Our thesis and insights
The evolution of APIs: 3 game-changing use cases for fintech's future – Part 1
October 13th - 2022
APIs may have been to fintech what the wheel was to transportation.
Before APIs, building a technology business involved a tremendous upfront cost – not in terms of CapEx, but in term of time and resources spent building the basic building blocks of the business. Pieces of the technology that were necessary for the business but not necessarily a differentiating element of it. Lots had to be built before a new fintech could even think about on-boarding its first customer. So, this was a structural limitation to new financial services companies entering the market.
The proliferation of APIs and the ‘as-a-service industry’ have turned this business model on its head. With many building blocks being delivered by third parties – from customer authentication, to payments to data integrations or basic data analytics –infrastructure at reasonable rates is readily available for consumption, allowing anyone to access the market-. Coupled with the push towards open finance — which has given firms unprecedented access to customers’ financial data, especially in Europe with progressive regulation in that regard — today’s fintechs are able to launch more easily, quickly, and cost-effectively, using APIs from best-in-breed providers as building blocks to create highly specialised and personalised products.
APIs in fintech are not a new thing anymore, but API-led products have also evolved considerably over time.
Ten years ago, the complexity of information access and banks’ fixation on personal finance management (an immediate evolution of a bank account, unsophisticated transaction categorisation and basic, rule-based recommendations) meant the landscape consisted mainly of apps like Money Dashboard and ID verification applications, with the occasional (very basic) payments app thrown in.
Since that early vision, fintech APIs have evolved in two fundamental ways.
On the one side, infrastructure APIs have enabled companies to build or replace anything that is not-core to the business by APIs, so they can focus on their key products and differentiating factor.
On the other side, many APIs are now full-fledged financial products delivered through code integrations and designed to address specific customer pain points at the point of need — so-called embedded finance.. A person or a business can now get a credit card or loan before paying at the online checkout, or buy travel insurance when booking a flight, or hedge against foreign currency fluctuations without ever having to deal with a bank or other financial services incumbent. This has also driven product-led growth for the ecosystem. It’s now easier than ever for customers to try out products — often for free or at a significant discount — and see its value for themselves. As a result, companies can now test product market fit and scale faster.
As we take the obvious next step from open finance to open data, APIs will undoubtedly become more mature and sophisticated and may evolved in other, new ways.
So what happens next? How will increasing API-fication impact the evolution of fintech? And what will this mean for the industry moving forward?
In this series, we’ll take an in-depth look at some exciting use cases which we think will take embedded finance to the next level.
1. Turning cost centres into competitive advantages via advanced payments operations
Managing payments is essential for every type of business being it real estate or SaaS and all businesses, especially those who are tech-first, need to evolve how they manage their financial operations.
Managing money flows is a hugely time-consuming and costly affair for many businesses and this is especially the case when it involves real-time flows.
The single biggest reason for this is that many organisations’ workflows are still largely manual and have not been built to take advantage of the data richness that comes from transactional and data-flows. But even those organisations that have invested in technology often have to contend with high costs and low efficiency, mainly because the major treasury management systems on the market today have limited automation, need to be handled by skilled staff, and may not integrate with each other to provide a single unified view.
Some companies choose to hire people to deal with payment operations, while others choose to build and maintain integrations with banks in order to automate these processes as much as possible. In either case, they are using valuable resources.
In the context of banks and payments, APIs enable companies to programmatically send, receive, and carry out ledger and (complex or not so complex) reconciliation functions within their own systems, as opposed to their banks’ applications.
This has three key benefits.
First, it saves time and money by leveraging automation and reduces human error.
Second, it allows for a data strategy that captures and manages data from the on-set of each new client on-boarding, each purchase order or each payment.
Third, it enables proactive budgeting and more accurate forecasting. Instead of relying on historic – and possibly incorrect – data, a real-time, unified view enables organisations to allocate budget based on actual need. Real time accounting.
There are already several players offering payments operation capabilities.
Modern Treasury‘s plug-and-play APIs, for instance, enables development teams to build their own money movement and tracking apps. In Europe, Numeral has built infrastructure for companies moving money through bank transfers. Bank transfers represent a huge market as over 90% of European payments are SEPA payments.
Others have APIs designed to facilitate one use case:
Formance has built a ledger-as-a-service solution for marketplaces and fintechs, Sequence is targeting money flows of e-commerce platforms and Sibill is focusing on cashflow management by consolidating bank accounts and financial data.
Scalability risks for these companies are significant:
For one, because these companies are once removed from the core product, it’s hard to earn credit for the user experience, but easy to get blamed if it falls short of expectations. And as API-led businesses, there’s a risk that when clients scale, they decide to replicate the technology in-house.
Also, when integrated in the payment flow a company will typically require specific processing or electronic money licenses and the case of the ledger not being held by the regulated party, can cause issues do to lack of real-time risk management.
The upshot is that, when successful, payment operations fintechs enable businesses to transform sunk functions into a compelling strategic advantage. Taking a lending company as an example, faster reconciliation can allow working capital efficiency where cash that would be tied up and couldn’t be lent for 4-5 days becomes immediately available. To do this, companies need to be cost-effective and able to handle multiple systems and payment methods at speed and become the system of record for a company. Building reconciliation and ledger products on top of APIs has enabled Modern Treasury to appeal to a broad range of customers.
Over time, it might well be that these APIs mature to the extent that they enable any company to build their own in-house banking stack, crowding out core banking software providers.
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