In the past, banks and FinTechs have been known to lock horns like (financially savvy) reality TV stars. Can APIs build a bridge and hand everyone a rose? For August’s PYMNTS.com B2B API Tracker™, a FI.SPAN collaboration, Silicon Valley Bank’s director of ACH product management Jason Carone, discusses bringing the two FIs together through a ‘lingua franca’ – common language – of APIs. Plus, the latest headlines and a provider directory with over 30 players in the space, inside the latest Tracker.
Banks and FinTech companies have a complicated history. To put it mildly, the two sides have not always worked harmoniously together.
Why the tension? Both types of institutions contend for the same business in the competitive financial services world. While traditional banks offer a more established and tested set of products, the offerings of newer FinTech companies — such as real-time data, streamlined payments and quick notifications — are helping these new players encroach on banks’ territories.
But if relationships between banks and FinTechs were once icy, it looks like they are on the verge of thawing thanks, in part, to API solutions. The tools are helping the two sides find ways to collaborate more often than compete. For banks, API solutions can help older financial institutions find innovative partners and, as a result, offer newer financial services. For FinTechs, APIs can get these startups working more effectively with banks’ legacy systems instead of building new systems on their own.
For APIs to successfully address the varying needs of different financial players, they need to be aligned. To address the need to standardize APIs, the National Automated Clearing House Association (NACHA) formed the API Standardization Industry Group in May. The group’s mission is to develop an “API Playbook” intended to help banks, FinTechs and other players in the financial services industry get on the same page when it comes to APIs. NACHA believes implementing a standardized API framework can help the financial services community more effectively support the payments and business needs of the various industry participants.
In other words, API solutions are bringing banks and smaller FinTech companies together to collaborate on solutions that can benefit the broader financial services industry. With the right APIs in place, institutions can offer greater operability between their respective systems, which can then facilitate faster and smoother transactions.
One company working to bridge the bank-FinTech divide is Silicon Valley Bank, a financial institution providing banking services to startup tech companies. Since 2015, Silicon Valley Bank has been using APIs to help players from the banking and FinTech industries communicate more effectively and deliver faster, more efficient banking solutions. On its website, the company describes the strategy of using APIs to address FinTech startups’ banking needs as providing the “lingua franca” — or common language — for the industry. In a recent interview with PYMNTS, Jason Carone, Silicon Valley Bank’s director of ACH product management, noted that as the industry continues to adopt this common language, the barriers between banks and startups in the financial space appear to be coming down. Carone, who’s also a member of NACHA’s API Standardization Industry Group, said banks and FinTechs are finding new reasons to collaborate using API solutions.
Banks And FinTechs: ‘Frenemies’ No More?
For now, Carone said, NACHA’s API Standardization Industry Group is primarily focused on addressing bank-to-bank operability issues along with the inefficiencies that still permeate the financial services sector. Despite many advancements in faster payment technologies and API solutions, some banks are still seriously lagging in their innovations.
In fact, Carone noted, some banks are still operating using distinctly 20th-century technology. Specifically, he said some banks use fax machines to communicate when looking for proof of authorization or additional transaction information.
While Carone said the Group’s current focus is on banks, the role of FinTechs in financial interoperability should not be overlooked. That’s because the rise of FinTech companies has prompted banks to change their strategy in response to the new competition on the market.
“FinTechs are pushing banks to go further,” Carone said. “They’re essentially stepping in and doing business that has traditionally only been done by a bank.”
These services can include merchant processing, ACH payments, budgeting tools and, in some cases, lending products.
The push by FinTechs has helped bring the two sides closer together, Carone said. As APIs evolve, both sides are finding opportunities to collaborate and work side-by-side to improve efficiencies.
Does that mean the rivalry between FinTechs and banks is over? Not entirely. But, Carone noted, both sides are now seeing opportunities to work together on shared goals instead of exclusively locking horns.
“I don’t know that we’re frenemies,” Carone said. “We truly are partners in this and, where there are opportunities between FinTechs and banks — we do what we can do to accommodate those where it makes business sense.”
More APIs, More Interaction
As more FinTechs seek to engage with banks’ financial systems, Carone said APIs are going to be play a key role in helping these newcomers work effectively with more established financial institutions’ legacy systems. He pointed out many of Silicon Valley Bank’s customers are FinTech startups that have struggled to with the older systems.
Offering banking APIs, Carone said, allows these newcomers to generate a methodology that works for their specific needs instead of forcing them to adopt and learn an unfamiliar file format. With API solutions in place, the FinTech companies do not have to radically change their financial operating systems or adapt to a more complicated file format used by banks.
“They don’t want to sign on to systems, download files, and then try and re-import them to other systems and do mapping to use the data,” Carone said.
Providing these APIs can help FinTechs divert attention to developing their public-facing products instead of trying to navigate the complexities of banking, he added.
“They don’t do banking for a living. They do software and services they offer out to the public, and that’s really where they want their focus to be,” Carone said. “We’re trying to enable them to focus on their businesses by taking care of the banking side in a more expeditious manner.”
In addition to banking, Carone said he sees additional opportunities for APIs to serve the FinTech community by offering a variety of financial services, including wire transfers, check issuance, bill pay and foreign exchange. Basically any service that they would traditionally use via a banks online banking portal.
Collaboration Inspiration
And, as more FinTechs emerge, they will need the services of banks — and banks will be pressured to step in and address those needs. In other words, it’s time for FinTechs and banks to put the rivalry behind them and focus more on a system of interoperability. Interoperability, said Carone, is the key driver behind API investment. Communication and interoperability between both parties’ respective systems will be important, and APIs will play a significant role in facilitating that connection.
For an interoperability model that should inspire banks and FinTechs on greater collaboration, Carone pointed to the rideshare industry. In this sector, service providers like Uber can work effectively with other services like Google Maps to determine a passenger’s location and destination, all via seamless API.
“I can request an Uber and it pulls up Google Maps and, based on my phone, it knows where I am,” Carone said. “The driver gets [my request] and knows where I’m going.”
The level of interoperability at work in the rideshare market is a standard that various players in the banking and FinTech space should try to emulate, he added. As FinTechs emerge, the call for more banking-focused APIs is poised to increase. If interoperability is what these new players expect, players from across the industry must work to meet those expectations.
“You’ve got to establish systems to grow in ways that the market is demanding,” Carone said.
And if the market demands greater collaboration between two different sides of the financial system, maybe it’s time to put the “frenemy” relationship to rest and focus instead on collaboration.
The level of interoperability at work in the rideshare market is a standard that various players in the banking and FinTech space should try to emulate, he added. As FinTechs emerge, the call for more banking-focused APIs is poised to increase. If interoperability is what these new players expect, players from across the industry must work to meet those expectations.
“You’ve got to establish systems to grow in ways that the market is demanding,” Carone said.
And if the market demands greater collaboration between two different sides of the financial system, maybe it’s time to put the “frenemy” relationship to rest and focus instead on collaboration.
. . . . . . . . . . . . . . . .
To download the August edition of the PYMNTS.com B2B API Tracker™, fill out the form below…
About the Tracker
The PYMNTS.com B2B API Tracker™, a FI.SPAN collaboration, serves as a monthly framework for the space, providing coverage of the most recent news and trends, along with a provider directory highlighting the key players contributing across the segments that comprise the B2B API ecosystem.