Banks may feel caught in a tug of war between regulators and fintech startups, but they can thrive in this spot, according to fintech entrepreneur Lisa Shields.
To appease regulators and startups that both want fast access to bank data, financial institutions can use their existing relationships to enable innovation rather than be disrupted by it.
"My personal mindset was a corporate would be unlikely to engage with a non-bank third party unless they had gone to the mat with that company," said Shields, co-founder and CEO of FI.SPAN, which operates a portal that connects fintechs, banks and merchants to facilitate the spread of open banking, particularly in the B-to-B space for small to medium-sized enterprises. "But no bank would have anything near to what that corporate would need."
FI.SPAN is a managed platform that courts fintechs on one side and banks on the other. It curates fintech products, which banks can use alone or alongside their internal technology to develop products. The platform allows banks to retain control of customer data and the client relationship, which the company contends can act as a "hedge" against pending Payment Services Directive (PSD2) rules.
PSD2 is a European regulation that requires banks to share data with third parties, such as fintech developers building mobile payments products. This sharing of data will generally take place via application programming interfaces, or open development tools that allow the third parties and banks to communicate with each other. While it's a European rule, it's expected that most banks in western markets will adopt the open banking model.
The regulation, which goes into effect in January, is attracting technology companies on the business payments side and consumer payments side. But technology sharing is a complex job given the number of fintechs and banks, and the work required for integration, according to Shields, who also founded the B-to-C payment company Hyperwallet.
One of the challenges for a fintech startup is finding ways to scale products to reach customers quickly, according to Shields. "We would have liked banks as a distribution channel," she said. "We had to have a direct sales force and reinvent the wheel."
The rise of advanced APIs and marketplaces was predicted as a likely outcome of the PSD2 regulation. At the time, experts predicted concerns over infrastructure deployment for banks would lead to advanced API marketplaces.
"Instead of asking fintechs to code to a bank's API, FI.SPAN reaches out to providers who develop things like instant issuance or employee payment cards," Shields said. "It's a supermarket for pre-integrated services."
FI.SPAN has been in development for about a year and formally launched in August. Banks pay an annual license fee, as opposed to a fee per click, for the pre-integrated service, and negotiate a commercial deal with the fintech that the bank chooses in the API marketplace.
The company's first financial institution is going live in the next couple of weeks, and two other banks just started pilots. It has 10 financial technology companies that are integrated into its system with 30 more in the pipeline. The company is adding fintech providers in FX, ACH processing, analytics, receivables and corporate cards/expense management.
"There are thousands of banks worldwide. It will be infeasible for most to support direct interfaces to the many banks offering APIs so intermediaries will be the norm," said Rick Oglesby, president of AZ Payments. "It’s a big opportunity for payment networks that are already in the bank-intermediary business. At the same time, however, it’s very different from what the networks offer today. This means it’s a big opportunity for others as well. It’s not a no-brainer win for the networks."