Using APIs in banking isn’t new – we know this much.
But how they are being used has evolved tremendously. Not only can you use APIs internally to connect old, disparate systems, but you can use them to generate new business.
Two terms, specifically, that have received a ton of buzz in the industry are “Open Banking” and Banking as a Service (BaaS). But contrary to what many may believe, these API-based banking solutions are not exclusive to major financial institutions or the rising neobanks of the world. In fact, small to mid-size banks, particularly community banks, can (and should) start considering these alternate forms of banking. And by having the right vendor relationships on your side, you can readily expand your bank’s products portfolio, grow your business, and keep up with the big players in the industry.
Now you’re probably wondering why this all matters and why you should start investing in yet another product, especially if your bank’s financial outlook is positive with the current products and services your bank offers. Honestly, the benefits of API banking technology outweigh the initial investment. You’re able to optimize operations for your staff, reduce costs for your bank, and attract and retain your customers with new and updated offerings.
Does your product suite fulfill all three of the above benefits?
If not, let’s discuss API banking a bit further and how it can help your institution.
API Banking Terms Breakdown
If you Google the terms below, chances are you’ll find tons of information, some of it conflicting, named differently, and often confusing, but here’s what we feel is most important to talk about:
API Banking can be defined as any software that uses an API to share information between financial institutional systems and third-party applications. With API Banking, the bank gives the customer more control over their data while the third party gets the opportunity to offer its services to the bank’s customers. There are several types of API Banking with Open Banking and BaaS being the most familiar.
API Banking allows third parties to use banking APIs as building blocks for developing solutions for the bank’s customer, while Open Banking is more specific and allows third parties to access shared data and credentials, such as account holder’s name, account type, account open date, transaction details, etc.
Examples of Open Banking
If a customer has created a savings account for a new house, a third-party provider can pull certain customer data on the account via a bank API and suggest a loan tailored to their savings and income capabilities.
Other examples of Open Banking solutions include:
- Customized investment plans
- Budgeting tips
- Savings notifications
- Account aggregation
- Instant credit risk
- New account origination
Banking as a Service
Banking as a Service (also referred to as Platform Banking or Embedded Banking from some sites) is when licensed banks enable non-banks to integrate digital banking and payment services to their own products.
While Open Banking allows third parties to access customer’s data, BaaS allows third parties to access the bank’s functionality. BaaS may often involve Open Banking, but it is not the same service.
Examples of BaaS
Think of your last experience shopping for a car. Did the dealer offer financing options? If they did, chances are they were working with a bank or several banks to offer customers financing through the dealership, instead of referring the customer to the bank for a loan qualification. This is BaaS.
Other opportunities for BaaS solutions:
- Fraud management
- Account management
- Investment solutions
- Debit card/credit card solutions
Did you know? Car-sharing company Lyft’s debit card offering is a real-life example of BaaS. The card promises a strong rewards program and instant payments coupled with seamless account opening and integration into the app.
API Banking Benefits
There are a multitude of reasons and benefits to onboard API Banking at your bank. Here are just a few of them:
• Drives innovation with adoption of new technology capabilities
• Broadens the customer base and increases market share
• Attracts and retains your bank’s customers by meeting their demands
• Creates new revenue streams through new partnerships
• Can be used internally to connect disparate systems
• Relieves the burden on internal IT resources
• Enables faster customer service
• Reduces workload and promotes work efficiencies
• Mitigates the risk for human error
• Increases customer loyalty
• Increases profitability
• Lowers the high costs of doing business
Many banks may be slow to respond to the API banking trend or not show interest at all due to a few misconceptions in the industry. Here are just a few and why they are not justified.
Non-banks in the fintech industry are competition and should be seen as a threat.
Your competition should be the banks that are partnering with these non-banks. They are taking advantage of a new channel and opportunity for profitability, are able to increase their customer base more than they could have on their own, and can leverage their partnership with their own customers.
Developing an API in-house to offer API-based banking solutions costs less than working with a trusted provider.
Banking institutions may want to keep costs low to and may feel inclined to turn to their own IT teams to get the job done. However, if your team isn’t experienced in API technology, it may cost more time and resources to complete, and you want to be certain that the integration will work according to plan.
Fintech providers that boast large API libraries are the partners of choice.
Having a large library is very attractive, but what matters is whether the provider can find an API that integrates with your bank’s systems and plays well with third-party providers. How frequently they update the API is also important because broken APIs do exist. Why invest in an API if you can’t rely on the functionality long-term?
An API can solve the problems of a bank’s current infrastructure.
API Banking can certainly optimize your bank’s operations and welcome new revenue opportunities. However, if your bank is operating a decades-old legacy system, then onboarding a new API-based platform may not be so seamless and won’t be able to fix any pre-existing issues with your technology stack.
Getting Started with API Banking
Are we piquing your interest in API Banking? If so, here are a few tips for joining the movement and exploring your options.
First, develop a strategy.
Innovation may be top of mind when selecting and onboarding any type of API banking service, but an institution’s staff needs to ask themselves if it will actually benefit their bank. If a bank is looking to grow their business by X percent in five years, how will Open Banking or BaaS help them achieve their goal?
Here are a few questions from Mckinsey & Company to consider asking yourself:
- Where are the opportunities for using API technology internally or externally?
- Have our customers been requesting products or services that would require an API integration?
- Do we have the resources internally to develop the APIs needed for the goals we want to accomplish?
- If we don’t have the internal staff and bandwidth to develop an API, what type of providers should we consider and what’s our budget?
Ask your core technology provider.
Before exploring options, ask your core provider what APIs they have available with third-party partners.
For example, if your institution is looking to build an app for customers to access their accounts while on the go, you may ask your core provider if they have a partner offering this product already. If they have something in place, make sure you ask for details on how it all works, what the cost would be to onboard, and what the cost would be moving forward.
If possible, ask for a reference to contact another institution that is using the same product.
Evaluate new providers
When looking at your current provider for API banking solutions, you may find yourself in a few unfortunate situations. 1.) Your core provider is a legacy provider, and their core system cannot accommodate API capabilities. 2.) Your core system can support a new API with a third-party provider, but the delivery time is too long (an average of 12 months!) and it could cost you up to $100k for the service.
If you find yourself in these situations, but you still want to move forward with API Banking options, then it may be best to look at new providers that offer the modern core technology that supports API Banking and is affordable to onboard.
The Future is Bright in API Banking
The pandemic catalyzed the movement we have seen trickle in, in the last several years. Visiting a brick-and-mortar institution was on pause for so long that customers started looking for digital banking options to take care of their banking needs. Since then, the demand for convenient, fast, and secure solutions has only increased, and the big fintech companies and banking institutions have already jumped on that train.
For small to mid-size banks to thrive in today’s environment, they must be open to innovation and embrace integrated banking experiences that involve API-based solutions. It’s time to deliver on what your customers need, whether it’s being able to open an account online, manage their accounts from anywhere, or finance their new set of wheels at the point of signing. If a bank wants to grow their business and stay relevant in the industry, they have to keep up with their competition. Failing to adopt these new technologies and continually being slow to respond is not a place you want to be long-term.
Looking for API banking options? Fill out our form and learn how we can help your bank.
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