The Changing Banking Tech Stack Fueling the Fintech Revolution

At its core, the business of banking is simple: borrowing money at lower interest rates and in turn lending it out at higher interest rates. The difference between these rates is what the banks earn in cash. Although this is a simplistic way of looking at the banking business, other important aspects such as underwriting, collection and risk management make it quite complex.

As an industry, banking globally has gone through two major revolutions in the last century. The first was the regulation of the banking sector in the United States in the 1930s following the Great Depression – which continued to evolve over time, with the last major trigger being the global financial crisis of 2008. India also went through phases of nationalization, liberalization and privatization with a fairly robust regulatory regime in place today.

The second – the most important and continuous revolution has been the technicization of banks. On this front, the Indian banking sector has made rapid progress over the past three decades and has arguably reached global pole position today with the explosion of the API economy.

India’s technological history of banking

The economic liberalization of the 1990s saw Indian banks exploring the use of technology in banking operations. This was largely limited to banks offering basic banking solutions – which revolved around processing banking transactions, i.e. deposits and loans. Since most of these processes were previously performed manually, technology-supported central systems have multiplied the speed of transaction processing.

The information technology revolution of the 2000s and the impetus given by the IT Act of 2000 saw the country’s largest banks adopt basic banking solutions, serving large-scale customers and processing large volumes of transactions. In short, the productivity, profitability and efficiency of banks have increased dramatically.

Digital payment solutions

The following decade and a half, up to 2016, saw massive disruption and major innovation in the consumer payment space. Cards were the first set of cashless payment instruments, with debit and credit cards becoming common, forcing banks to expand and upgrade their existing basic banking solutions. It also saw the introduction of ATMs.

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

Digital wallet fintechs have had to integrate with core banking systems to store money and process payments, something banks have been reluctant to do. In order to leverage the benefits arising from the penetration of digital wallets, banks have developed frameworks to share payment-related services only through APIs. The result was a robust integration mechanism between two parties – banks and fintechs – where banks no longer had to worry about exposing their entire core technology systems to fintechs, and on the other hand, fintechs had access to specific services, and parts of core banking systems to power their payment products. The UPI, which has revolutionized digital payments in India, is also built on similar API frameworks.

The explosion of the API economy

The corollary of this phenomenon has been a sudden realization among banks to leverage the power of APIs to offer fintechs other products available in their suite. Banks today offer basic products, such as savings accounts, FDs, credit cards and other related products such as demat accounts and insurance in the form of APIs to fintech partners. The benefits are obvious: banks get additional user acquisition channels at much lower costs, and the ability to scale increases dramatically. Fintechs, on the other hand, are solely focused on delivering great user experiences that banks have traditionally fallen back on.

This symbiotic relationship is at the heart of the multitude of fintech-bank partnerships in the Indian ecosystem that we see today – whether in the form of neobanks, challenger credit cards, Buy Now Pay Later (BNPL) products. , pocket insurance, new age investment products, P2P loans, etc.

Indian banks have done a remarkable job of being nimble in building and exposing their APIs to realize the benefits of scale and improve delivery and service. However, some banks have not yet joined the API economy bandwagon and developed their API suites. It is clear, however, 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 over the next decade.



The opinions expressed above are those of the author.