3 APIs That Could Revolutionize Banking

OBSERVATIONS FROM THE FINTECH SNARK TANK

Application programming interfaces (APIs) have been around for 20 years or so, but you might not know it looking at most US-based banks.

In Cornerstone Advisors’ 2020 What’s Going On in Banking study, just one in five community banks had deployed APIs before 2020, with a quarter planning to do so this year. One in five don’t even have APIs on their radar. Among credit unions, 53% used APIs before 2020 and another one in four plan to do so this year.

Meanwhile, in Europe, APIs are far more prevalent with UK banks leading the way with 97% of them having deployed APIs.

Three APIs That Could Revolutionize Banking

Ask US bankers why API deployment is so far behind Europe, and they’ll probably blame it on the lack of Open Banking that exists in the US relative to Europe.

Unfortunately, that’s not a good excuse.

By not more aggressively deploying APIs, banks are missing opportunities to reduce cycle time and costs on a number of business processes, in particular, product application-related processes.

Bankers are familiar with companies like Yodlee, Stripe, and Plaid whose APIs have helped create connectivity between financial institutions and between institutions and fintech companies.

There are three lesser known fintech startups, however, who are poised to have a significant impact on the banking industry: Pinwheel, Sila, and Codat.

Pinwheel: An API For Payroll Integration

According to TechCrunch, Pinwheel, which recently announced a $7 million seed round raise:

“Started by developing a software platform for companies to easily offer their employees pre-tax benefits like expensing transit passes and funding health savings accounts. They hit a programming wall though: there was no easy way to connect their product to the myriad of payroll providers out there.”

As a result, the company pivoted and developed an API for payroll data that handles everything from income and employee verification to easily switching and managing direct deposit. According t0 Kurtis Lin, Pinwheel’s CEO, there are three primary use cases for the API:

• Income and employment verification. Most people still submit paper pay stubs or tax documents to prove their income and/or employment. The process is time-consuming, costly, and prone to errors.
• Paycheck-linked loans (PLLs). With PLLs, borrowers can opt to have lenders collect payment directly from their paycheck, essentially guaranteeing that the latter will be the “first money out.” This higher accountability model means lenders can significantly de-risk their loans.
• Seamless switching of direct deposit accounts. Banks’ holy grail is to have customers switch their direct deposits from competing banks to their own. The current process usually requires employees to fill out a paper authorization form or navigate a clunky employee portal.

Why Pinwheel Could Revolutionize Banking

According to the 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.”

The potential to speed up the lending process could be a game changer for both financial institutions and fintech companies, however. Today, few options exist to directly pull payroll data into a unified, machine-readable format.

Pinwheel’s Barriers and Hurdles

The 800-pound gorilla in the payroll space, ADP, isn’t very amenable to sharing its bananas, i.e., its payroll data.

Fintech executives complain that the payroll processor has inordinately high charges per API call for a solution that many believe isn't necessarily reliable to begin with.

A number of the fintech execs I spoke to also mentioned oppressive (or “Draconian” as one put it) terms for connecting with ADP, including high revenue share percentages that persist in perpetuity.

Sila: An API For Payments and Identity Verification

One of Sila’s co-founders, Shamir Karkal, also knows about “hitting a wall”—the wall of organizational bureaucracy at the large bank that acquired his previous startup, Simple. 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.

Why Sila Could Revolutionize Banking

According to TechCrunch, Sila could:

“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.”

Sila’s Barriers and Hurdles

There’s no shortage of well-funded players trying to revolutionize payments, including Facebook with Libra, JPMorgan Chase with its JPMCoin, and Walmart with its cryptocurrency efforts.

In addition, someday, who knows, but maybe even the US government’s FedNow program will see the light of day and have an impact on real-time payments.

While Sila might not ultimately revolutionize banking in the US, it may find a niche market to own.

Codat: An API For Small Businesses

London-based Codat is signing up 10,000 new small businesses each month to use its app to link directly to financial providers. 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.”

Why Codat Could Revolutionize Banking

With the current economic conditions, many small businesses are struggling and in need of funds. But current lending processes are time-consuming and confusing. Simplifying and streamlining the flow of data between small businesses and financial institutions could disrupt the relationships in place today.

Improving know-your-customer (KYC) practices for small business is another huge opportunity to be addressed.

Codat’s Barriers and Hurdles

Codat’s API eliminates the need to send spreadsheets and PDFs through email, but that itself is a huge barrier facing Codat: Many small businesses still rely on spreadsheets and even Word documents to manage their accounting functions.

In addition, Codat has some strong competition in this space.

Microsoft and Plaid announced a partnership to offer a service they’re calling Money in Excel, which, according to Plaid, “turns spreadsheets into a fintech app. It allows users to connect their financial accounts, import the data within them, sync balances and transactions over time, and, ultimately, gain greater insights into their financial health.”

In addition, Codat faces competition from Autobooks who works directly with banks to provide accounting and payments services to small businesses, eliminating the need for third-party APIs as the bank itself becomes the service provider.

Or Maybe We Don’t Needs APIs At All

If these three APIs fall short of revolutionizing banking, it may be because something comes along to replace APIs altogether.

In The End Of An API Era, Brian Platz, co-CEO of Fluree, writes:

“Data locked up into databases, and sipped out by APIs, takes a disproportionate amount of time and resources to extract. 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.”

We’ll see.