Banks And APIs: Tough Questions, New Answers

The B2B payments industry is finally beginning to hustle when it comes to technological innovation. And as traditional financial institutions (FI) begin to recognize the value of collaborating with FinTechs, these banks can similarly shake their reputation for being innovation laggards and promote B2B payments progress while they’re at it. 

This industry is on the cusp of some major innovation, too, as FinTechs roll out services that banks can offer to their own customer clients via APIs. But issues abound. How can banks stay competitive while still cooperating with FinTechs? How do banks not only add these new services into their offering, but actually manage operations of that tool in the back office? 

And perhaps the most controversial question: Who actually owns the customer data that banks and FinTechs share via API? 

PYMNTS will explore these questions and others with its upcoming launch of the PYMNTS.com B2B API Tracker™. In collaboration with FI.SPAN, the monthly tracker will examine the latest B2B financial services released onto the market. 

The PYMNTS.com B2B API Tracker™ won’t be released until later this week, but PYMNTS’ Karen Webster spoke with FI.SPAN founder and CEO Lisa Shields about how banks should navigate the new world of B2B financial services available to them thanks to the rise of the third-party API. 

“APIs will play a vital role in the quality of payment and financial services available, both for consumers and businesses,” she said. 

“Banks are realizing that APIs can solve some of these industry issues we’ve been talking about, like credential sharing, manual data exchange and even things like screen scraping.” 

Shields may be confident that APIs will be integral for banks moving forward, but it’s only in the past year or so, she said, that the technology has surfaced. She describes the evolution of the API in phases: the first being, what are APIs?  

Throughout 2016, though, as the technology became more common, industry players began to raise significant questions about the tool around the potential pitfalls and threats involved with the sharing of data necessary for new services to function. As that conversation continues into 2017, Shields said, the financial services market is now working out its business strategies around APIs. 

For FIs, understanding how APIs can actually support their competitive edge in the FinServ space is critical at this juncture, the executive noted. 

After all, when a FinTech develops a B2B payments solution far more sophisticated and agile than what a bank can offer, that bank now risks losing a client — or at least part of that client’s business. Shields explained that traditionally, banks have faced many boundaries in their own product and service development goals, including budget, regulations and how that innovation can fit into an existing infrastructure. FinTechs, on the other hand, are built for the purpose of product development. 

“A FinTech doesn’t think about revenue cannibalization,” she said. “It loves modern technology. It can highly specialize its offering to a particular customer niche. It operates in a less complex regulatory environment.” 

Admittedly, she continued, it seems that FinTechs are positioned squarely against banks. But if a bank thinks it can’t gain from the current industry climate, it’s wrong. 

“Add to all of this the concept of interoperating and data sharing through APIs, and it seems like a bad place in time to be a bank,” said Shields. “But we believe the exact opposite: that banks are in fact that ecosystem participant best positioned to profit from the era of the API.” 

The idea of the management platform will be critical to FIs as they connect with third-party service providers via API, allowing banks to move from banking-as-a-service toward FinTech-as-a-service — a necessary shift if banks want to stay competitive and reap the benefits of the age of APIs. 

“Banks have always been a trusted service provider of core financial services, but customers are turning to third parties for functional innovation,” she said. “What I see service management platforms doing is turning and orchestrating these innovating and compelling third-party offerings into a point-and-click exercise.” 

According to Shields, the role of these service management platforms should be threefold: Enable a plug-and-play integration between FinTech services and banks, facilitate client onboarding and provide ongoing operational service to ensure banks maintain compliance and streamline issues like reconciliation and exceptions handling. This can address a key challenge for banks when they want to begin offering a third-party service: An API may enable the connection between a bank and that service, but a management platform is key for the bank to streamline operation of that service. 

Shields offered the idea of a third-party corporate card solution as an example. It may allow easy onboarding so that a bank can offer the solution under its own brand. But there needs to be a mechanism for the bank’s operational staff to handle things like exceptions and customer service.  

“The technical integration and interconnecting of APIs is a trivial exercise,” the executive stated. “Seamlessly interconnecting services is non-trivial.” 

Perhaps one of the biggest questions about the rise of the API is the issue of sharing customer data. These third-party services need the data stored by banks to function properly, but who gives permission for that process? Over the next few years, Shields say, that question — and many others —will shape the evolution of the industry. 

“It’s less clear how discussions are going to progress in the industry discourse and how we’re going to end up thinking about who owns the data,” she said. “Interconnecting and sharing of this data is inevitable, but who owns it?” 

Regulations like PSD2 or simply market forces are probably going to play a role in formulating the answer. Shields said banks should take the view that the data is owned by the customer if they want to play a competitive and profitable role in working with FinTechs via APIs.  

“I think there’s a fantastic opportunity for banks to get ahead of those discussions,” the CEO noted. “Personally, I think banks taking the view that the customer owns the data is the right long-term view to adopt. I think that as financial institutions recognize the fact that it’s not your data, it’s your customers’ data, that there is massive opportunity for you to help the customer make the best use of all that data.” 

That position can enable banks to get ahead of the competition, she said, to grab more share of the financial services market — and the customer’s wallet.