Bankers as Buyers: APIs, Small Biz Banking and Real-time Payments

By Kerry Eagan April 25, 2023 BankingFintech

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"Technology has made banking faster than ever before, and there's no going back to the slower pace of the past." – Suresh Renganathan, CTO for Teachers Federal Credit Union

The pandemic and subsequent lockdown became strong accelerators for digital transformation within financial institutions (FIs), forcing many banks and credit unions to adopt technology quickly to remain operable and effectively reach customers. FIs' operational processes, technology stacks and product offerings all reflect decisions made in the past, making for a complex banking environment.

While most institutions began their digital journeys years ago, the process is still very much ongoing. Many are working towards blending the gap between digital and physical environments for the coveted omnichannel experience that consumers expect. Today’s advancements within the banking industry are primarily driven by consumer demand and the desire to remain competitive within the larger market.

Our annual report provides a consolidated collection of viewpoints from thought leaders across the banking and fintech industries. This three-part blog series will outline the trends and advancements impacting and shaping today's banking environment.

APIs: Enabling Expansion Opportunities and Fintech Partnerships

Consumer demand for seamless digital experiences will only continue to increase. Banks and credit unions are struggling to provide consumers with these experiences while relying on multiple vendors with different levels of openness (and willingness to work with other providers). Intense competition is forcing banks to move faster, shift their viewpoint on fintechs from competitors to partners and support user experience across multiple platforms, all of which require proficient API-driven architectures. Collaborative banking will continue to advance as these partnerships strengthen and become more prevalent.

Many institutions are shifting toward the use of open APIs, which can support a variety of business lines and demographics while maintaining security and compliance. Brian Bodell, VP of Platform Technology in CUNA Mutual Group's Fintech Solutions division, states that FIs must utilize internal APIs. "For financial institutions to receive optimum benefits from APIs, they need to have a purposely architected platform designed to expose well-documented APIs and services with full security, monitoring and reporting, with a layer to abstract the front end from back-end solutions," explains Bodell.

APIs are allowing Banking as a Service (BaaS) to gain traction, with Juniper Research predicting the global BaaS market will expand to more than $38 billion in the next five years. As APIs become more prevalent in banking, so will protecting personally identifiable information (PII). The Consumer Financial Protection Bureau (CFPB) is actively working on section 1033 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). This section will require transparency into transaction data and other information concerning a consumer financial product or service that the consumer obtains through their bank.

Small Business Banking Digital Advances

Strengthening small business banking relationships will be a top priority for FIs due to the stickiness of the relationship and the opportunity for cross-selling. Banks are moving toward a single system provider for business digital account opening, business loan origination and business servicing like cash management.

Currently, banks are failing to use data automation to provide valuable insights and services to SMBs. These businesses are looking to their financial institution to develop a connected environment that allows insight into cash flow and receivables for a more robust look into their business. Implementing cloud- and API-based solutions allow FIs to compete with fintechs and expand the SMB banking relationship.

An American Banker survey stated that 53% of SMBs are willing to extend their relationships with third-party payment providers. "Most banks lack a great digital platform to provide these services to sole proprietors or other small businesses that don't need or want a complex application, but need more services that a consumer does," said Riddle. This vertical offers a significant opportunity for financial institutions to support their SMB accounts.

The Real Opportunity in Instant Payments

Instant payments are rising in popularity, as evident by the launch of RTP by the Clearing House in 2017 and the introduction of FedNow slated for this summer. The most common use case for real-time payments is within peer-to-peer (P2P) payments, with staggering usage rates.

However, the real opportunity for instant payments lies within the B2B space. Instant payments are well-suited for managing cash flow and making time-sensitive payments. Higher interest rates will draw certain businesses to instant payments because the cost of capital can impact margins. Enabling real-time payments is the most significant opportunity for FIs and is crucial to retain deposits for businesses that will leverage instant payments in the future. For an FI, they offer opportunities to deliver rich details about the underlying transaction, paving the way for new products and services.

Payments are the first area where blockchain technology is being leveraged. Still, there is more opportunity for FIs to leverage this technology, according to Robert Morgan, CEO of the USDF Consortium. Morgan states, "Banks are now using cloud-based blockchain as the next ledger technology. So we think that blockchain can be used to facilitate everything that banks do."

The banking industry is undergoing significant transformation, and FIs that can adapt to the changing landscape will be better positioned for success. Keep an eye out for the second part of this series, where we will explore more advancements within the space, including those within data management, segmentation and cybersecurity. Download the full Bankers as Buyers report for a more comprehensive outlook on banking in 2023.

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