Everyone has an API, right? Not so fast. Not all APIs are created equal. The difference could mean the trap of vendor lock-in or the path to becoming an innovation powerhouse. Identifying these differences is challenging enough but banks and credit unions face an even greater impending crisis—integration modernization is a costly investment.
Every financial institution wants to bring new products to market faster for its account holders. Yet, daily, I work with organizations grappling to justify the significant financial investment and effort required to make modernization a reality. This struggle reveals a more profound “tension” that every bank and credit union must confront: the contrast between legacy banking technology and the demands of a fast, flexible, and digital-first world. Overcoming it isn’t easy, but the rewards are undeniable.
The “Tension” FIs Can’t Avoid on the Path to Modernization
The rise of fintechs, mainstream adoption of digital-first banking practices, and a global catalyst—the pandemic—pushed consumer behaviors over the edge for good. Account holders have come to expect their financial institution (FI) to provide access to an array of specialized products and services.
And this is where the tension starts.
Most US bank infrastructure is built on legacy systems that weren’t meant to handle the speed and agility of modern enterprise IT architecture. Historically, FIs developed a homegrown, brittle spider web of connections between various systems. Or, they implemented a best-of-suite approach, relying on a single vendor—typically the core—to provide everything for them, leading to a high dependency on that partnership.
Times have changed.
Today’s best-of-breed real-time payment solutions, digital lending platforms, and personal finance tools have an application programming interface (API) to simplify integration requirements. An API is like a power outlet. Where the receptacle provides a device with access to electricity without requiring in-depth operational knowledge of the source of that power, an API provides the data and functionality of an application without the details of its underlying systems.
Direct APIs vs. Open APIs and Why the Difference Matters
Overall, APIs have been instrumental in modernizing an industry that has been one of the slowest to adopt new technology. But it’s not all good news. Not all APIs are the same; some can even set a FI back on its modernization journey.
Direct APIs are controlled by vendors. They offer access to specific systems but limit flexibility, interoperability, and data ownership. Banks and credit unions that rely on these APIs are frequently locked into vendor ecosystems, paying high fees for additional integrations and being limited in their ability to customize services. These APIs primarily serve the vendor’s business model rather than empowering FIs with complete control over their data.
On the other hand, open APIs enable interoperability, innovation, and API-first banking. Designed with industry standards like REST, JSON, and OAuth, these APIs allow FIs to integrate with multiple fintech providers, payment networks, and third-party applications without vendor-imposed barriers.
Proceed with Caution: The Risks of Integrating Before You’re Ready
Jumping into integration without a clear strategy can put FIs in a tough spot. Banks and credit unions risk costly missteps without a well-defined integration strategy or the ability to discern the type of API a potential partner offers. Even well-meaning vendors that offer a direct API connection to their services come at a cost, typically through software licensing, service fees, or both. They usually rely on custom code, allowing the vendor to control data access, licensing models, and future costs.
Adding to the complexity (and cost), data storage vendors and core systems often embed “click charges” in their contracts to provide such integrations, leaving FIs to shoulder the costs on both ends—first to the vendor for API access and again to the core provider for the privilege of integrating with their data.
Lastly, third-party vendors may refuse to integrate with banks and credit unions that have yet to modernize. Even if integration is possible, FIs often face hefty fees when building custom connections.
As a result, FIs find themselves caught between legacy constraints and new technology, lacking leverage over either side. This creates an ongoing “tension”—the need to innovate versus the struggle to justify the cost.
Video: Learn more about partnering with best-of-breed fintech outside of the core.
The Solution: Invest in These Three Strategic Investments
Here’s the reality: fintechs and core banking solutions currently have the upper hand in the industry, thanks to their head start in modernization. FIs can regain ground, but it will require making a significant investment. And if they are to remain competitive, they can’t afford not to write the check.
FIs need to view the cost as an investment in their future, categorized into these three areas:
1. Re-Licensing for API-First Contracts
The first and most crucial expense is re-licensing the FI’s technology to ensure an API-first approach. This step lays the foundation for modernization by breaking down silos and enabling seamless access to the FI’s data and systems. Without open access to data, every subsequent effort—integrating with fintech partners, launching new products, or something else—will stall.
Consider this the “toll fee” for entering the modern digital ecosystem. It’s the price the FI pays to unlock its potential, transforming outdated, closed systems into flexible, interoperable platforms. While this investment may seem significant upfront, it is essential for creating the agility needed to respond to market demands, leverage data for better decision-making, and embrace innovation at scale. Re-licensing isn’t just about opening the doors; it’s about removing the locks altogether.
2. Cultivate Integration Expertise
Banks and credit unions that want to stay competitive must invest in team members with expertise in technology integration. Legacy approaches, where contractual vendor management dictated how systems operated, are no longer sufficient. To deliver the seamless, personalized customer experiences that modern consumers demand, FIs must take control of how their systems work together. Doing so requires teams that understand how to integrate diverse applications and build agile, scalable enterprise IT architectures tailored to the FI’s unique needs.
Achieving this level of expertise involves a multi-pronged approach: retraining existing staff and recruiting from a talent pool experienced in cutting-edge technologies like APIs, microservices, and cloud-native solutions. By building a strong in-house team, FIs can reduce dependency on external vendors, accelerate innovation, and maintain control over their technology ecosystem.
3. Invest in Tooling
FIs must expand their IT budgets to include a new category of essential technology tools, such as middleware, integration platforms, developer tools, workflow automation software, and API management solutions. These tools are critical for building modern IT architectures that enable seamless system interoperability, real-time data sharing, and efficient integration with third-party applications.
The financial impact of investing in these tools could increase IT budgets by an estimated 10–20% as a capital cost, but the potential return is significant. By empowering teams with advanced integration capabilities, banks and credit unions can accelerate project timelines, enhance operational efficiency, and deliver better customer experiences. These tools also reduce dependency on external vendors, giving FIs greater flexibility and control over their IT infrastructure.
Why Modernize? Because Fast Beats Slow But Fast And Smart Wins Every Time.
“The world is changing very fast. Big will not beat small anymore. It will be the fast beating the slow.” – Rupert Murdoch
Murdoch’s media empire was rooted in traditional print newspapers and television, industries profoundly disrupted by digital platforms and the internet. The resulting globalization created opportunities for smaller players to outmaneuver larger, more bureaucratic firms. Instead of waiting, Murdoch pressed his businesses into new frontiers—at great expense, mind you.
Building with speed and scalability in mind isn’t just about keeping up—it’s about creating new opportunities for growth and market dominance. Another well-known example of this concept is Jeff Bezos’ legendary Amazon API mandate, where he required all teams to communicate through APIs and design systems as if they were externally available. While the original communication, now over 20 years old, has been lost to time, its takeaway remains equally relevant (and imperative) today. The directive ensured modularity and speed within Amazon’s operations and laid the groundwork for AWS, one of the company’s most successful business ventures.
We are experiencing a transformative time in the industry and those FIs that move quickly and adeptly will win in several ways.
Become a Fast Organization
Speed to market will always win (as long as you’re smart, too, but we’ll get there in a moment).
FIs can gain this speed in one of two ways. The first option is to buy everything from a single vendor, often referred to as a best-of-suite approach. While it may simplify procurement and integration initially, this approach creates a complete dependency on that vendor, limiting flexibility, increasing costs over time, and making it difficult to adopt new technologies or pivot to meet emerging customer demands.
The second option is to build a best-of-breed ecosystem, leveraging applications from multiple vendors to create a tailored, flexible infrastructure. This approach ensures that the institution is never restricted from integrating new systems or replacing underperforming solutions. Globally, the best-of-breed model has become the standard for modern IT infrastructure, offering greater adaptability and resilience.
Differentiate Through Customization
Customization is a powerful capability. As the world becomes more digitized, FIs must tailor their digital experiences to meet the unique needs of specific customer segments. This often involves integrating multiple third-party applications that may not have traditionally worked together. Without a clear focus on customization in their roadmap, FIs risk losing the critical differentiation required to stand out in the market. This raises a fundamental question: Why would customers choose to bank with that FI in the first place?
The future of community banks and credit unions will involve a higher degree of personalized white-glove treatment, where the ability to fine-tune the customer experience on a per-application basis becomes mission-critical. To achieve this, FIs must prioritize flexibility and agility in their IT infrastructure so that their digital offerings can adapt quickly to changing customer expectations and market dynamics.
Unlock the Power of Ubiquitous Data Access and AI-Powered Intelligence
If data is black gold—the lifeblood of modern banking—artificial intelligence (AI) is the refinery that transforms raw data into actionable intelligence.
Combating attrition, building new products and services, and speeding up decision-making are just a few of the many benefits FIs can achieve by fully leveraging their data. FIs are sitting on a gold mine of information. With AI-driven analytics, they can unlock deeper insights, predictive capabilities, and real-time automation to protect their business and accelerate new growth.
Greater access to data, combined with AI, enables real-time analysis of account holder information, leading to faster, smarter, and more informed decisions. This benefit is especially compelling because it allows banks and credit unions to proactively identify and respond to customer needs rather than reacting afterward. For example, AI-powered models can detect spending patterns that indicate financial stress and proactively offer tailored solutions like short-term loans or savings programs. They can also identify opportunities to upsell or cross-sell products that align with a customer’s behavior and feel intuitive rather than intrusive.
Additionally, AI can identify macro-level trends across the FI’s customer base, enabling them to prioritize investments in new products and services that resonate strongly with their target market. The FIs that successfully pair ubiquitous data access with AI won’t just react to change—they’ll drive it.
Gain Leverage (and Speed) in Vendor Negotiations
Renegotiating gives the FI increased leverage over vendors. Third-party organizations are forced to compete on the quality of their products, not their lock-in with the FI’s systems. The FI now has the freedom to explore options from various providers, ensuring a cheaper and higher-caliber solution. The direct cost savings alone can often equal or exceed the investment in modernization.
The FI can make decisions more efficiently by breaking down systems into individual business components. If a partner underperforms, this modular architecture allows swiftly replacing it with an alternative solution—a concept often referred to as “fail-fast” in the tech world.
This approach has transformed vendor management for many FIs, enabling them to accelerate project timelines drastically. What once took one to two years to implement can be completed in just a few weeks.
Creating a Faster, Nimbler Culture
The most powerful benefit of modernization is its transformation of the company’s culture. As employees gain experience with a different way of doing business, their decision-making criteria change. It shifts the mindset from slow to fast, from complacency to challenging the status quo, and from vendor dependency to empowerment. This culture shift drives the forward momentum of an innovation flywheel, creating a decisive competitive advantage for the FI—one that will be difficult for others to match or disrupt.
The Question Every FI Must Answer
The tension between legacy systems and modern demands presents a challenge and an opportunity for FIs. Those who embrace the challenge, make the necessary investments, and adopt a forward-thinking approach will position themselves as leaders. They’ll gain the speed, agility, and AI-powered insights needed to differentiate, innovate, and thrive in an increasingly competitive market.
The cost of inaction will be far more significant for those who hesitate. Falling behind means losing relevance, customer trust, and the ability to compete effectively.
Today, a new question is on the table: Will FIs invest in their future, or will the tension hold them back?
Banks and credit unions have trusted PortX with their API modernization strategy for nearly 10 years. We’re always happy to share real-life stories about how other FIs have turned challenges into a competitive advantage. Start investing in your FI’s future by starting a conversation with our team today.
