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The Fintech API economy – an overview

Each and every banking service is now available on ones’ smartphone. But this is not the end.

Relying on bank API

Fintech market is stepping in with an array of non-banking apps that enable personal financial management tools at fingertips. These apps rely heavily on bank account information to provide customers with a complete detail of their financial position. This calls for aggregation of financial data.

API Pros

The aggregation of financial data is already emerging as an important vertical in the Fintech market. Aggregation gives account holders right to get access to their data held at different financial institutions. This data can be then collated by apps to paint a complete picture for the user. Aggregation can be performed through custom APIs, OFX server; direct file downloads or screen scraping. Financial Data aggregation means a compilation of information from different accounts like bank accounts, investment accounts, credit card accounts and other consumer or business accounts.

API Cons

But most of the banks and financial institutions have been reluctant to provide open access to their data.

Bank of America, J.P. Morgan Chase & Co, Wells Fargo & Co. are amongst the companies to temporarily cut off the flow of information to applications and websites that aggregate data. They fear providing access would compromise confidentiality and erode their competitive edge.

Additionally, millions of active users refresh their accounts multiple times a day which slows down the bank servers. Moreover, banks are failing to differentiate between aggregators and hackers. According to some experts, the most appropriate solution to counter the above problem is to implement Application Programming Interface (APIs).

What is an API ?

APIs are the protocols, tools, and logic that allow developers to interact with banking solutions and functionality without interacting directly with bank’s back-end systems. If banks don’t have their own APIs and don’t collaborate with third parties, the users would have to resort to applications which scrape through bank’s website to collect all financial information at one place.

While scraping, a third party application uses customer’s credentials to log in to each institution whenever the application updates to pull the recent data. But due to customers demand, banks need to invest in their own data infrastructure so as to build their own APIs or collaborate with third parties.

An important question is whether banks should be able to restrict access. The user owns his/her transaction data and the bank should help facilitate a request for the user’s own information. Especially with EU passing Payment Service Directive 2, European banks will have to honor requests from such data aggregators. Sooner or later American regulators will follow course. Banks are still waiting on the sidelines until there’s a larger demand for these services across the industry which can raise competitive concerns.

3rd party APIs

In 1999, venture-backed companies in the United States began offering Financial Data aggregation services. One of the best known in the industry was Vertical One which later on merged with Yodle, which is now the undisputed market leader. A number of startups have gained momentum since then. The following figure illustrates the number of APIs present in different sectors. There were around 508 financial APIs in the year 2013.

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APIs survey

There are many Financial Data APIs present in the market today, most popular being Yodle, Xignite, and Plaid. Other known APIs for financial data aggregation are , Finicity, Microbilt and Fintech Systems etc. Some have integrated their systems with the banks and many use a different kind of algorithm i.e. Web Scraping Technologies to get access to the bank website and gather transaction data. It requires logging in as a user and robobrowsing to collect the information. Below figure shows the modus operandi for gathering the transaction data:

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Different financial data aggregators provide different kinds of services. Yodle, one of the oldest and popular of the lot enjoys direct access to banking data in contrast to other APIs who have to rely on extracting data from banking websites. It is suitable for clients who need permission-based access and bank level security to access their customers’ bank, credit card, investments and loan accounts.

Xignite is one of the fastest growing companies and provides cloud API that makes it easier to integrate the API into the financial applications.

Since 2012, Plaid has launched a suite of six APIs including Plaid Auth and Plaid Connect. Thousands of developers and businesses—from stealth startups to Venmo and Robinhood—use Plaid to enable core functionalities; the company has analyzed over 10 billion transactions to date.

Kontomatic is a popular bank data API. Kontomatic allows financial companies to get access to the banking information of their customers. It provides information like KYC, balance, and transactional data.

Finicity is a financial services company that has partnered with financial institutions, fellow aggregators, and Fintech app developers to create new standards for data access that will improve the security and consistency of data aggregation.

Microbilt has been a leading credit analysis and management Company in the alternative consumer market for over 35 years. Microbilt provides bank verification as a part of risk assessment. They help to identify the banking status and history of the prospective client. It also enables (through a different product) to track down the location of the delinquent customers.

Microbilt bank verification products offer verification and aggregation, assessing account holder risk and prescreening the account. Aggregation service provides access to transactional data over 15000 financial institutions worldwide.

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Source : Letstalkpayment.com

Risks

There is obviously risk associated with providing a random financial technology platform access to banking data. Customers are understandably reluctant to provide their passwords. Along with the risk of impersonation, the customer loses control over his banking data.

Many situations have emerged where large amounts of data access in one jurisdiction are processed in a different country with different regulatory and security environments and customers have little knowledge of what is happening with their data.

Through APIs, a customer might not have to provide login credentials. The data would also be more reliable as it would not have to be scraped in an archaic fashion. There are many benefits of APIs to the users as they provide a comprehensive idea of person’s financial situation, real knowledge of investment and consumption habits and most importantly help in automation of processes by providing data in real time.

API alternative

Wells Fargo created an API alternative for small businesses to access account holder data without the need for screen scraping. Xero an accounting software firm is used by Wells Fargo to develop the product. This system allows the users to allow third parties to access their account information without providing their password information. A major concern with screen sharing has always been sharing password information. This solution removes the hurdle.

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Big data

A growing number of financial services firms are improving their web portals and mobile apps for their customers well as business partners. The amount of data that these firms have to manage is growing day by day. In order to manage the data, these firms use APIs to improve connectivity, get access to data and streamline their operations. For Fintech and other alternative lenders account aggregation is extremely beneficial.

P2P Lenders

P2P lenders are probably the biggest seekers of banking data. Information provided by credit rating agencies is limited. Getting access to bank account information is probably the most valuable data source for underwriting loans. It enables better and informed decision making.

Lenders can also speed up the process of loan approval by directly getting access to borrower’s bank transactions for the underwriting purpose. As per the Forbes Contributor Ryan Caldbeck, technology-driven data aggregation analysis helps online marketplace lenders to bring their lending costs down by 400 basis points.  But with more than 15,000 mainstream financial institutions and growing, is API ecosystem financially feasible for each and every institution.

Replacing the banking value chain

Seeing the growth of Fintech market, time is not far when the Fintech Companies will substitute almost every service of the banking value chain. Banks would have to start collaborating with Fintech Companies to provide access to data or float their own solutions if they don’t want to lose their customers. The opposite approach would only create frustration in the minds of customers. The banking data aggregation industry is shaping to be an important associate segment for the marketplace lending sector. It will be interesting to see whether the market remains divided or consolidation creates one true giant.

 

References

  1. http://www.wsj.com/articles/bank-of-america-cut-off-finance-sites-from-its-data-1447115089
  2. http://www.investopedia.com/articles/financial-advisors/021216/top-problems-financial-data-aggregation.asp
  3. https://letstalkpayments.com/the-most-important-thing-in-fintech-advent-of-apis-and-banking-apis-are-real-too/
  4. http://letstalkpayments.com/wp-content/uploads/2016/05/1-36.png
  5. https://letstalkpayments.com/plaid-xignite-or-yodlee-choices-for-financial-apis/
  6. http://irishbryan.com/2014/overview-of-bank-data-apis
  7. http://www.microbilt.com/news/article/how-can-you-get-the-most-value-from-data-aggregation
  8. https://www.mulesoft.com/resources/api/api-strategy-financial-services
  9. https://www-304.ibm.com/events/tools/interconnect/2016ems/REST/presentations/PDF/InterConnect2016_1767.pdf

 

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About the author

George Popescu

Serial entrepreneur.

George sold and exited his most successful company, Boston Technologies (BT) group, in 2014. BT was a technology, market maker, high-frequency trading and inter-broker broker-dealer in the FX Spot, precious metals and CFDs space company. George was the Founder and CEO and he boot-strapped from $0 to a $20+ million in revenue without any equity investment. BT has been #1 fastest growing company in Boston in 2011 according to the Boston Business Journal and the only company being in top 10 fastest in 2012-13 as it was #5 in 2012. BT has been on the Inc. 500/5000 list of fastest growing companies in the US for 4 years in a row ( #143, #373, #897 and #1270). After the company sale in July 2014 until February 2015 George was Head-of-Strategy for Currency Mountain ( www.currencymountain.com ), a USD 100 million+ holding company focused on retail and medium institutional currencies, precious metals, stocks, fixed income and commodities businesses.

• Over the last 10 years, George founded 10 companies in online lending, craft beer brewery, exotic sports car rental space, hedge funds, peer-reviewed scientific journal ( Journal of Cellular and Molecular medicine…) and more. George advised 30+ early stage start-ups in different fields. George was also a mentor at MIT’s Venture Mentoring Services and Techstar Fintech in NY.

• Previously George obtained 3 Master's Degrees: a Master's of Science from MIT working on 3D printing, a Master’s in Electrical Engineering and Computer Science from Supelec, France and a Master's in Nanosciences from Paris XI University. Previously he worked as a visiting scientist at MIT in Bio-engineering for 2 years. George had 3 undergrad majors: Maths, Physics and Chemistry. His scientific career led to about 10 publications and patents.

• On the business side, Boston Business Journal has named me in the top 40 under 40 in 2012 in recognition of his business achievements.

• George is originally from Romania and grew up in Paris, France.

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