The banking and financial services industry is entering exciting – and unprecedented – new times. For several years, we have seen banking and technology become increasingly interconnected, with banks and blue chip financial services companies setting their sights on acquiring and partnering with fintechs. Take for example Santander’s £350 million acquisition of 50.1% of Ebury, a fintech specializing in international cash management and cross border payments, and Mastercard’s $825 million acquisition of Finicity, a Utah-based fintech specializing in open banking.

On the other end of the spectrum, Jiko, a start-up led by a former Goldman Sachs trader, last month became the first fintech firm to complete an acquisition of a nationally regulated U.S. bank, Mid Central National Bank. This acquisition came on the heels of Varo Money becoming the first fintech to be granted a national banking charter by U.S. regulators.

The role of APIs in an M&A environment

So what does all of this acquisition activity mean for financial institutions in the U.S., especially small and medium-sized institutions? In short, banks will continue to partner with and acquire technology companies, leading to continued consolidation and M&A activities between institutions of all sizes. Operationally, this type of activity can lead to big headaches for smaller players who often lack the technical capabilities required to manage efficient integrations. Disparate back-end systems that fail to “talk” to one another need to be connected and aligned, which can create a significant strain on IT resources.

To help manage complex integrations and ensure continuity of customer experience, it is  crucial that FIs embrace APIs – which enable different pieces of software to communicate efficiently – to create the foundation that will allow them to build new digital products and services.

While banks do still have rows of massive on-site servers and budgets for building their own proprietary technology, the tides are beginning to turn. In this new age of partnerships and integrations, it is critical to embrace technology like APIs and cloud computing to avoid falling behind.

Keeping up with customer demand

Adopting the right technology, oftentimes through fintech partnerships, improves the customer experience and gives banks a competitive edge when it comes to attracting and retaining customers. As technology evolves, consumers will expect streamlined, user-friendly digital services from every business they interact with – including their financial institution. Smaller and mid-sized banks that lack the same resources and budgets as global FIs will need to rely on partnerships in order to satisfy and expand their existing customer base. APIs will help to facilitate integrations with fintechs to cost-effectively deliver the latest innovations.

Consumer polls have shown that customers prefer to use their bank for financial services, rather than a technology company because of the trust that has been established. Even so, customers may begin to turn to fintechs out of necessity if their banks lack robust digital services or simply don’t innovate rapidly enough.

Many fintechs are monoline – meaning they offer one product, whether that be lending, budgeting tools or direct accounts. FIs, on the other hand, offer varied financial products.  It is evident that by partnering and working together, both FIs and fintechs reap the benefits – FIs gain access to new, in-demand services and fintechs gain a larger pool of users. These partnerships are worth considering, especially for smaller institutions that want to keep their community feel while offering services that compete with the larger players.

As the lines between banking and technology continue to blur, now is the time for FIs to adopt APIs and other innovations that will ensure they are well-positioned going forward, both operationally and in the eyes of their customers.

About Chermaine Hu:

Chermaine Hu is the CFO and co-founder of next-generation financial technology provider, Episode Six, where she is responsible for the company’s global finance and accounting functions, as well as its M&A and investor activities. Prior to co-founding Episode Six, Chermaine had over two decades of experience in fintech and financial services, including 14 years as an M&A banker at Morgan Stanley in both London and New York.

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