Are banking APIs the real revolution?

Application programming interfaces (APIs) have been around for 20 years, but, as Ron Shevlin points out, just one in five community banks in the USA had deployed APIs before 2020, and they aren’t even on the radar of at least 20% of the banks.

Contrast this with Europe, where 97% of UK banks are already using them, and even the lowest uptake country, the Netherlands, has 83% of its banks deploying APIs. The reason for this huge gap between the USA and Europe is the latter’s Open Banking initiative, however Shevlin says that American banks cannot simply use this as an excuse for their low adoption of the technology.

As a result of the lack of API deployment, US banks are missing out on a number of opportunities, including the reduction of time and costs in several business processes, particularly product application-related processes.

The best known API providers include Stripe, Plaid and Yodlee. These three have furthered the connections between financial institutions and fintech companies. However, Shevlin says there are three fintech startups that are “poised to have a significant impact on the banking industry: Pinwheel, Sila, and Codat.”

Pinwheel

Pinwheel, which has just announced a $7 million funding raise, offers an API for payroll data, “that handles everything from income and employee verification to easily switching and managing direct deposit.”

How would this revolutionise banking? According to a Techcrunch article, “For consumers, the main draw is automated direct deposit control, which will allow consumers to control where their paychecks go. For instance, if they want to split a direct deposit into multiple accounts, or regularly move part of their paycheck into a savings app like Digit or Acorns, Pinwheel can help them do that easily.”

Sila

According to Coindesk, Sila, “is an API platform that issues an ERC-20 stablecoin called SilaToken (SILA). Every transaction on the platform is done using the token, which is pegged 100:1 to the U.S. dollar. Sila plans to install card payments, international payments, business ID verification and begin issuing tokens within one business day. Its partner bank, Evolve Bank & Trust, plans to connect to the Clearing House system, a network started by big banks that provides access to instant payments.”

Techcrunch comments that Sila’s API would: “Supplant ACH as the payments choice for companies who need to move money. Sila’s API for identity verification, which empowers developers to identify users and use that info in the company’s banking API, allows users to debit their accounts and move funds from one account to another. On top of that infrastructure, Sila allows for the creation of smart contracts, which should allow for more rapid deployment of financial apps.”

Codat

Codat, which is based in London, has an API focused on small businesses, and is signing up 10,000 new customers per month. According to TechCrunch:

“Codat is building an API that connects with all the systems that hold all the relevant financial data. That type of information is usually spread across multiple systems, and small businesses often use different systems. On the other side, banks, insurance companies and more can speed up their internal processes and give you an educated answer for your next loan or insurance product.”

Codat is especially on point right now as small businesses are struggling and need funds. However, the current lending processes are time-consuming and confusing. Its API simplifies and streamlines the flow of data between small businesses and financial institutions, and could potentially disrupt the way SME loans are handled today.

Blockchain

On the other hand, perhaps APIs aren’t the ultimate answer for a banking revolution. Brian Platz, co-CEO of Fluree, says, “The answer isn’t to build a better API; rather, it is to turn the database inside out and let data escape from the walls that confine it. Blockchain is how data frees itself. It’s time to end the era of data APIs and begin to look into the blockchain.”

A List Of Fintech Firms Providing Free Technology During The Coronavirus Crisis

Coronavirus, or Covid-19, is preoccupying everyone at the moment, and in different ways. Businesses in almost every sector face a rough ride ahead, as they close offices in response to protecting employees health and responding to government instructions to stay at home and avoid contact with others.

Meanwhile, most of us still need money. We have to pay for food and online products, and for that we depend on bank services. And at this critical time, the more traditional banks have been receiving support from the fintechs, so that they can continue to support their customers.

According to Ron Shevlin writing for Forbes, the fintechs are “extending free, discounted, or accelerated deployment offers to financial institutions.”

So let’s see what some of them are doing.

Active.AI has a pre-built virtual assistant that can be quickly customized with answers specific to the institution. It is offering a 30-day free trial.

Agolo is providing customers with AI-generated summary feeds focusing on the impact of coronavirus on various sectors such asFinance, Energy, Media & Entertainment, Health Care, Info Technology, etc. It is offering these feeds for free on the web and via social media.

Agora Teen is an interesting fintech that specialises in offering white-label solutions for teenager bank accounts pre-opened by parents. It is offering free access to its products.

BillGO helps track, manage, and pay bills in one place and it is offering its Prism app free to help everyone stay on top of their money.

Brace is a borrower platform and it is helping borrowers to seamlessly apply for mortgage assistance in the event that the hardship is caused by COVID-19.

Digital Onboarding is a fintech offering its clients unlimited usage at no extra cost to help educate their customers/members on how to access money and utilise digital services without visiting a branch.

Similarly, Horizn works with financial institutions globally making sure both customers and employees understand and know how to bank digitally. It is providing a discounted short-term licence package of our cloud-based Customer Digital Platform and Digital Demos, and like other fintechs, it is accelerating deployment to get banks up and running within two weeks.

There are many other fintechs who are rallying around the financial sector and helping those institutions that need to react quickly to support customers. It’s a welcome move from fintechs and it can only help to boost confidence in digital banking once we come out the other side of this crisis.

Why has Australia fallen in love with neobanking?

Neobanks, or digital banks, arrived in Australia in 2018, dues to a change in legislation, and since then there has been a flurry of activity. Some might even call it a tsunami of neobanks, and this has led to a high level of competition in the country’s banking sector, something that hasn’t occurred for decades.

The neobanks are app-based banks accessed mostly from a smartphone. They don’t have physical branches and they promise clients a ‘touch of the button’ 24/7 service, and most of them have much lower charges than the traditional banks.

Neobanks have been growing in popularity outside Australia for some time, with Europe being a leader, especially the UK. As Jack Derwin points out, the fact that they are doing so well in the UK, and a number of them are registered there, such as Starling, Revolut and Monzo, is a good sign for Australia.

The digital banks are a more recent addition to the Australian banking scene, because until legislation changed in 2017/18, it was extremely difficult to start a neobank. Whilst the previous legislation was intended to protect the consumer, it was perhaps too restrictive, and anti-competition.

In 2017, Scott Morrison, who then headed the Treasury, dramatically simplified the application process to enter the banking sector. As a result, within months neobanks were lining up to enter the market.

Still, entering the banking sector is never easy. Neobanks need a banking licence, a core banking system and a substantial fund of money: one neobank founder told Business Insider Australia that $100 million was the figure needed to start up.

It takes time to raise that kind of money, and to get a banking licence, which can take up to 12 months, as the newcomer must convince the financial regulator to trust the product.

So, what is the advantage to using a neobank? Unlike traditional banks, they are more cost efficient. They don’t have a network of offices and the fact they have lower overheads, means they can pass the cost saving onto the client. Also neobanks have access to the best tech and can therefore optimise their product. It only takes minutes to set up an account, compared with all the paperwork needed for a bank. So, the consumer appeal is there, combined with free accounts and lower charges.

As Derwin says, “From recognising higher than usual bills, notifying you of unused subscriptions, and even helping you switch to a cheaper energy provider, neobanks say they can do banking better.”

That might not be hard to achieve in Australia, where the traditional banks have admitted to extorting fees for non-existent services, to the point they were even charging dead people. They also admitted to lying to the regulators, holding forged documents, failed to verify customers’ expenses when approving loans, and sold insurance to people who couldn’t afford it. And as Derwin says, with four banks controlling 80% of Australia’s business, there was no incentive for them to do better.

All this adds up to a reason for Australians to love neobanking. They now have around five to choose from, including Volt and Xinja, and the UK’s Revolut is testing the market. This is definitely a geographical space to watch for anyone interested in neobanks.

A bank you never heard of has died

How many of you can hold your hands up and say that you have heard of Raphael’s Bank?

It is one owned by an archangel by the way. It is Britain’s second oldest bank and it has existed for 232 years.

What happened to cause its quiet demise? It wasn;t on the news, because few people have heard of it, therefore there was no rush to get the government to bail it out. The bank, which was a leader in lending, sold its motor finance division in 2018 and stopped lending completely in April this year, as reported in Forbes by Frances Coppola. It has also now just closed its retail savings division. Its press release said,

“All savings account holders have been given sixty days’ notice, in line with regulatory guidelines, of the bank’s intention to return their monies to them and close their accounts.”

In 2015, the bank was an active lender, though it had no high street presence and operated mainly through brokers and third parties. Its main strength was in motor finance, including mobility scooters and such like, and it was known for its range of retail and small business loans. It was also a significant provider of pre-paid credit cards in the UK, and had a string of ATMs. Coppola says, “It was, in short, a small full-service bank. Just the sort of bank the highly concentrated UK banking marketplace needs.”

However, story of its death goes back to who owns it, because it wasn’t really an independent bank, despite its independent sounding name. It is owned by Lenley Holdings, which also owns the International Currency Exchange (ICE). And Lenley didn’t want to support a small British bank, so it put it up for sale in 2016.

The expectation was that Russian and Chinese buyers would leap at the opportunity, but none emerged. Meanwhile Raphael’s kept expanding its services, including becoming the banking partner for Transferwise in the UK. And it partnered with Vodafone and PayPal in their mobile money initiative in Germany.

In fact the bank was doing very well in 2017 and reported a profit of over £22m ($28.57m), which was a significant increase on the paltry £25,000 ($32,470) of the year before.

Some onlookers say that the Brexit fiasco spooked overseas buyers, which is likely true, but then in 2018 the bank reported a massive loss of nearly £4.5m ($5.84m). The chances of finding a buyer now were rapidly disappearing, which is why it closed its motor finance and asset finance activities, and sold its motor loan book. Therefore in 2019 it was judged that it couldn’t be sold as a going concern, so Lenley decided to liquidate it.

It is not a catastrophic situation for the banking community, but it is an interesting story for startup neobanks. Just remember, even though this bank opened for business before the French Revolution, in the end it was defeated by a combination of geopolitical events and a low Euribor rate that decimated its evolving payments division.