Financial Institutions Seek More Involvement in Fintech Innovation

Partnerships and incubator present a key fintech opportunity for financial service organizations

After many years of emphasizing productivity and compliance more than invention, many traditional financial service institutions now seek out financial technology capability in the form of fintech incubators and partnerships. In order to succeed however they must ensure application programming interface (API) connectivity.

Fintech companies and financial innovation are changing the competitive landscape. Customers today demand more from their banking services and if they do not get it from their traditional financial institutions they will seek and find it elsewhere. Financial institutions, who are starting to grasp the shift in the competitive environment and the erosion of a number of their core business functions to new retail banking players, now themselves seek hi-tech help.

With the rise of mobile banking applications and smartphone usage, financial institutions want to develop novel methods to attract and retain customers. As a result, traditional financial service companies no longer necessarily view fintechs as interlopers but instead view them as potential partners to help propel innovative strategies.

Many seek assistance in areas to improve their mobile banking and payment channels, personal digital assistants, saving and investment tools, fraud mitigation, payment processing, artificial intelligence (AI) and machine learning including chatbots.

Banks and credit unions also want to provide real-time and same-day banking services and big data access through open banking to provide accountholders with personal and actionable insights; and robotic processing to automate existing processes.

Fintech Innovation Getting Funded

Funding is moving from venture-capitalist participants towards more mainstream investments. According to PwC research, funding of fintech startups increased at a compound annual growth rate (CAGR) of 41% over the last four years, with over $40 billion in cumulative investment. Accenture’s analysis of data from CB Insights, a global venture-finance data and analytics firm, found the total value of fintech deals in the U.S. jumped 54%, to $26.1 billion, with the number of transactions rising 6.9%, to 1,232; and signaled that investors remain confident about the future growth and demand for innovative digital solutions for financial institutions. The largest portion of U.S. funding went to lending startups and those in payments, each accounting for 26% of the total.

Some mainstream financial institutions are rapidly embracing the disruptive nature of fintech and forging partnerships to improve operational efficiency and respond to customer demands for more innovative services.

In the next three to five years, 77% of incumbent financial institutions globally said they would increase their focus on internal innovations to boost customer retention, according to PWC. In addition, 82% of incumbents expect to increase fintech partnerships in the next three to five years

Seeking Fintech Collaboration

A number of financial service organization’s now support their own, or work with, incubators centers, labs and accelerators for nurturing products aligning with their strategies.

In Germany, Commerzbank Group Main Incubator is currently handling the Covid-19 crisis in part by using video collaboration tools developed internally; Deutsche Bank Innovation Labs reached out to startups specializing in AI and robotic automation; Citi Innovation Labs created software to integrate receivables; and Michigan State University Federal Credit Union (MSUFCU) launched The Lab at MSUFCU to identify, create and execute opportunities for innovation.

Partnerships between fintechs and financial institution are mutually beneficial. For credit unions and banks, a solution using a fintech system or product is an opportunity to extend their market reach, connectivity to its customers and provide new revenue opportunities.

Meanwhile, partnering with financial institutions to gain access to financial service APIs and payments capabilities allows fintechs to strengthen their offerings.

API Connectivity a Key Factor

Development of cloud migration helped power the evolution of APIs, which permit fintech innovators and partners to connect with financial institutions’ core vendors and third-party financial tech visionaries.

With their growing significance, developers also need a place to shop for APIs — or shop them to others. API marketplaces aggregate a number of API providers into a holistic view and typically adds search capabilities so developers can browse the interface inventory.

Usually, an API marketplace comprises several components, including an API manager, gateway, security, publisher and developer areas. They collect, categorize and presents the published APIs.

A trustworthy marketplace should fundamentally feature a straightforward interface with groupings and a search mechanism. It should also deliver all essential material for the API such as documentation and sample code. However, it is also vital that an API marketplace contain a security component because of the troubling concerns associated with cloud security and an increase in cyberattacks within the existing cloud API market.

NXTsoft’s OmniConnect Platform is a premier open banking marketplace for all API needs. OmniConnect utilizes cutting-edge cloud technology to connect fintech solutions to financial institutions, ensuring that its clients have the most secure and reliable integration environment in the industry. It connects everything from digital banking to item processing and financial systems. OmniConnect delivers the access needed to financial institutions, removing integration roadblocks and providing a seamless connection between a solution and a financial institution’s core processing systems.