Innovation in Finance
Throughout history, one thing has remained true: as technology evolves, so too does innovation. The invention of the internal combustion engine led to the birth of the modern car. The barcodes that are on nearly everything we purchase today were invented in 1952, but they weren’t widely used until 20 years later when laser technology innovations allowed for widespread commercial use.
The same holds true today for online banking innovation and the advancement of technology adjacent to the financial industry. Within banking innovation, fintechs have emerged as a primary driver for sparking advancements within financial institutions.
But an industry as powerful as finance certainly has the budget and resources to innovate. So why do these institutions need fintech to help push for banking innovation?
The Cause: Banking Bureaucracy
Banks are naturally risk averse. Generally, for an institution with the main job of storing and keeping money safe, that is a reasonable posture. Core banking communication has remained unchanged for decades. Additional services are always being offered to improve the core offering and add new features, but it’s rare to see a brand new product or service being rolled out.
Why?
Contrary to what their ads and mission statements may say, for banks, the goal isn’t to be far-and-away the best financial institution. Instead, their goal is to be just better than the competition. To accomplish this, they seek out ways to differentiate their offerings from their competitors – to gain just enough edge to win new clients, and retain or grow wallet share of existing clients. They’re trying to win the individual battles, not to win the war – which materially impacts the future banking technology on their roadmap.
Read The Hackett Group paper: Why Treasurers should care about bank APIs
Filling the Gap
Corporate finance teams want to better achieve their goals and solve common headaches, and adopting new technology is the solution for many of these tasks. But with banks eliminated as the tip of the spear, there are few candidates left for the job.
- Legacy Systems built for the bank services of yesteryear
These legacy Treasury Management Software and ERP systems were built with old technology and data exchanges in mind. Legacy treasury workstations were built for a file-based world working on a set schedule. As the incumbent system and the receiver of the data, this makes sense. But being entrenched with these outdated technologies, legacy TMS systems have not kept pace with the rate of change in banking technology.
- Communication Networks have the pedigree of being the bridge
While communication networks like SWIFT make sense to help enable communication between banks and corporates, with new direct B2B bank API communication, these legacy communication networks are rendered obsolete – an intermediary adding complexity, standing in the way of the future of banking technology.
- Payment Service Providers
Value added services provided by payment service providers (PSPs) certainly create value in a file-based world, but the additional layer is prohibitive when coupled with innovations in the banking sector. Consider a drag race where speed over a short distance is key: when moving from A to B, does it make sense to pull over for a pit stop? Or is the better approach to move from A to B as fast as possible?
- FinTechs
With the legacy world holding all other candidates back, FinTechs fill the gap – marrying banking of the future with revolutionary treasury and banking technology. Freed from legacy thinking, tech debt and the baggage of file-based methods, the goals of treasury software fintechs are clear: eliminate friction and increase speed.
Example #1: B2B Bank APIs
This reality is certainly true when it comes to bank APIs. For B2B bank APIs, banks have very little motivation to standardize among other banks – in fact, it’s not even a goal of theirs. As we’ve discussed, their goal is to be just a little bit better than the competition, or to differentiate when compared to the competition.
This dynamic creates the B2B bank API environment we see today: with each bank using its own unique and proprietary design for their APIs. From bank to bank, nothing is standard – different messaging formats and programming languages are the most common occurrences. One can even see differences in design within a single bank – the balances B2B bank API may be designed with JSON whereas the transactions B2B bank API is designed with XML. As each bank continues to “keep up with the Joneses” the design of these commercial bank APIs will continue to evolve.
Banks have neither the motivation nor the qualifications to meet the specific needs of individual clients. They are designing commercial bank APIs for the masses and don’t want to add the complexity to their business to create and maintain special design requests from clients.
For corporations with multiple banking partners, this lack of standardization and ongoing banking industry changes create a gap. Corporate treasury teams are left to with 2 options: (1) adopt multiple standards and recruit an army of specialized IT teams and engineers to build every single corporate bank API connection from scratch using the hundred-page instruction manuals, involving a serious initial investment of time and money, plus ongoing upkeep and maintenance of those connections. Or, (2) partner with a fintech – in this case a corporate bank API aggregator – that provides a single endpoint for corporate bank APIs across all their banks. This innovative approach means the banks can stick to their core offering while their corporate clients also have their needs met in the form of a standardized flow of bank data, regardless of bank formats.
Read The Hackett Group paper: Why Treasurers should care about bank APIs
Example #2: Payment Services
Initiating and formatting payments is a hassle: countless disconnected systems involved, too many layers for each payment to pass through.
Technology has evolved to eliminate some of these extra systems, and once again fintechs are there to bridge the gap between corporate finance and the banks, without ever communicating to a third-party network or the cloud.
This further distills and simplifies corporate architecture, allowing point-to-point communication between the source system and a corporate’s many banks with no additional layers. The results? Reduced friction and fewer systems to manage.
Example #3: Banks Acquiring FinTechs
A future banking trend that will only continue to grow is bank acquisition of FinTech companies. When we think about the goal of differentiating to gain wallet share, recognizing and acquiring FinTechs to create unique advantages over competitors makes too much sense. This is core to many banks’ strategies and allows them to leapfrog competition in perceived areas of weakness via acquisition.
