5 questions on APIs and the future of banking

Unpacking some of the key issues in financial APIs today—with some thoughts drawn from questions we received during a panel last year

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Banking and APIs seem to be top of mind these days. That naturally leads to questions—ranging from what people mean by bank data APIs to what the practical implications of them are. Here’s our quick take on some of these topics, drawn from questions we received during a panel hosted last year by Silicon Valley Bank.

What is API banking? Why is this relevant now?

It’s important to remember that every bank has—and has long had—APIs. An API is just a set a protocols, logic, and tools that allows developers to be able to programmatically interact with banking solutions and functionality, without having to interact directly with the bank’s back-end systems. The distinction in what’s being debated today (APIs used for fintech) and what has long existed is how open these APIs are, and whether they enable external access of any kind.

The beauty of an API is that it can modernize legacy infrastructure. For example, Plaid’s technology abstracts away all the complexity around data standardization, cleansing, categorization, and offers developers consistency across thousands of financial institutions.

So the key isn’t just to focus on the APIs, but rather the entire tool kit and infrastructure that developers rely upon to build on top of legacy banking infrastructure.

Europe is poised to create an open banking standard, and some banks have created their own APIs. How does Plaid fit in?

We’re actually happy to see banks starting to develop their own public APIs; even when we don’t provide the underlying infrastructure ourselves, we clean the data and layer on context. But more fundamentally, there has to be room for developers to innovate in this space, and our role as an intermediary will continue to be critical to the future of financial services, as we provide interoperability and standardization to the system. That interoperability at the end of the day is what underpins consumer choice, supports smaller institutions (especially those that can’t build their own APIs), and makes it easier for developers to innovate.

How big an advantage is it that many FinTech companies are not burdened with legacy infrastructure and can build from modern technology stacks?

At the end of the day, there is some sort of legacy banking technology behind every new, technology-powered solution in the financial market.

The big challenge today is marrying the old with the new, and making sure that that legacy infrastructure isn’t restrictive from an innovation perspective or insecure from an infosec best practices point of view.

At Plaid, we think that the right approach is to work with third parties that understand the developer experience to help build the platform and learn best practices, and then potentially try to bring that knowledge in-house. It also has to be acknowledged that there are a lot of compliance and security issues at work here.

Financial institutions are realizing that they need focus on a different sort of innovation. Financial technology startups tend to be very good at taking thinly sliced vertical problems and trying to make the customer experience as frictionless as possible.

At Plaid, we believe that the key to unlocking that potential is by lowering the barriers to entry to make the development experience as frictionless as possible. The cycle of innovation is getting shorter and the only way to move and innovate quickly is by creating the right framework and tools for rapid development.

What are some of the most effective strategies to building strong and sustaining partnerships with a financial institution to find win-win opportunities?

In some ways, you can make the analogy that major banks are a bit like giant ships. Many that exist today are the result of many, many years of acquisitions, mergers, and divestitures.

The strategy of solutions that a bank wants to provide to clients has often times already been decided years ago, and it can be extremely difficult to drastically change that roadmap.

As a partner, you can either be an “iceberg” and cause conflict and drastic decisions, or you can be a “current” and try to influence and guide.

Here at Plaid, we want to be the current. Developing new products in financial services is often very complicated due to the amount of regulations and infrastructure complexities involved. Plaid’s core focus is to help companies—including banks—and individuals develop new solutions, while also protecting the end consumer.

By acting as a gatekeeper in partnership with the banks, we can ensure that steps are taken with security, compliance, and consumer interest in mind.

Three years from now, just how transformative do you think API banking will be, and how much will it potentially change how traditional financial services are delivered and consumed?

The bank that can figure out how to effectively offer APIs for their services through partnerships will be the bank of the future.

Bank accounts were inherently not built for the web and the customer experience is going to be extremely different three years from now. 10 years ago, online banking was a nice to have, not a necessity, and the key to success is being able to continue to offer differentiated customer experiences by making it as easy as possible for developers to just build.

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