March 9, 2023

American Bankers Association: Middleware Helps Banks Minimize Dependencies and Unleash Innovation

by David Wexler in API Management , Banking Core Integration , Fintech 0 comments

The American Bankers Association (ABA) released its 2022 Exploring Banking Middleware Solutions report detailing the strategic benefits of implementing middleware for banks. Community banks’ potential to innovate directly relates to their connection with the core banking vendor. However, according to ABA, nearly 42% of banks surveyed are dissatisfied with their core provider. As a result, middleware platforms are gaining popularity because they can bridge legacy systems with new applications, reduce reliance on legacy cores, build a single source of truth for customer data, and foster partnerships with fintech companies. Here, we’ll give a high-level perspective of the findings from ABA’s report and provide our perspective.

Highlighting the significance of API-based middleware for innovation in community banks

The article highlights how legacy architecture limits the ability to support innovation and how API-based middleware has emerged as a popular solution, bridging the gap between legacy systems and new applications while reducing reliance on the core. Middleware offers multiple benefits, including faster product delivery, improved customer experience, and easier partnerships with fintech companies. It translates between the core and various customer-facing systems, facilitating data flow and exchange.

Middleware is not all the same or a magic bullet

Banks can use middleware to prolong the lifespan of their legacy core systems temporarily, but eventual core replacement with cloud-based platforms is likely unavoidable. The potential downsides of middleware include additional entry points for cyberattacks, lack of real-time visibility, and concerns regarding data handling and management.

According to ABA, there are two broad categories of middleware platforms: API-based connectivity platforms and cloud-based Integration-Platform-as-a-Service (iPaaS) offerings.

API-based connectivity platform vendors provide an API platform that sits on top of the legacy core and exposes core banking functions and data, offering third-party onboarding and management, a developer portal, an API marketplace, and support for various banking functions. These vendors require an in-house bank IT staff to maintain the middleware post-implementation, and some vendors have an exclusive focus on the banking vertical. Some core vendors, such as FIS, Fiserv, and Jack Henry, have also built API middleware layers that fit in this category.

Integration-Platform-as-a-Service (iPaaS) vendors offer end-to-end services beyond technology and implementation guidance, including ongoing maintenance, development support, and third-party onboarding. They provide API management, workflow management, data processing, data hub functionality, consent management, consumer authentication, API marketplace, data analytics, fraud detection, and risk analysis tools. IPaaS vendors like PortX offer coding-optional environments, which help business and operational users deploy solutions without requiring a robust IT team. 

Banks can achieve three crucial results by utilizing middleware:

Minimizing dependence on the core enables rapid product delivery and simplifies future migrations

Speed-to-market is critical to empowering banks to respond to competition and customer pressure for on-demand, digital self-service. Integrating a bank’s core and back-office systems to an API-based middleware platform can provide rapid access to data and generate new opportunities for revenue growth. Adding a middleware layer reduces the dependency on the core, allows for easier third-party fintech access, and prepares banks for an easier transition to a new core in the future.

A 360-degree view of the customer allows FIs to optimize the customer experience

Banks can use middleware platforms to unify customer and internal data into one platform, creating a single source of truth to build better products and customer experience. This can be achieved by leveraging APIs and the middleware integration layer to deliver a 360-degree view of the customer across lines of business for a seamless, connected experience.

Seamless integration with fintechs unleashes innovation

APIs are increasingly used in financial services to connect banks with fintech companies, with a majority of banks globally leveraging APIs as part of their business strategies. Collaboration with fintech partners is viewed by banking leaders as the best strategy for achieving digital transformation and driving business success. Partner APIs are used to support integration with business partners and are expected to double in number by 2025. 

Banks are increasingly using middleware and APIs to offer banking products and services through third-party distributors, known as Banking-as-a-Service, in which banks act as modular platforms that supply core banking functions that fintechs source to build their own financial services, allowing for external connectivity and partnerships. Middleware also assists banks in conducting third-party risk management by allowing real-time observability of transactions and enabling the monitoring of risk factors identified during onboarding of fintech partners.

Key considerations for Banks

The report concludes by emphasizing the need for collaboration among various stakeholders and provides recommendations for banks to evaluate a middleware solution that’s right for them.

Is middleware the right strategy for your bank?
  1. Evaluate your customers’ needs. Determine if there are new applications or use cases that can benefit customers and potentially drive revenue.
  2. Define your business objectives. Decide if the bank wants to focus on supporting current customers or seek out new segments and consider how middleware adoption can help achieve those objectives.
  3. Assess your ability to roll out innovations. Determine if the bank’s current tech stack can support new innovations and partnerships with fintechs, and consider how investing in in-house development capabilities can lead to a vendor-independent path forward and potential revenue through APIs.
Choose your middleware implementation partner carefully.
  1. Evaluate if the core-provided middleware solution is sufficient for your needs. Be especially careful in this area. There are three key questions you need to know the answer to: How long will it take? What is the true cost to do so (all cores charge click charges)? Who owns the access to your data?
  2. Community banks often lack technical staff to manage an in-house middleware layer, so they need to evaluate whether to handle it themselves or seek the help of a managed services provider who can offer active administration and ongoing support in delivering application, infrastructure, and security services.
  3. Validate a vendor’s relevant experience, including their ability to integrate with the bank’s existing core platform, security plans, and customer testimonials regarding past implementations.

Take your banking middleware strategy a step further with CICaaS

Your integration partner should offer technical capabilities and advisory services for all strategic initiatives. At PortX, we refer to this as Customer-Integration-to-the-Core-as-a-Service (CICaaS). CICaaS is a comprehensive solution that prioritizes the banking core integration and provides Open Banking solutions for future integrations, saving time and money. After the initial phase, banking core integration becomes a service that the FI can easily access.

You can download the 2022 Exploring Banking Middleware Solutions report from ABA’s site. Let us know your thoughts in the comments below, or feel free to start a conversation by contacting the team today.

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