Community-based banks and credit unions find themselves caught between the proverbial rock and a hard place, that is proprietary systems holding on tight to the financial institution’s data and competition flashing next-generation open systems capable of accessing and dispensing data as needed. But data integration services can release captive information and also use application programming interfaces (APIs) to free that data in fresh ways to please digitally-savvy banking customers desiring more personalized experiences.

Many traditional financial institutions understand the need to adapt faster, and many have picked up their speed of innovation and delivery through new technologies. But banks and credit unions typically are hindered by legacy back-end core banking systems, technologically inflexible closed systems unable to change quickly, if at all. 

In planning technology investments, many financial institutions have deprioritized modernizing their core systems in favor of the technological front ends, including websites, mobile apps, and channel experiences, according to a McKinsey report. Several have been “hollowing out” the core, or extracting smaller apps and services to extend the service life of their existing banking systems. 

“The logical next step for many banks is a next-generation core banking system that allows them to operate with the speed and agility required in an increasingly fast-paced and complex world. This is not a simple undertaking,” suggested McKinsey.

Pandemic Accelerated Open Banking Awareness 

The adoption of new digital habits and a drive toward online channels during the pandemic accelerated open banking needs and deliverables. Consumers may not specifically ask for open banking, but they surely expect the convenience and accessibility it brings as they rely on digital channels to meet their financial needs.

As a result, many financial institutions have increasingly started to offer banking-as-a-service (BaaS) and embedded banking services such as payment processing and open finance to enable third party providers to access customers’ complete financial data.

Prior to the last half dozen years or so, financial services firms had wide-ranging control over their customer’s information. The notion of yielding consumer data to a third party to benefit customers was never a possibility for financial institutions until it became a competitive weakness. 

That is because data held within some proprietary legacy banking system is enormously hard and expensive to access, especially for many regional and community based financial institutions.

Open Banking Inevitable

Financial institutions and fintechs are gearing up for the inevitability of open banking as a standard as more U.S. open banking schemes advance, supported by application programming interfaces (APIs), and more consumers become aware of universal banking possibilities. 

The banking industry as a whole is shifting away from closed systems, in which each financial institution and its core provider handle all the work of providing services directly to its customers, toward a model of operating as part of a larger ecosystem revealed McKinsey. 

In the ecosystem approach, market participants make their products and services available through other providers’ channels and offer third-party offerings through their own channels. McKinsey suggested this open-architecture method is, obviously, built on the financial institution’s capacity to make isolated elements of their core systems available to other systems and to use other core systems’ parts and pieces. McKinsey cites as examples U.S. Bank’s partnership with State Farm, Goldman Sachs’s deal with Apple, and Stripe’s integration with Shopify and Capital One’s DevExchange, which enables the use of APIs as connectors.

Some leading banks are also now unlocking their proprietary data to offer dynamic customer experiences that offer embedded credit products at point of search, and real time or on demand decisioning, as well personalized product selection, portfolio analysis, and service delivery.

An Insider Intelligence report on U.S. banking technology expected tech spending to hit nearly $86 billion in 2022 and grow to almost $112 billion by 2026. Many financial institutions are modernizing their core banking systems technology according to accommodate more data-intensive strategies. In another report, Bank Director’s 2021 Technology Survey U.S. banking executives said 40.0% of their financial institution’s 2021 technology budget went to core systems technology. That study also suggests regional banks, community banks, credit unions, and neobanks — will make up 48.5% of total U.S. bank tech spending in 2024. 

Opening Up Access to the Data

Part of the problem for smaller financial institutions is that preparing data for a core conversion or just migrating it to a neutral party for storage and accessibility means unleashing proprietary from information silos may be system and cost prohibitive. In addition, though open banking driven by consumer demand is a hot topic in financial services currently, a dearth of regulation and standardization in the U.S. makes unsupported API integration concerning and hazardous. 

Financial institutions are well aware of the need to match consumers’ changing expectations for speed and convenience online. Some financial services organizations are adopting a partnership approach with fintechs to reach customers in innovative ways. Collaboration remains important to 94% of financial services institutions, according to Finastra’s “financial services state of the nation survey 2021.” 

Adopting open banking and/or BaaS business lines, usually distributed to clients via APIs, requires robust risk and compliance management. While open-banking APIs enable financial institutions, vendors and fintech companies to share data there are still compelling concerns over the protection of information. Issues related to cloud security and an upsurge in cyberattacks are also important to consider when entering the open-banking/cloud fintech API marketplace. 

NXTsoft offers several secure routes to free up and connect banking data: 

  • OmniData enables financial institutions to access its data quickly and securely when a financial institution is involved in a core conversion, legacy data migration or other data event. The OmniData solution can assist financial institutions free-up data stored on legacy systems. 
  • OmniConnect, the vendor agnostic premier open banking marketplace for all API needs, uses cutting-edge cloud technology to connect fintech solutions to financial institutions. OmniConnect removes integration obstacles and provides a seamless connection between third-party API solutions and financial institutions’ core digital banking, item processing and financial systems. 

NXTsoft has implemented and managed data connectivity events for over 2,000 financial institutions and provides connections to more than 40 different banking core accounting systems including platforms from Fiserv, Jack Henry and FIS, as well as many other financial systems.