Integrating financial products and services using APIs can improve customer engagement

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By developing solutions that use application programming interfaces (APIs), financial service providers can reduce friction and potentially provide customers with simplified digital experiences.

Examples of integrated financial products and services

An example of this is the integrated loan. The ability to borrow, sometimes interest-free, at the point of sale helps “buy now, pay later” suppliers increase their market share. It has become popular with millions of online customers for consumer shopping. There is also now a growing opportunity for corporate clients to access finance provided through integrated non-traditional lending platforms.

Integrated payments are another example. Unlike debit and credit cards, integrated payment providers work behind the scenes with banks and merchants to provide direct bank-to-bank transfers, improving the customer journey and potentially saving the customer some of the cost of transactions.

Integrating insurance into product purchases is another area of ​​growth. This can reduce the cost of distributing insurance and, as with other forms of integrated financial services, expose the financial provider to a segment of the market with which it would not otherwise engage.

API and embedded finance

APIs have become essential for integrating finance into online channels. However, their use may require a change of mindset among some financial service providers.

In many scenarios, a financial services provider will not only provide a regulated service, but will also provide the API technology required for its products, services, or customer data to be accessed through the third party’s integrated channel. As a provider not just of a financial product or service, but now also of technology, a host of new issues will arise.

As an API provider, the financial services firm will need to ensure that its technology is robust and effectively integrated. This will likely require providing test facilities to third parties so that data formats, API standards, and other technical and customer experience issues can be resolved before the integrated solution goes live.

Once in service, service levels offered for on-board technology will need to be established and monitored. In particular, there may be cost implications if usage by a large number of customers results in unexpected spikes. API limits should be in place and factored into fee agreements.

The integration of financial products and services will often result in the sharing of personal data between two separate organizations. The complexity of the roles that each organization takes on when handling data, potentially as data controller, joint controller or processor, will need to be addressed.

There is also a growing expectation that regulated financial entities have effective processes in place to protect all critical data, not just personal data, processed by third parties. Therefore, in an integrated funding scenario, data transfer agreements may need to be considered from a number of legal and regulatory perspectives, not just in terms of compliance with data protection legislation.

Complex business arrangements

The integration of financial products and services can lead to complex business and regulatory relationships. From a business perspective, it is not always clear which party is responsible for which part of the integrated solution.

The financial service provider may or may not have a direct relationship with the end customer. There may be a complex supply chain and in some circumstances the financial service provider may only have a separate parallel relationship with the end customer for the provision of the integrated service.

However, as the end customer will be engaging with products or services from two separate organizations, expectations for effective complaints processes and dispute resolution mechanisms will need to be considered. There should be transparency regarding which companies a customer should complain to in the event of a problem, options in the event of a dispute, fees and other business arrangements. Poor management of these processes poses a significant reputational risk.

Misunderstandings about whether or not a party is providing a service directly to a client or acting solely on behalf of another could also lead to regulatory non-compliance issues. As regulators move away from regulating outsourcing arrangements to ensure all third-party relationships meet operational resilience expectations, regulatory requirements for data security, under-outsourcing, business continuity activities, termination and exit take on increased importance.

The future of integrated finance

With unprecedented growth in online transactions since the start of the pandemic, the demand for in-vehicle financing solutions is expected to accelerate. Financial service providers who understand and address the legal and regulatory issues associated with integrating products and services into third-party channels will be at an advantage.

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