Open banking application programming interfaces (APIs), driven by consumer demand, is a hot topic in financial service circles these days. However, a lack of regulation and standardization in the U.S. sometimes makes API integration, without proper support, concerning at best, and downright hazardous at worst.

Prior to the last half dozen years or so, financial services firms had wide-ranging control over their customer’s information. The notion of yielding consumer data to a third party to benefit customers was never an option for financial institutions until it became a competitive disadvantage.

Throughout Europe and Latin America and in many countries, such as the United Kingdom and Australia, mandates such as the European Union’s Payment Services Directive (PSD2) compelled financial institutions and service providers to implement open banking technologies to allow customer-permissioned access to their data. With PSD2, any business delivering financial services had to provide for third party access. The intent was to inspire innovation and let customers take more control of their financial interactions and information.

While a lack of rules has slowed implementation in the U.S., and other countries including Japan and Canada, major fintech players and some financial institutions are still embracing open API models to improve transaction transparency.

Digital Transformation Thrives with Innovation and APIs

As these consumer-permissioned models become available, digital innovation among fintechs and financial institutions booms. IDC projects that organizations will spend $6.8 trillion on digital transformation between 2020 and 2023.

APIs are building blocks for digital transformation, but determining which APIs to develop and what products and solutions they will enable requires a digital mindset, according to the Harvard Business Review (HBR). “You don’t have to be a tech company to reap the benefits of APIs, and they would particularly benefit small to midsize companies that now struggle to reach digital audiences through saturated and tightly controlled ad networks and ecommerce markets.”

APIs position financial institutions to offer digital products and services more easily through emerging platforms, unbundle and re-bundle their core competencies, and offload non-core competencies to third-party providers. “Companies that have been most successful with APIs display common thinking patterns and practices, something the authors call the ‘ways of the API,’” according the HBR article.

Online payments network Trustly explained companies in industries where API-related regulations and standards are being implemented (PSD2 in financial services), can use their compliance initiatives to strategic advantage. In Europe, the Banking Industry Architecture Network (BIAN) has defined 30 standardized APIs and implemented them both from the consumers’ and providers’ end. Although BIAN started in Europe, they are well-connected in the U.S. as well.

Also, the industry group the Financial Services Information Sharing and Analysis Center (FS-ISAC), through its subsidiary the Financial Data Exchange (FDX) is also developing APIs relevant to open banking. Sixteen million North American consumers now use its FDX API for open banking and open finance data sharing.

Finding a Safe API Haven in Open Banking

For the financial services community, preserving existing legacy systems untouched is as good as falling behind. Allowing innovation to push the boundaries puts customers firmly in control and permitted new powerful competitive banking players, such as fintech companies and neobanks, to emerge. For traditional financial institutions they must adjust by becoming more flexible and adaptive to changes, innovations and challenges.

However, committing to open banking is only a first step. Forming a new system allowing for APIs, sharing data, information and transactions requires careful implementation. While open-banking APIs enable financial institutions, vendors and fintech companies to share data there are still valid concerns over the safekeeping of information passing through them. Apprehensions related to cloud security and a surge in cyberattacks are also significant issues to consider when entering the open-banking/cloud API marketplace.

With the intention of capitalizing on the shift toward more open banking, many credit unions and banks seek a fintech partnership. Many pursue help in areas to improve their mobile banking and payment channels, personal digital assistants, saving and investment tools, fraud mitigation, payment processing, and artificial intelligence/machine learning capabilities (including chatbots). They may also seek to upgrade their digital banking platforms to provide real-time and same-day banking services, big data access through open banking to provide customers with personal and actionable insights; and robotic process automation to power existing processes.

Fintech Partnerships Mutually Beneficial

APIs continue to grow into the nucleus of consumer-permissioned paradigm that provides banking customers with control over real-time access to their financial information in a digital environment.

To enter this new open-banking marketplace, a start-up with ground-breaking idea that could fill a fintech gap needs to find a partner with the capability to deliver APIs and data layered integration to financial institutions.

Partnerships between fintechs and financial institution are mutually beneficial. For credit unions and banks, an open-banking solution tapping into new technology can extend their market reach, connectivity to customers and provide new revenue opportunities. Meanwhile, partnering with financial institutions by gaining access through open banking APIs allows fintechs to strengthen their offerings. An API marketplace — which includes an API manager, gateway, security, publisher and developer — helps bring the financial institutions and fintechs together.

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 vendor agnostic OmniConnect Platform, the premier open banking marketplace for all API needs, uses cutting-edge cloud technology to connect fintech solutions to financial institutions, ensuring that NXTsoft clients have the most secure and reliable integration environment in the industry. OmniConnect provides the access needed to the financial institutions information, removing integration obstacles and providing a seamless connection between third-party API solutions and financial institutions’ core digital banking, item processing and financial systems.