Improve your community bank’s core with APIs

Across most industry sectors, organizations are rethinking their existing technology infrastructures and the monolithic, on-premises software solutions that they’ve relied on for years or even decades. They want software that’s hosted in the cloud, paid for on a subscription basis and easier to integrate with outside systems— and community banks are no exception.

Using open application programming interfaces (APIs), banks can add modern functionalities to their existing systems without having to completely replace their core solutions. These publicly available APIs give developers programmatic access to proprietary software solutions, thus enabling “plug and play” applications that provide added value to banks and their customers.

It’s those customers that are driving the charge. “Until recently, banks expected customers to choose from a few basic retail and business products,” McKinsey & Company points out in a 2022 study. “Now, however, retail and corporate banking customers alike are placing more importance on banks’ ability to personalize by making small changes … or offering new products.”

Timberland Bank in Hoquiam, Wash., is a good example of this. The $1.9 billion-asset community bank replaced its existing core processing system three and a half years ago and is now using the Banno Digital Platform from Jack Henry Banking. “We wanted to align ourselves with a provider that had open APIs and was interested in working with third parties,” says Jonathan Fischer, executive vice president and chief operating officer.

Last year, the bank integrated both the Autobooks financial management application and the Array suite of credit and identity protection tools into its core system. Fischer says these offerings give Timberland Bank a new way to level the playing field with its larger competitors. “Having that technology gives our customers a reason to stick with us,” says Fischer. “In a sense, we’re still a ‘mom and pop’ community bank, so we’re here to talk to and work with our customers one-on-one. Now, we also have the technology and tools that help us compete more effectively for their business.”

“[APIs] allow banks to offer new products—from new variations on traditional demand deposit accounts to brand new products that didn’t even exist before—all while keeping the core itself in place.”

—Chris Cox, Apiture

Digital transformation is on everyone’s mind these days as organizations look for ways to infuse more technology and automation into their operations. As trusted financial partners, community banks also have to meet customer demand for mobile and online access; ease of interaction and connection; high-quality service; and security and fraud protection. The emergence of digital-only banks is another driver, and namely because those firms may be more tech-forward than traditional banking institutions.

Spurring digital transformation

“Digital-only banks offer a smaller set of traditional bank products, but they also have well-designed mobile user interfaces,” says Chris Cox, chief operating officer at Apiture, a cloud-based banking platform. “This is putting some pressure on banks to move forward with their digital transformation.”

Those using legacy core systems may face the choice of replacing these solutions or finding ways to connect modern digital banking solutions into their existing platforms.

McKinsey and Company refers to the latter as “hollowing out the core” and says it’s all about extracting smaller applications and services in an effort to extend the existing core banking system’s service life. This is where open APIs come in. By allowing banks to attach outside solutions to their cores, APIs make it “easier and more efficient” for institutions to gain access to modern capabilities, says Cox.

Once in place, these digital banking solutions leave the transaction processing; balance storage; and calculation of interest and fees to the core or “guts of the bank,” Cox explains. “Then, they allow banks to offer new products—from new variations on traditional demand deposit accounts to brand new products that didn’t even exist before—all while keeping the core itself in place.”

Filling in the gaps

As digital transformation continues to dominate conversations across the community bank’s C-suite, the idea of using plug-and-play technologies to address “financial fragmentation” and fill in the gaps is gaining steam. “Everything is starting to move toward an API-first architecture across all of the various fintechs and software providers,” says Joshua Jordan, senior strategist of digital experience at Jack Henry.

As part of that shift, what was formerly known as “online” or “mobile” banking is now being called digital banking and is supported by APIs that are free for anyone—including community banks and fintechs—to use. Banks that already have core solutions to handle balance inquires, funds transfers and bill payment, for example, can use them to add credit scoring, budget tracking and/or financial wellness capabilities to a system that’s “open” to those APIs.

Of course, the decision to replace a central software system or use open APIs to add new functionalities to it is a big decision for any community bank.

Having gone through both scenarios, Fischer says a good starting point is to talk to other institutions about their approach, how it worked for them and what challenges they encountered along the way. Talk to vendors about their offerings, he says, and look for a solution that best fits your environment.

“I think that ICBA has done a nice job with [the ThinkTECH Accelerator] and bringing in hundreds of providers that can help and consult on these issues,” Fischer adds. “The key is to look outside of your own bank for assistance; we all need help pinpointing the solutions that customers are expecting these days.”