The next generation of fintech API / infrastructure — business models

Ideas on how fintech infrastructure will evolve

Takeaways

• Fintech is transforming technology and financial industry through APIs, enabling any companies to offer financial services to their end customers.
• The next generation fintech infrastructure for banking will be one or more of the following: market place model, service oriented, leverage new emerging technologies, and or platform enabler.
• The models are not mutually exclusive, and you will likely see successful companies in leveraging more than one model.

Intro

In the recent year, there has been no shortage of fintech companies providing APIs. With the help of these APIs, finance has evolved from traditional physical bank branches to online digital transactions, and from a separate entity to embedded in just about everything.

As Andreessen Horowitz parter Angela Strange very well pointed out in Every Company Will Be a Fintech Company where she argues that,

In the not-too-distant future, I believe nearly every company will derive a significant portion of its revenue from financial services.

Embedding financial services into our everyday app not only creates convenience for the user, but also brings important transactional data and additional source of revenue for the provider. The most commonly sited example is perhaps Uber adding payment so that drivers can quickly access the money they have earned. But this certainly can be applied broadly to different industries: from education and healthcare providers that simplify payment and access to financing for its users to pretty soon we will see shopping and payment on social platforms like TikTok or Instagram. Basically, any scenarios that you need to make a payment, need a loan, or insurance can be a candidate.

The current landscape

As the fintech API providers have lowered the barrier to entry, from millions of dollars and year spend on development and regulatory hurdles to plug-and-play API that can take days or even hours to integrate, the trend to embed more financial function into everyday app will continue. As fintech infrastructure becomes more prevalent and important, what will the next generation look like? Let’s first take a quick look at the current landscape.

Currently, within the BaaS space, there are 2 types of players:

• Fintech start-ups providing API and partner with existing bank: Synapse, Cambr, ClearBank
• Existing bank providing API: Cross River, BBVA, GreenDot

Whether it’s the startups, which typically starts out focus on a particular area within finance but tend to offer a more dynamic solution, or existing banks capitalizing on its infrastructure by providing more standardized API, we have seen these API providers evolve to provide more comprehensive offering. These APIs cover most of the area in finance from card issuing, payments, saving accounts to loans and insurance. For easy reference within this article, we will refer to these as the basic financial functions.

While the leaders of these two models will continue to thrive, others can consider the following models to differentiate or create more value for the customers.

The market place model

First, let’s consider the “market place” model. Imagine to setting up the financial functions in your app is like going through screens and picking the vendor you want for each of the services (KYC, core banking, AML, data aggregation, Cards, Account verification…,etc)from a list of vendors.

Instead of forming partnership with only one bank, the infrastructure API provider, which we will refer to as the API provider, will partner will large networks of financial services providers. Offering the following benefits:

• Seamless integration: Financial applications are usually complicated with different components resulting in multiple integrations. This model takes away the pain of integrating multiple software.
• More choices and easy comparison: By having all vendors aggregated into a market place will allow end customer to easily compare the service offering, price, and pick the most suited solution for their needs.
• Modular in nature: By grouping each service (KYC, AML) into module, allows end-user to select only the service they want.
• Reduced risk: Compliance, security, fraud, data are some of the biggest risks concerning financial institutions. By using different vendors reduced the risk of exposing “all information” when there is a breach.
• Seamless switching: For this model, changing or switching the underlying vendor should have minimal or no impact to the code or the operation of the application. This can be achieved through a common interface. Such feature allows the customers to swap the vendor they are not happy with, and not have to worry about vendor switching risks or costs.

Companies like Bond, Hydrogen, eBankIt, and Episode Six have already started to build out such model. It will be exciting to see how these infrastructure are leveraged.

Another model that has fintech infrastructure provider can consider is one focused on service or creating value added service.

Service oriented model

As fintech infrastructure evolve, another model that I think will create value for customers is one focused on service. Currently, the infrastructure providers have created value by offering more services. For example Stripe, an online payment processor, is expanding its clients services with loans, fraud detection, or issuing cards to better serve their end-users’ needs. Galileo, an API provider for issuing card, recently launched Instant to offer debit card and bank account. As API providers are becoming more comprehensive in their offering, I think we will see value-added services expanding in different and into particular verticals.

An example in payment vertical Finix, a payment facilitator enabler, purchased consulting firm Fintech 513, to help clients unlock additional revenue by processing and manage payment themselves.

For our marketplace model above, professional service can help clients from picking the most suited vendors to building customized solution based on the provided API.

Emerging tech model

Third, the next generation API can create value by incorporating new technologies such as AI, data analytics, and blockchain to offer unique features in their offering. For example, providing autonomous money. Autonomous money or self-driving money refers to users set a goal / destination, and the underlying computer code / algorithm should be able to figure out the best way to get there through AI and data analytics. And also constantly update the “best way” as new info is received. Imagine for your mortgage: as interest rate keeps dropping, your AI agent automatically find savings opportunities, present those opportunities for you to review, and refinance is as simple as a simple click.

The idea is that API infrastructure providers provide the tool, and let the users apply business logic or use cases to best apply those tools. As the first generation APIs are focused on providing the basic financial functions, the next generation will evolve to provide customers with advanced functions, functions made possible by leveraging emerging technologies. In the example of autonomous money above, companies shouldn’t have to worry about hiring data scientists or AI specialists, but only have to worry about how to apply the function of autonomous money in its clients’ best interest.

Platform centric model

Lastly, there is the platform centric model. What I meant by platform centric is a model that help banks or clients to become a platform center, a center that can serve most if not all of their end users’ need. For example, the API can help bank become the platform for anything that require payment. The API provides connections to different vendors that are part of our daily life needs, and embed finance into the user experience. Imagine you are on your banking app checking your budget for the vacation you are planning. There is connection to travel website to book air tickets & hotel, connection to open table to book restaurants at your destination city, connection to ticket master to book tickets to shows all through your bank app without having to make separate registration, and entering your payment info. This is what I meant by platform.

Here is another example of platform model where the banking platform looks for savings on your behalf:

I do believe that there will be some type of consolidation: we will only use a limited number of app on our phone, say 10–15, even though we have more than 50 installed. Whether that happens or not, it’s just not very convenient to have to go through 4 to 8 different app to plan a trip. In addition, everyone is competing for eye-ball, customer engagement, and data points. So, there is value if the fintech API provider can provide the tools its customers need to achieve so.

Conclusion

Whether it’s the marketplace that provides more choices and seamless integration, consulting service to unlock value, incorporate new technology to differentiate, or help clients create platform to create more possibilities, the general theme is to create service / value by extending on current basic financial functions. Though I don’t have the best examples here, as they are used to simply help illustrate the model, I look forward to more innovative use cases that create true value to customers by simplifying and optimizing our interaction with finance.

Next, I will write about fintech infrastructure on the payment space. Thank you.