendors was often problematic and expensive.
Best-in-class, or best-of-class refers to a top-shelf product within a category of hardware or software. It does not automatically mean best product overall. For example, the best-in-class product in a low-priced category may be inferior to the best product on the market.
Best-of-breed denotes top software from different vendors for each banking niche. Best-of-breed software systems perform specialized functions better than integrated systems but are typically constrained by their limited capacity. For example, financial institutions may purchase a core accounting package from one vendor and an ancillary or loan origination system from another vendor.
In today’s progressively interconnected banking technology environment, a la carte, best-of-breed system solutions are becoming more prevalent because they guarantee the best customer experience connection and efficiency across department lines in a financial institution.
However, in the event that an organization chooses a best-of-breed approach, it can expect a greater degree of complexity in importing and exporting data between departments and file sharing thereby triggering the need to deploy an API to connect the various or specific fintech components.
In addition, banks and credit unions need fintech partnerships to accelerate innovation and growth. Q2 Holdings, Inc. in a report on banking innovation and digital evolution revealed more than 60% of financial institutions surveyed see fintech partnerships as key to their growth strategy; however, only 12% of the respondents have fintech partnerships.
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 free-up data stored on legacy systems.
- OmniConnect, the vendor agnostic premier open banking marketplace for all API needs, uses cutting-edge cloud technology to connect fintech solutions to financial institutions. OmniConnect removes integration obstacles and provides a seamless connection between third-party API solutions and financial institutions’ core digital banking, item processing and financial systems.
NXTsoft has implemented and managed data connectivity events for over 2,000 financial institutions and provides connections to all major U.S.-based banking core accounting systems including platforms from Fiserv, Jack Henry and FIS.