Our thesis and insights
The evolution of APIs: 3 game-changing use cases for fintech's future – Part 2
November 23rd - 2022
In the first part of this series, we looked at how businesses need to manage their money flow as part of data and cost management efforts; data management remains expensive and overly time-consuming. Now, in this second instalment, we follow up with our thoughts on how application processing interfaces (APIs) can facilitate new use cases and embedded propositions.
2. Complex data flows: Accounting and e-commerce
It’s a reality that organisations rely on increasingly large volumes of data across their operations for underwriting and risk management purposes, for inventory and order management, to improve customer service… the list goes on. At the moment, however, as much as 80% of this data is unstructured, which means it needs to be cleaned up and reorganised before it’s fit for meaningful consumption. And the big problem here is that the various tools one might use in their clean-up efforts, often don’t sync with each other and, as a result, terabytes of business-critical information remain siloed and ultimately unusable.
There’s an opportunity, then, for fintechs to step up in offering APIs that can aggregate data from disparate sources and pull it together in one unified and organised view. Plaid is arguably the pioneer in this area, having developed account-linking and banking integration services before expanding into other categories of financial data, including customer identity information, investment data, and data about liabilities like mortgages and student loans. But several other companies have also started similar offerings with accounting and e-commerce data.
Accounting data is complex because it deals with a range of principles, and it’s not delivered in real time. But, by integrating with key platforms, newcomer Codat enables banks, fintech lenders and other technology users to pull small business accounting data and give a better snapshot of their financial health. The company has also recently overcome one of the key outstanding issues: namely, account manipulation. Using Plaid’s technology, Codat can now reconcile accounts with bank flows to make much more accurate risk assessments and create tailor-made products for lenders.
Likewise, Rutter has developed a unified e-commerce API that serves a similar customer base to Codat’s. As transactions move increasingly online, lenders want to evaluate, not only a customer’s financial data, but also its sales history, inventory levels and sales margins. Traditional financial models and long-winded loan application processes are sorely inefficient against this long list of requirements and users are increasingly tiring of them. By leveraging one or both platforms above, however, a digital lender can make almost instant decisions.
But key to success in this model is scalability, and that brings its own considerations of build vs. buy. In the early days of a business, speed to market is more important than cost, but that relationship often changes as operations ramp up. As closely as these APIs can serve their core business, many customers still prefer to build key integrations in-house, for reasons of cost efficiency and speed of maintenance. If API platforms want to tip the balance in their favour, they must be able to build-in enhanced functionality and actionable insights on top of the data as they evolve from being developer-first platforms, to serve a larger suite of users within an organisation.
A move to open data would allow these APIs to become even more comprehensive, pulling together not just related categories of data, but potentially becoming a single source of truth that organisations rely on to make strategic decisions.
3. Embedded crypto, or crypto-as-a-service
Notwithstanding that we’re currently in the midst of a crypto winter, made worse by the recent collapse of FTX, one cannot forget about all the other things happening, many at institutional or government level, that are looking to normalise the technology and asset class. There’s still growing demand for the service. Many institutional investors are looking to increase their exposure to crypto or allowing customers to manage and trade digital assets as part of their own portfolios. As such, providers have to manage the unique risks and compliance requirements that holding digital assets creates. And crypto ownership is equally on the rise among individuals. With 30% of UK consumers — 40% globally — keen to make purchases using crypto, merchants are under growing pressure to accept the alternative payment method.
Demand for crypto services runs the gamut, from front-end features like payments, currency conversion, yield and wallet management, to back-end operations like payment processing, secure custody, and compliance. Creating a crypto-as-a-service product isn’t easy. And, for larger clients who have been slow to adopt crypto features, and especially institutional investors, regulatory approvals in key jurisdictions and strong ties to the leading exchanges are table stakes.
Specialised services like Coinbase Institutional have already begun targeting the sector, but companies developing crypto strategies are not only large operations. From e-commerce merchants to fintechs, there is a huge gap in the market for smaller companies that are better able to operate at pace. Given that onboarding processes at Coinbase remain cumbersome, many players are opting for these more agile providers.
From an institutional perspective, providing custody services can be an effective foot in the door before differentiating through other services. Take Swiss fintech, Metaco, for example. They started out as a digital asset custody engine and then developed an order and execution management system alongside technology that allows financial institutions to access decentralised finance products or start offering them to their own customers.
By contrast, when it comes to other operators, on-ramps and off-ramps — specifically crypto-linked cards and currency conversion services — are obvious low hanging fruit. Speed, risk management and price are the key drivers for growth. The catch is that, with established players like DriveWealth, a Mouro Capital portfolio company, and Stripe offering ramps to merchants and trading services, and Visa and Mastercard developing crypto integrations, transaction fees and likely to fall, squeezing potential margins for newcomers.
That said, we still believe in the long term that the ability to build new infrastructure, rather than connect existing layers, will likely make these players’ value propositions much stickier.
The future of finance is embedded, open, and interconnected
McKinsey estimates that those economies that embrace data-sharing could boost GDP by up to 5% from financial data alone. They reason that data sharing enables customers to buy and use financial services to which they might not otherwise have access, saves time for customers in their interactions with financial services providers and improves the range of product options available.
Similarly, financial institutions stand to gain through “Increased operational efficiency… better fraud prediction… improved workforce allocation… and reduced friction from data intermediation.” To this end, we’re already seeing movement towards broader, more granular API-based data sharing but, in order to unlock its full potential, two key challenges remain in place.
First, how to move data more efficiently and securely?
There’s a balance to be struck here. Companies need to be able to access and make full use of the data they require easily, but consumers, whether businesses or individuals, need to have peace of mind that their data is in safe hands and won’t be abused. Skyflow, a Mouro Capital portfolio company, has built a data privacy vault for sensitive data, offering an API-delivered service that stores personally identifying information (PII), among other sensitive data for customers. This allows companies to simplify how they manage, access, and govern sensitive data and developers to quickly build applications and workflows without worrying about data privacy, compliance or residency.
Second (and arguably more important), fintechs need to scale effectively if they are to make an impact.
This will likely entail some consolidation, which we’ve already started to see in Visa’s abandoned pursuit of Plaid and subsequent acquisition of open banking platform, Tink, instead. Likewise, strategic partnerships will also prove critical. Embracing new standards of openness and interoperability, fintechs can create transformative opportunities for collaboration and innovation to everyone’s benefit — be they traditional financial services firms, customers, or the fintech industry itself.
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