A few weeks ago, I wrote a blog post titled “Digital PropTech Financial Services” where I talked about how consumer preferences are shifting, and how it’s impacting the way consumers are interacting with banks. As other parts of our lives are digitized, it is training us to expect the same type of experience from our banking relationships and partners. In this post, I build upon my previous blog and discuss how evolving customer behavior has created opportunities for next generation infrastructure technologies to enable incumbents and upstarts to deliver the delightful products and experiences customers are demanding.
One of the main reasons why incumbent banks have failed to innovate, or at least at the same rate as startups, is because the technology stack of the existing banking system is complicated. The amount of infrastructure and information needed to facilitate a single transaction, let alone trillions of dollars of fund flows between stakeholders, requires myriad integrations with disparate systems. More specifically, every banking related action involves asset verifications, compliance assessments and workflow decisioning for closings, transfers and distributions, etc. To make things even more complex, each one of those actions requires multiple sub-actions. For example, asset verifications require access to asset, employment, payroll, credit and identity data, among others. The data exists but often times in siloed environments that do not easily communicate with each other. This technical debt has largely been driven by regulation. Banks legally cannot share specific information unless the vendors they use meet strict compliance thresholds and security credentials, and there must be audit trails in place to track everything. Those layers pile up and can quickly become what feels to be insurmountable. As a result, and in order to help solve this timely problem, the banking sector has seen a dramatic increase in demand for infrastructure APIs.
APIs are application programmable interfaces that enable seamless interactions between different applications. APIs define the kinds of calls and requests that can be made, how to make them, the data formats that can be used and so on. They are important because they allow developers to focus on building core products instead of commoditized backend infrastructure (i.e. payments, messaging, etc.) by abstracting away complexities through a few lines of code and ultimately saving valuable resources such as time and capital. Stripe (for payments) and Twilio (for messaging) are great examples of API businesses that successfully offload painful integrations into single APIs and enable delightful end user experiences.
New banking infrastructure APIs solve problems for both incumbents and new entrants because neither incumbent banks’ nor neobanks’ core competencies are infrastructure software development. Thus, infrastructure APIs will enable stakeholders, old and new, to meet the digital demands of new customer behaviors and deliver a seamless, fast and compliant experience to improve engagement, lifetime value and reduce churn which is critical in an increasingly competitive environment.
Startups such as Plaid, Pinwheel, Argyle, Staircase, Sentilink and Synctera, among many others, have taken notice. While all are taking distinct approaches and tackling different parts of the financial services value chain, they all have the same goal in mind: democratizing access to financial data quickly and securely. Although we’ve made a lot of progress, we have a long way to go so it will be exciting to watch how this space evolves. If you’re building infrastructure technology to improve the way money flows across the built world, please reach out!