The Intersection of Financial Institutions and Technology Leaders

The True Cost of API Modernization

January 29, 2025

By David Wexler

Financial institutions know they need to innovate quickly. The rise of fintechs, adoption of digital-first banking and a global pandemic has deeply altered consumer behaviors. 

Most bank infrastructure, however, was designed in a different era. Many have relied on homegrown, brittle integrations between systems or have employed a single vendor, typically the core, following a best-of-suite approach.

Modern solutions, like real-time payments and digital lending platforms, offer an application programming interface (API) to simplify integration requirements. An API is like the power outlet of integration, providing the data and functionality of an application without the details of its underlying systems. 

But these solutions often carry licensing fees and custom code requirements, allowing vendors to maintain control over data access and licensing models. Data storage vendors and core systems also embed click charges in their integration contracts, leaving banks to shoulder the costs from both sides. 

As a result, fintechs and cores currently hold the upper hand. FIs can regain ground but must be willing to make these three key investments:

1. Relicensing for API-first contracts. The first and most crucial expense is relicensing the bank’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 bank’s data and systems. Without open access to data, every subsequent effort will stall. While this investment may seem significant upfront, it is essential for creating the agility an institution will need down the line to respond to market demands, leverage data for better decision-making, and embrace innovation.

2. Cultivate integration expertise. Delivering the seamless, personalized account holder experiences that modern consumers demand requires teams that understand how to integrate diverse applications and build agile, scalable enterprise IT architectures. This means retraining existing staff and recruiting talent experienced in APIs, microservices, and cloud-native solutions.

3. Invest in tooling. Institutions need to expand their IT budgets to include middleware, integration platforms, developer tools, workflow automation software, and APIs to enable seamless system interoperability, real-time data sharing, and efficient integration with third-party applications. Advanced integration capabilities accelerate project timelines, enhance efficiency, and deliver better consumer experiences. They also reduce dependency, providing banks greater flexibility and control.  

Building with speed and scalability is essential for growth and market dominance. Institutions must prioritize speed and agility to outpace competitors and seize opportunities. FIs can achieve speed through two approaches:

1. Best-of-suite. Buying everything from a single vendor simplifies procurement but creates dependency on that vendor, limiting flexibility and increasing costs over time.

2. Best-of-breed. Building a tailored ecosystem with applications from multiple vendors ensures that the institution is never restricted by vendors. This approach has become the global standard for modern IT infrastructure.

The future of community banking will involve a higher degree of personalized white-glove treatment, where the ability to fine-tune the consumer experience on a per-application basis becomes mission-critical. Institutions must create digital experiences that address specific account holder needs, often integrating multiple third-party applications. Without customization in their road map, banks risk losing the critical differentiation required to stand out in the market. Real-time data analysis allows banks to proactively identify and respond to consumer needs, detect financial stress, and offer tailored solutions like short-term loans or savings programs. Additionally, it helps identify macrolevel trends across account holders, guiding investments in new products that resonate with target markets.

Modernization gives banks increased leverage over vendors, forcing them to compete on the quality of their products, not on lock-in. By breaking down systems into individual business components, banks can swiftly replace underperforming partners. The tension between legacy systems and modern demands represents both a challenge and an opportunity for banks. Those that embrace the challenge and adopt a forward-thinking approach will gain the speed, agility and data-driven insights needed to thrive in a competitive market.

David is the Founder and CEO of PortX. The company’s Integration Platform-as-a-Service, Fintech Hub, is tailored for banks, credit unions, fintechs, and cores, enabling seamless data access, accelerated projects, and innovative open banking solutions. Visit portx.io or contact hello@portx.io.