APIs can help fintechs transition into traditional finance

Only when fintechs use APIs can they innovate and make a real difference in the financial services marketplace.
27 July 2018

If fintechs want to seriously change the financial landscape, they must use APIs. Source: TradeIt

Application programming interface (API) is becoming increasingly common as a way for companies to collaborate on developing technology without compromising their entire system.

By 2022, the API economy is projected to be a US$3.4 billion market according to data from Zion Market Research.

Amongst all API types, ProgrammableWeb’s data shows that financial APIs is the fastest growing category. As financial services take a more open stance towards innovation, more and more incumbent players are opening up their APIs for tech developers.

APIs allow fintechs to work with banks to improve the financial ecosystem; as opposed to doing everything on their own.

Traditionally, incumbents are reluctant to open up APIs, largely due to a lack of technical skills to do so. Besides, it was costly to maintain an open API.

For many fintechs, the absence of an API means they cannot truly innovate and improve on current systems. At best, they can provide alternative solutions or services that are not fully integrated or compliant with consumer’s banking needs.

“A lot of so-called fintech companies have built their business model on reselling customer data. They say that they represent innovation, but in fact, they’re not,” said Nathan Richardson, Co-founder and CEO of TradeIt, in an exclusive interview with TechHQ.

What Richarson is referring to, are screen scraping companies. These companies obtain information by mining and extracting data found on a user interface.

Screen scrapers are often used by aggregators, such as price comparing websites in the travel industry, to present the data to users in a simplified manner.

In the case of travel search tools, this reduces a lot of the manual processes for users, which are beneficial to customers.

However, screen scraping requires companies to store data and in the case of financial services, this includes users’ credentials and private data.

While it isn’t strictly illegal, a lot of the related processes used by screen scraping companies, especially in the financial space, can quickly turn risky.

“The screen scrapers have totally conned the media. They’re not doing anything to protect consumers transparency or data, and they’re misrepresenting themselves to the consumer,” Richardson exclaimed.

Unlike credentials stored on a social media platform, there are no simple ways to revoke access of data from screen scraping companies.

For example, users using Facebook login for various apps or services can control where credentials are being used in the settings page. However, screen scraping happens without consumers even realizing it explicitly.

Besides the issue of data protection, Richardson explained that screenscraping companies don’t always have explicit permission from banks or other incumbents to use a logo on their platform.

“To the consumer, if their logo is there that is a representation of a trusted relationship. There’s a lot of misrepresentation and misleading information that’s being shared with consumers,” he warned.

Across other industries, the issue of screen scraping is becoming a talking point for companies.

Last year, Ryanair sued Expedia for “unlawfully pulling content” off the airliner’s website, according to Travel Weekly. Previously, the airliner sued other screen scraping travel websites on similar claims.

LinkedIn also sent a legal warning letter to screen scraping company hiQ after finding out that the latter “scrapes data about thousands of employees from public LinkedIn profiles, then packages the data for sale to employers worried about their employees quitting”, reported Ars Technica.

In the EU, the new Payment Services Directive (PSD2) have put a ban on screenscraping, despite fintechs battling with regulators on the issue before the ban came into effect.

However, in the US, regulators remain slow to act. Richardson was critical, “The CFPB (Consumer Financial Protection Bureau) no longer has any teeth at least for the next few years under the current administration.”

Having said that, he added that financial institutions are stepping up to address issues of screen scraping, as it begins to turn into a fraud and security hazard.

For fintechs to truly transform the financial landscape for the benefit of customers, they must work with incumbents.

As more and more banks open up their API, fintechs can develop and deploy solutions with banks, while ensuring they meet the regulatory requirements.

It’s more than just about having explicit permissions to use particular data or systems. By using an API, banks have control over the standards fintechs need to adhere to, while fintechs have better understanding and access to banking systems.

Ultimately, this will enable both incumbents and fintechs to collaborate in providing better and safer services for their customers.