Why have startup fintechs been able to make up so much ground on 150-year-old banks in recent times? To a great extent, it’s because they have built up developer portals. With open banking on the way, legacy banks face an imperative to build up and work with these developer communities.
In a new report from Javelin Strategy & Research, The Role of Developers: Building Developer Communities, Javelin Payments Analyst Matthew Gaughan looks at the role these developer portals have played in the financial industry. As Gaughan explains it, cultural factors have been as significant as technological ones in leaving the playing field open for fintechs.
Caught Short
Some of the legacy banks have acknowledged that they didn’t see the fintech revolution coming, nor did they understand the advantages those startups had. Jamie Dimon, the longtime CEO of JP Morgan Chase, has talked about the threat of fintechs over the years, citing Square as a company doing exactly what Chase could have done, except the bank didn’t move on it.
Much of that difference is cultural. The “move fast and break things” mantra that has characterized Silicon Valley since the dot-com era doesn’t square with an industry known for strict compliance and regulatory processes.
“The developers were the driving force behind all that,” Gaughan said. “The culture was caught up in trying to make as little friction as possible and just shipping new solutions and new product.”
The banking industry would probably love to emulate that mindset, especially as new apps and digital offerings come to the market every day. But as a highly regulated industry, banks are constrained in ways the fintechs aren’t. On top of that, they have been a little slow to modernize, failing to meet the moment when it could have made a difference.
“Obviously they made a lot of investments, but a lot of it has been over the last 10 years,” Gaughan said. “There’s a recognition on their part that they’re going to need developers to do this, but they would have been better off focusing on it in 2013.”
‘Seven Lines of Code’
Fintech companies like Stripe were the first mover in that sense. Stripe’s portal offers developers a full breadth of support, including initial development, testing, troubleshooting, updates, and more. It is constructed in a way that fosters mutually beneficial relationships with developers across the business landscape. Stripe made it easy to access its developer portal and make contributions. It may be an apocryphal claim, but at one point Stripe famously boasted that it had democratized online payment acceptance with “just seven lines of code.”
The simplicity of the claim underscored how different the approach was between nimble fintechs and legacy banks. The banks recognized how powerful the fintech model was and have begun to invite developers in, not only providing more access to other solutions but also potentially opening the door to new solutions that they might not even be aware of right now.
The Promise of Open Banking
One trend that is likely to spur banks toward greater relationships with their developers is open banking. Open banking has become popular in Europe and is poised to take off in the United States. It gives consumers the option to make financial transactions directly from their accounts, allowing fintechs and other third parties to tap directly into customer account data.
The move toward open banking is complicated by a rule called Section 1033, part of the 2010 Dodd-Frank Act. The crux of Section 1033 is that Individuals will be given full control of their financial data. They will be able to transfer their data between financial institutions or revoke a bank’s access to their information at any time. While it’s officially law now, the current administration has discussed rescinding Section 1033.
“Open banking sets the stage for the future of a lot of these developer communities,” Gaughan said. “Section 1033 would mandate APIs to be offered at financial institutions, tiered based on size and a few other things. It gives third parties the opportunity to access this data and use it in their own applications. In a sense it’s unlocking a lot of financial data that for a long time has been within a closed wall.”
Gaughan said the open banking revolution will further encourage core banking systems to transition from a mainframe architecture to a more modular type of infrastructure, one that’s better capable of handling emerging solutions like real-time payments, event-driven architecture, and cloud-native solutions.
The Developer Community
Developers historically don’t like to set down roots in a particular place for long. They tend to move around a lot, and they tend to be pretty open with information, willing to share best practices or different and exciting solutions they are working on.
Beyond the technical aspects, there’s a community portion built into these portals that extends beyond the portal itself, into social media channels like YouTube tutorials or Discord chats. Although banks have not yet leveraged them as much, these communities very much exist in the fintech model.
“If you start an e-commerce business and you want to be able to take online payments, the easy way to do that is going to Stripe and their developer portal,” Gaughan said. “You’d probably be able to find an API to add the ability to accept online payments within your apps.”
Bring on the Metrics
One other factor that will accelerate the union between developer portals and legacy banks is the need to measure the results of these new offerings.
Open banking will add new key performance indicators to an industry already awash in them. Some of these are straightforward, such as cost and revenue, but others will be new to bank leadership. Operational KPIs, such as average and max call latency and total pass and error rates are crucial to establishing a strong API program.
“Metrics come more into play when financial institutions are trying to determine whether or not a certain solution is working,” Gaughan said. “Banks will need to learn how to monitor how different APIs are doing so they can see whether the solutions are working. If they are, that provides a signal that they should invest more into that space in addition to more operationally focused APIs, whether or not they have experienced any major errors. Giving more focus to metrics will be an important aspect of the developer portals.”
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