Banking On APIs For B2B Innovation

Banks and FinTechs have been both competitors and collaborators in the financial services space. One of the key reasons for the complicated relationship – the term “frenemies” comes to mind – is that FinTech newcomers are demonstrating innovative approaches to traditional banking practices, including financial management services and money transfers, while older banks tend to be wedded to older systems.

In recent years, banks have even seen greater competition in the lending market from new FinTech players that can quickly approve loan applications and distribute funds to lenders. Some of the more prominent names in the marketplaces lending space include OnDeck, Kabbage and Orion First. According to the latest statistics from the Innovative Lending Platform Association, a trade organization that represents several marketplace lenders (MPLs) in the market, these new FinTech lenders have issued over $14 billion in capital loans to date.

But, perhaps ironically, while these new lenders are disrupting traditional banking practices there are some banks that are helping them carry out the disruption. Some of the biggest players in the alt-lending space, including Kabbage, OnDeck and Square Capital, partner with Celtic Bank for issuing loans. Other online lenders like LendingClub, CAN Capital, and Prosper partner with WebBank to issue loans from their platforms.

Another financial institution that has been active in online lending is Cross River Bank, based in Fort Lee, New Jersey. The bank was founded in 2008 and since then has played an active role in helping disrupt how banks conduct their lending activities. Cross River has partnered with roughly 15 online lending partners, including Affirm, Borrowers First, Marlette Funding, Rocket Loans and Upstart and issued more than $2.4 billion in aggregate loans to these platforms in 2015 alone.

According to Ben Isaacson, SVP and GM of Cross River Banks’ payments division, the bank’s suite of APIs is the primary reason the bank has been able to attract partners in the lending pace and issue over $2 billion in loans during its short time in operation. During a recent conversation with PYMNTS, Isaacson explained how Cross River’s usage of APIs is appealing to borrowers and the broader changes the solutions could invite to the banking industry.

New tools for new FinTechs

As a bank that caters heavily to companies from the FinTech community, Isaacson said, it’s important to give these companies the tools they need to work effectively and gain access to banking infrastructure. But that can be challenging, given the older legacy technology systems in place at many conventional banks.

“We had the observation that a lot of current banks had legacy technology and infrastructure from the 1960s or even earlier,” Isaacson said.

These older legacy systems are where banks struggle to meet the needs of today’s new FinTech companies, he said and added that the legacy systems in place at many traditional banks are often lagging behind the expectations of newer companies and can struggle to integrate.

That’s why, Isaacson said, the bank operates on an “API-first” approach to helping the FinTech community. The strategy is to use the same technology used by FinTechs to better serve their needs and to step in to address the “technology lag” that these new companies can encounter with traditional banks.

“What Cross River Bank aims to do is look at a business and see if we can serve them with the same tech they are using,” Isaacson said.

An ‘API-first’ strategy

Isaacson provided an overview of how the bank’s API-first approach is meant to more effectively serve the bank’s customers. The legacy systems in place at many banks, he said, can create a “cumbersome” process because they require payments to be batched and files to be created and then uploaded to a bank’s portal.

This setup, Isaacson said, can be a burden for customers because it can involve lag time between the payment initiation and batch processing. In the case of individual payments, he noted that someone needs to manually enter the bank’s portal and initiate the payment.

APIs, on the other hand, enable customers to initiate payments and reporting without creating files and without having to enter data into a bank’s portal or waiting for bank to finish processing a request. Also, Isaacson said, APIs can help his bank’s customers bypass the need to directly interact the bank at all. He noted that customers and clients can integrate and manage payments initiations and reporting from their own environments instead of having to submit data through a bank’s portal.

By moving to an API-first approach, Isaacson said, Cross River stands to draw the attention of more tech-savvy customers who are seeking faster payment processing capabilities from their financial institution.

“We’re able to serve emerging companies that are used to leveraging APIs across all elements of their business,” Isaacson said.

With APIs, new opportunities for new industries

Beyond offering companies a new way for FinTechs to engage with their financial institutions and gain access to more efficient financial infrastructure, Isaacson said, by using APIs to verify and monitor customer information in real time, the bank can feel comfortable that they are appropriately managing risks, allowing them to serve some customers that traditional banks usually won’t.

With the APIs in place, Isaacson said the bank can quickly analyze whether a company carries a higher or lower risk for financial backing. This approach allows the bank to partner with newer industries and technologies that more traditional banks tend to avoid, he said.

“We found there are entire business models that tend to get either a bad rap or fall under a list where most banks won’t do business with an entire model,” Isaacson explained.

One example he pointed to is the emerging bitcoin industry. Isaacson said most traditional banks don’t understand the emerging bitcoin market well and, as a result, are averse to investing in companies in the bitcoin market. Because Cross River uses an API-first approach, the bank can gain a clearer understanding of what companies are making smart moves in the specific market by demonstrating strong AML and KYC protocols, he said.

Banks get the message

While most traditional banks have been slow to offer APIs, Isaacson believes that trend is bound to change. Because APIs are relatively easy solutions to integrate, banks are stepping up their own investments.

And, as more API investment occurs in the financial services space, Isaacson believes the banking industry could transform dramatically as a result over the course of the following decade.

“In the next five to 10 years, you can imagine a world where most activity between a bank and a client happens through APIs because it’s simpler and more efficient,” he said.

He also believes that most banks will keep their legacy infrastructures in place rather than replace them. However, the rise of rival FinTech players that are using APIs to provide a more seamless experience for customers adds to the pressure for banks turn to APIs for their own innovations.

As banks step up their focus on APIs, Isaacson thinks they will likely realize the full potential these solutions can offer.

“The more integration you can have, the more seamless you can make it and the more services banks can provide,” he said.

In other words, traditional banks could stand to take a lesson from their “frenemies” in the FinTech space to stay ahead of the innovation curve.

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About the Tracker

The PYMNTS.com B2B API Tracker™, a FI.SPAN collaboration, serves as a monthly framework, providing coverage of the most recent B2B API news and trends and a provider directory highlighting the key players contributing to the B2B API ecosystem.