APIs for Credit Unions: Disruptors or Enablers?
Terminology and technology evolve. Fintech and API, for example, are not new terms; they just signify change in today's increasingly digitalized financial world. How credit unions fit into it remains unsettled.
Fintech, or financial technology, originally referred to just banking systems. However, it has come to refer to disruptors taking hold in financial services today. Handcuffed by regulations and infrastructure, many financial institutions struggle to compete with these fintech startups in terms of innovation and speed in areas such as payments, money transfer, lending and investing.
Application program interfaces are not new either. The use of open APIs is a practical way for credit unions to supply members with faster, convenient access to funds, financial resources and payment vehicles, especially when combating nontraditional financial players.
“APIs have been around for a number of years,” George Throckmorton, NACHA's managing director of advanced payments solutions, explained.
Throckmorton pointed out that many organizations take advantage of APIs because of legacy or disparate systems that need help communicating with other systems. “The interesting part is in applying the technology in meaningful ways that support innovation and consumer demands, and solve some industry pain points or opportunities.” It does not have to be a credit union or a bank, it could be a nonfinancial business, but the objective is bringing together siloed systems to create new products or services or solve some other efficiency or operational issues.
This is where the industry has seen financial institutions collaborating with fintech providers. “Partner APIs are not just based on the technology but kind of a bilateral agreement: ‘We’re going to use the API and the information in this way and we are going to agree to those terms, and that is going to work very well,’” Throckmorton explained.
Looking ahead, APIs will enable more targeted offerings that rely on existing core infrastructures and growing partnerships with fintech leaders, Ted Bilke, president of Symitar, a division of the Monett, Mo.-based Jack Henry & Associates, pointed out. “The core systems that focus on ease of integration with third parties and a better user experience stand to gain the most traction. Anticipate analytic offerings to provide new and valued services.”
Bilke added new models of shareware would foster more collaboration between credit unions and their fintech partners and promote efficiency in new technology advances.
“While there has been a lot of talk regarding new fintech providers, the reality is they haven't drastically altered action in terms of what credit unions are actually doing,” Daryl Jones, director at the Scottsdale, Ariz.-based Cornerstone Advisors, noted.
There are new vendors and new platforms out there, but they are not yet having widespread impact, according to Jones. “I believe the reason for this is that most of the systems really getting a lot of the buzz in the market are solutions with really slick, customer-facing front-ends because traditional banking platforms haven't done the greatest job with these. But, when our clients really dig into the functionality of these platforms, they are not as robust as expected on back-end functionality such as underwriting capabilities or integration with third-party solutions.”
Conversely, tech startups face many unexpected growing pains and challenges as well when integrating their technology with many credit unions’ core systems. “One of the interesting things as a startup is you don't know what you don't know,” said Ben Morales, CEO of QCash Financial and chief technology and operations officer at the $2.5 billion, Olympia, Wash.-based Washington State Employees Credit Union.
WSECU created QCash, a wholly owned subsidiary of WSEC, in 2004 to meet the short-term lending needs of members who were requesting large money orders to pay off payday lenders. WSECU's QCash program books more than 30,000 loans annually, maintains loan loss rates in the 6% to 8% range, provides financial education for members and generates an annual net income of $4 million.
However, one of the unanticipated hurdles since QCash ventured out as a startup in 2015 was resistance. Morales explained what limits credit unions is old infrastructure and technology partners demanding compensation through licensing fees for trying out innovation.
“You are kind of innocent walking out into this new world – how do we innovate, how do we partner with fintechs in trying to create solutions for credit unions?” Morales asked. He claimed in order for credit unions to innovate, an ecosystem of players needs to recognize the value of staying relevant to members. “In order to do that, we’ve got to try some things and we’ve got to take some risks. At the end of the day we don't want winners and losers – we all have to work together.”
There are security concerns as well.
“This is a software development issue. It is true that WebApps with insecure APIs, together with social engineering, are the two main entry points for hackers,” Stu Sjouwerman, founder and CEO of Tampa Bay, Fla.-based cybersecurity firm KnowBe4, said. He added most APIs offered across a variety of channels still need protection. “This creates its own set of challenges with integration and intermediary software. Then there are issues with authentication, message protection and the code validation. Along with this is the use of encryption as a key component of secure transactions. If done haphazardly, this allows for insecure APIs, which will eventually create a backlash.”
Although new technology can speed loan processing or credit evaluation, those innovations must protect consumers and the financial system, Fed Governor Lael Brainard said in remarks before a conference on financial innovation. “‘Run fast and break things’ may be a popular mantra in the technology space; it is ill-suited to an arena that depends on trust and confidence.”
“But it would be a lost opportunity if, instead of expanding access in a socially beneficial way, some fintech products merely provided a vehicle to market high-cost loans to the undeserved, or resulted in the digital equivalent of redlining,” Brainard added.
The Fed is reviewing the entire assortment of fintech innovations and ideas that are starting to transform components of the financial system. These include an assortment of programs such as a component that analyzes the credit profile and behavior of a loan applicant, as well as blockchain technology, which allows financial entities to share an encrypted ledger.
One of the great obstacles is the need for consistency. “You would rather have an environment where it is standardized,” Throckmorton said.
To that end, Throckmorton is launching an API Project Team through NACHA's Payments Innovation Alliance, a group of 250-300 financial institutions, technologists, service providers, billers and merchants.
Standardization inherently means some level of ubiquity. When you think about standardization obstacles, it is not just getting a few entities to agree, it involves a whole industry, Throckmorton noted. “That is where we see NACHA as a good entity to do that. It really does not matter as to the size of an institution, if you are a large credit union versus some of the smaller ones, consumer or retail focused, a mix and some wholesale business as well.”
Throckmorton thinks there are definitely openings for the standardization effort. “Opportunities are what we all want to do: Increase efficiency, reduce costs and provide better service. Without sounding like APIs are the magic pill for everything, I think they are definitely a component.”