Terminology and technology evolve. Fintech and API, for example,are not new terms; they just signify change in today's increasinglydigitalized financial world. How credit unions fit into it remainsunsettled.

Fintech, or financial technology, originally referred to justbanking systems. However, it has come to refer to disruptors takinghold in financial services today. Handcuffed by regulations andinfrastructure, many financial institutions struggle to competewith these fintech startups in terms of innovation and speed inareas such as payments, money transfer, lending and investing.

Application program interfaces are not new either. The use ofopen APIs is a practical way for credit unions to supply memberswith faster, convenient access to funds, financial resources andpayment vehicles, especially when combating nontraditionalfinancial players.

“APIs have been around for a number of years,” GeorgeThrockmorton, NACHA's managing director of advanced paymentssolutions, explained.

Throckmorton pointed out that many organizations take advantageof APIs because of legacy or disparate systems that need helpcommunicating with other systems. “The interesting part is inapplying the technology in meaningful ways that support innovationand consumer demands, and solve some industry pain points oropportunities.” It does not have to be a credit union or a bank, itcould be a nonfinancial business, but the objective is bringingtogether siloed systems to create new products or services or solvesome other efficiency or operational issues.

This is where the industry has seen financial institutionscollaborating with fintech providers. “Partner APIs are not justbased on the technology but kind of a bilateral agreement: 'We'regoing to use the API and the information in this way and we aregoing to agree to those terms, and that is going to work verywell,'” Throckmorton explained.

Looking ahead, APIs will enable more targeted offerings thatrely on existing core infrastructures and growing partnerships withfintech leaders, Ted Bilke, president of Symitar, a division of theMonett, Mo.-based Jack Henry & Associates, pointed out. “Thecore systems that focus on ease of integration with third partiesand a better user experience stand to gain the most traction.Anticipate analytic offerings to provide new and valuedservices.”

Bilke added new models of shareware would foster morecollaboration between credit unions and their fintech partners andpromote efficiency in new technology advances.

“While there has been a lot of talk regarding new fintechproviders, the reality is they haven't drastically altered actionin terms of what credit unions are actually doing,” Daryl Jones,director at the Scottsdale, Ariz.-based Cornerstone Advisors,noted.

There are new vendors and new platforms out there, but they arenot yet having widespread impact, according to Jones. “I believethe reason for this is that most of the systems really getting alot of the buzz in the market are solutions with really slick,customer-facing front-ends because traditional banking platformshaven't done the greatest job with these. But, when our clientsreally dig into the functionality of these platforms, they are notas robust as expected on back-end functionality such asunderwriting capabilities or integration with third-partysolutions.”

Conversely, tech startups face many unexpected growing pains andchallenges as well when integrating their technology with manycredit unions' core systems. “One of the interesting things as astartup is you don't know what you don't know,” said Ben Morales,CEO of QCash Financial and chief technology and operations officerat the $2.5 billion, Olympia, Wash.-based Washington StateEmployees Credit Union.

WSECU created QCash, a wholly owned subsidiary of WSEC, in 2004to meet the short-term lending needs of members who were requestinglarge money orders to pay off payday lenders. WSECU's QCash programbooks more than 30,000 loans annually, maintains loan loss rates inthe 6% to 8% range, provides financial education for members andgenerates an annual net income of $4 million.

However, one of the unanticipated hurdles since QCash venturedout as a startup in 2015 was resistance. Morales explained whatlimits credit unions is old infrastructure and technology partnersdemanding compensation through licensing fees for trying outinnovation.

“You are kind of innocent walking out into this new world – howdo we innovate, how do we partner with fintechs in trying to createsolutions for credit unions?” Morales asked. He claimed in orderfor credit unions to innovate, an ecosystem of players needs torecognize the value of staying relevant to members. “In order to dothat, we've got to try some things and we've got to take somerisks. At the end of the day we don't want winners and losers – weall have to work together.”

There are security concerns as well.

“This is a software development issue. It is true that WebAppswith insecure APIs, together with social engineering, are the twomain entry points for hackers,” Stu Sjouwerman, founder and CEO ofTampa Bay, Fla.-based cybersecurity firm KnowBe4, said. He addedmost APIs offered across a variety of channels still needprotection. “This creates its own set of challenges withintegration and intermediary software. Then there are issues withauthentication, message protection and the code validation. Alongwith this is the use of encryption as a key component of securetransactions. If done haphazardly, this allows for insecure APIs,which will eventually create a backlash.”

Although new technology can speed loan processing or creditevaluation, those innovations must protect consumers and thefinancial system, Fed Governor Lael Brainard said in remarks beforea conference on financial innovation. “'Run fast and break things'may be a popular mantra in the technology space; it is ill-suitedto an arena that depends on trust and confidence.”

“But it would be a lost opportunity if, instead of expandingaccess in a socially beneficial way, some fintech products merelyprovided a vehicle to market high-cost loans to the undeserved, orresulted in the digital equivalent of redlining,” Brainardadded.

The Fed is reviewing the entire assortment of fintechinnovations and ideas that are starting to transform components ofthe financial system. These include an assortment of programs suchas a component that analyzes the credit profile and behavior of aloan applicant, as well as blockchain technology, which allowsfinancial entities to share an encrypted ledger.

One of the great obstacles is the need for consistency. “Youwould rather have an environment where it is standardized,”Throckmorton said.

To that end, Throckmorton is launching an API Project Teamthrough NACHA's Payments Innovation Alliance, a group of 250-300financial institutions, technologists, service providers, billersand merchants.

Standardization inherently means some level of ubiquity. Whenyou think about standardization obstacles, it is not just getting afew entities to agree, it involves a whole industry, Throckmortonnoted. “That is where we see NACHA as a good entity to do that. Itreally does not matter as to the size of an institution, if you area large credit union versus some of the smaller ones, consumer orretail focused, a mix and some wholesale business as well.”

Throckmorton thinks there are definitely openings for thestandardization effort. “Opportunities are what we all want to do:Increase efficiency, reduce costs and provide better service.Without sounding like APIs are the magic pill for everything, Ithink they are definitely a component.”