The changing banking technology stack that’s powering the Fintech revolution

At the core, the business of banking is simple – borrow money at lower interest rates and in turn lend the same at higher interest rates. The difference in these rates is what banks make as money. While this is a simplistic way of looking at the banking business, other important aspects such as underwriting, collecting and risk management make it quite complex. 

As an industry, banking, globally, has gone through two large revolutions in the last century. The first was the regulation of banking in the US in the 1930s as a result of the Great Depression – which has continued to evolve over time with the last major trigger being the 2008 Global Financial Crisis. India, too, has gone through phases of nationalization, liberalization and privatization with a fairly robust regulatory regime in place today. 

The second – the more important and continual revolution has been the technologization of banks. On this front, the Indian banking industry has made rapid strides in the last three decades and has arguably attained pole position globally today with the explosion of the API economy. 

The Indian Tech Story of Banking

The economic liberalization of the 90s saw Indian banks explore the use of technology in banking operations. This was largely restricted to banks with core banking solutions – which revolved around processing banking transactions i.e., deposits and loans. With most of these processes performed manually before, technology backed core systems increased the speed of processing transactions multifold. 

The information technology revolution of the 2000s and the impetus provided by the IT Act of 2000 saw the largest banks in the country embrace core banking solutions – thereby serving customers at scale and processing large volumes of transactions. In short, the productivity, profitability and efficiency of banks significantly increased. 

Digital Payment Solutions

The next decade and a half, until 2016, saw massive disruption and major innovation in the consumer payment space. Cards led the first set of cashless payment instruments with debit and credit cards becoming mainstream – which compelled banks to develop and upgrade their existing core banking solutions. It also saw the introduction of ATMs. 

The major turning point during period was the rise of digital wallet fintech firms. While this period was short with the advent of the United Payments Interface (UPI) – which has almost wiped out the digital wallet ecosystem in India – it saw the introduction of Application Programming Interfaces (APIs) in banking technology stacks. 

Digital wallet fintechs had to integrate with core banking systems to store money and process payments – which banks were hesitant to. In order to accrue the benefits arising from the penetration of digital wallets, banks developed frameworks to only share payment related services through APIs.  The result was a robust integration mechanism between two parties – banks and fintechs – where banks, now, didn’t have to worry about exposing their entire core technology systems to fintechs, and on the other hand, fintechs got access to specific services, and parts of core banking systems to power their payment products. The UPI, which has revolutionised digital payments in India, is also built on similar API frameworks. 

The Explosion of the API Economy

The corollary to this phenomenon was a stark realisation amongst banks to leverage the power of APIs to offer other available products in their suite to fintechs. Banks today offer core products-such as savings accounts, FDs, credit cards and other allied products like demat accounts and insurances in the form of APIs to fintech partners. The benefits of this are clear – banks get additional user acquisition channels at much lower costs, and the ability to scale significantly increases. Fintechs, on the other hand, purely focus on delivering exceptional user experiences that banks have traditionally fallen back in. 

This symbiotic relationship is at the core of the multitude of fintech-bank partnerships in the Indian ecosystem we see today – whether it is in the form of neobanks, challenger credit cards, buy now pay later (BNPL) products, pocket insurances, new-age investment products, P2P lending etc.  

Indian banks have done a remarkable job in being nimble to build and expose their APIs to realise the advantages of scale, and enhanced delivery and service. However, some banks are yet to join the bandwagon of the API economy and develop their API suites. It is however clear that banks that provide API suites for all products, can take advantage of the fintech revolution, expand their business footprint, and will become the leaders in the coming decade. 

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