FinTech and APIs: Making the Bank Programmable Bill Doerrfeld September 15, 2015 With negative public connotation still ringing after the Global Financial Crisis, banking institutions are usually portrayed as monoliths, slow to change even amidst obsolescence and new technological advances. This won’t be for long, as the FinTech sector is becoming increasingly open and programmable. Even large U.S. banking institutions like Citigroup, BBVA Compass, Bank of America and Capital One acknowledge the benefits of opening internal systems for third party developers to integrate into new apps. And, as alternative banking services like Simple or Holvi emerge, we are seeing more of a diversity of services that embrace new consumer expectations brought on by the Internet and mobile devices. In this article, we tune into FinTech experts to hear what organizations like Fidor, the Open Bank Project, and others are doing to lead the banking revolution. We’ll find that we’re moving toward a new financial market of customer choice, third party services, and open data — all powered by APIs. Essentially this means making the bank programmable. What is FinTech? FinTech stands for financial technology; a broad sector of innovative and emerging financial services. Examples include crowdfunding platforms like Kickstarter, new online-based currencies like Bitcoin, virtual wallets, micro stock investment apps like Robinhood, account aggregation and analysis services like Mint, payment splitting services like Splitwise, new mobile-optimized peer-peer payment transfer apps like Venmo — the list goes on. Replacing physical charities, paper checks, and paper money, FinTech services are suitable to the digital times we are living in now, and are shaking existing banking infrastructure and international payment streams. According to Stefan Weiss, head of APIs at Fidor: “The customer expects a different behavior from service companies, and banks, somehow, are stuck in the last century, and the movement of money is stuck in the last century.” Weiss sees the Fintech craze as not simply a short lived phenomenon. The technologies being developed now are going to have everlasting impacts on the future financial and banking industry, and institutions need to adopt change or face destruction. Major FinTech activity is localized in London, where FinTech venture capital investments are hitting record highs. Related: How APIs are Disrupting the Way We Think Advantages of Exposing a Bank with an API APIs are yet again another vital cog driving disruption, now fueling FinTech startups and open banking data initiatives worldwide. According to Weiss, Fidor decided to build their banking platform with a community of third party developers in mind for the following reasons: A bank API allows the end user to have a quicker onboarding experience. An API enables a bank to acquire partners that specialize in niche FinTech services with optimized front-end user interfaces. A bank API allows seamless integration with crowdfunding platforms, payment splitting apps, and more — great for startups with innovative financial-oriented products that may lack the budget and legal counsel to hold funds or establish their own bank. Regulation Kills a Business Model Weiss stresses that banking licenses are tough to acquire. Even smaller legal licenses to transfer payments or handle credit, likely needed to start a FinTech, are difficult to mitigate for most small developer teams unfamiliar with the many laws that regulate these handlings. Banks can provide this knowledge via APIs and partnerships to help FinTech companies accell — especially the ones who are creating APIs themselves. What banks need to create are well-designed, standardized APIs, along with self-serving adoption processes complete with documentation, sandbox, simulated account structures, and more to quickly get in the hands of developer users. Onboard more partnerships and make it cheaper for FinTech startups to launch, and you’ve got a recipe for a banking API success. Use of APIs: In-Account App Marketplace Concept Weiss recognizes a long term goal for Fidor is leveraging their API to allow developers to create add-on services in a marketplace format, enabling the end user to customize their banking experience. The idea is that a bank can provide an API and open app store (i.e. appstore.mybank.com) and allow users to pair certain apps with specific accounts. Win-win-win. Banks can acquire new partners, third party developers bring innovation, and customers are empowered with more choice and customization. It’s true that for banks, building an application manager is no easy task, however, but API management solutions exist to aid this process. “Just because you can offer an API for something doesn’t mean that you have to offer an API for something. APIs are products, have to be handled as products. You must have a customer, and a reason for the customer to buy the product” Weiss admits that even though their full production API is making 30,000 requests daily, the team consistently strives to reiterate their product, tuning into the customer and considering “what is a beautiful API?” Proof of Concepts Open Banking Project is a separate organization striving to reinvent how banks handle their data. The Open Bank Stack, written in Scala and running on on the JVM, is secured with OAuth and is a “semantic API vertical for the banking space”. They’ve had numerous FinTech apps developed that tap into their API service. Examples include Savetastic, which pulls data from a bank to calculate potential savings, and Social Finance application, which enables account users to choose who they want to share account data with. In a session with Nordic APIs, Simon Redfern, Founder and CEO of Open Bank Project, even demonstrated The Singing Bank, which produces varying tonalities associated with withdrawls and deposites. Combining FinTech with musical composition — now that’s a tough act to follow. Into creative API use cases? Read: API: Part of the Creative Pallete Data Transparency and the Rise of Open Banking From timestamps to transaction IDs, banks collect enormous amounts of data. In fact, it was this information that led the Fidor team to consider how it could be used to create a better bank. To Redfern, ‘better’ means more open, more transparent, and less corrupt. Curtosey of Transparency International, the Corruptions Perceptions Index depicts “the perceived levels of public sector corruption in 175 countries and territories.” The higher the number, the cleaner the country, and in the case of the diagram, the most yellow. Apathy in companies perpetuates distrust, which is bad for society and democracy in general. With the philosophy that transparency can increase empowerment, Simon Redfern was inspired to reevaluate how banks handle and expose their data. Could company bank accounts be open for everyone to see? What if all personal bank holdings were open for the public eye? How could this data be used programmatically to create new, ethical services? New Platforms Lead to Unexpected Innovation What’s the similarity between a violin and a smartphone? In a session with Nordic APIs, Redfern, a composer at heart, argues that they’re both platforms. A violin and iPhone are both standardized interfaces. Yet, standardization doesn’t inhibit musical creativity no more than the current smartphone design channels app developer curiosity and innovation. With platforms, weird things can happen, such a a rising class of Instagram entrepreneurs in Kuwait using the platform to sell their sheep. In FinTech, the idea is that an open standard API could revolutionize banking with unprecendented consequences. Xignite CEO Stephane Dubois acknowledges that: “The role of technology in advancing the financial service industry is more critical than ever before. The use of APIs by today’s banks is becoming increasingly common as they help to drive speed and cost-effectiveness compared to traditional legacy systems.” Just as Facebook and other social media giants have become a platform, Redfern believes that banks will inevitably become platforms as well. The idea is that banks can push innovation and allow developers the ability to create brand new products, and the Open Bank Project can allow banks to easily adopt an API. To Redfern, open banking is made up of four distinct facets: Open standards Open Source Open data options Open innovation “APIs are great for abstracting away aging IT systems which are barriers to innovation….We think banks need to open up their infrastructures, and they should be developing ecosystems so they can better respond to their customers and so they can compete better in the market” It’s been proven that customers are interested in using new entrant services rather than their own. According to the Millenilal Disruption Index, “71% would rather go to the dentist than listen to what banks are saying” — proof to some that the industry is ripe for “seismic” change. Watch Redfern of Open Bank Project discuss the rise of open banking Redfern certainly walks the open data walk. Here are live public transaction streams of his personal bank account and TESOBE’s account. Setting standards for opening bank data is something the UK government is currently considering and can be undrestood in detail within this request for evidence in data sharing and open data in banking. More Advances in the Financial Sector Whether we explore new mobile banking services like Number26, analyze the steady increase in credit unions, or how the global remittance handler Ripple is making ripples [cough] throughout the global economy — we find many accounts that the FinTech industry is growing at an enourmous rate. Further indication that people desire alternatives to the politics of brick and mortar banks, Bitcoin has altered the state of the monetary conversation on a fundamental level. As Weiss puts it: “Bitcoin changed many things. It changed conversation, it changed technology, because Bitcoin is more or less an internet payment system that is much more suitable to the times we are living in now, than banks, credit cards, interchange fees, etc … It really shook the foundations of international payment streams. It opened a discussion on security as well, and what internet protocols are capable of…. Probably in 50 years from now there will be no reason for a bank anymore.” Weiss acknowledges that what banks actually can do today is regulate and certify trust and knowledge about financial transactions. If banks wish to remain competitive, many argue that through opening up APIs to outsiders they can form new ecosystems that encourage innovative product creations and new end user experiences. Conclusion As we said before, making the bank programmable is a win-win-win. For developers, they get to mess around with the power and knowledge of banks to create innovative services and terminate compliance issues. For end users, they can experience a new breed of services that tie into their accounts. Politically, it could be argued that open banking transparency could decrease corruption. For banks, they open new revenue streams by monetizing partner resources, and experience an increased customer satisfaction. So, why not make the bank programmable? What do you foresee the possibilities are with FinTech, banks, and APIs?