Middleware has emerged as a crucial factor in the banking industry, enabling small- and midsized banks to offer the same level of services as their larger rivals. As Javelin Strategy & Research analyst Matthew Gaughan defines middleware, two primary forms have emerged to work with banks: API-based middle layers and integrated platforms as a service (IPaaS). Gaughan’s new report, Coexisting in Payments: How Middleware Forges Alliances Among Smaller Fis, Core Providers, and Fintechs, examines the role middleware plays in today’s payments landscape.  Gaughan discusses not just the key players providing the middleware services but also how the smaller banks benefit from a more level playing field.  “Middleware puts smaller financial institutions in a better position to handle alternative payment methods, such as account-to-account payments or different types of instant payment rails,” Gaughan said. “Small- and medium-sized banks are the big winners in this shift.” A Leg Up for Smaller Banks Small to medium-sized banks have long harbored frustrations with the core banking provider they are beholden to—such as FIS, Fiserv, Jack Henry—because of the slow pace of innovation.

The cost and human effort of changing providers would come at too great a toll. While larger regional banks have been able to buy other banks and acquire better technology and expertise, many smaller banks have become resigned to playing catch-up with their larger counterparts’ ability to innovate. That’s where middleware comes in. Banks are turning to financial data providers and other third-party fintechs to give their banking clients the technological firepower they need to stay relevant.

These partners are enabling third parties to connect to a bank’s core platform by implementing middleware solutions that translate information between the different systems at each company. “Players like Fiserv and Jack Henry essentially act as a single wrapper around a core banking platform,” Gaughan said. “Third parties connecting to integrated platform as a service, or IPaaS, are similarly a way to open up a bank data to those third parties via APIs. But they do so through multiple point-to-point connections instead of the single layer that some of those API-based middleware solutions offer.“ Building Partnerships Partnerships bolster banks’ traditional product suites and lay the groundwork for being able to offer emerging payment methods.

Giving customers the ability to share their data with many third-party applications enables banks to meet users where they need them. The middleware providers play an important role in this process. In one example, a young adult looking to fund an account at an online neobank could use the debit card from their primary bank without having to save or repeatedly enter their credentials. The same could be said for sending money to a friend via a P2P payment app, like Venmo.

Both scenarios, fueled by middleware services, help ensure the acceptance of traditional products offered by a bank. Middleware can also put smaller FIs in a better position to handle alternative payment methods, such as account-to-account and instant payments. Leveraging the third-party connections facilitated by a bank’s core provider or platform will be a force multiplier for providing innovative technology that consumers increasingly expect. A Web of Payment Methods Consumers have gained more agency over how and where they pay as payment methods proliferate. Nevertheless, banks still play an active role in a customer’s financial life.

Financial institutions will need to offer emerging options while also ensuring the acceptance of their more traditional, card-based products. Customers will still need a bank account to access other payment rails, such as those supporting A2A. Some customers may even expect these transactions to settle instantly. The resulting web of payment methods is increasingly complex, and banks will need technology that supports a customer’s desire for choice.

This starts with determining who to partner with. Choosing the right financial data provider to collaborate with could give a bank’s customers access to thousands of APIs that could help them connect to a wide array of third parties. Through these connections, a bank can scale existing and emerging product lines.

It could use loan decisioning tools from Plaid’s recently announced consumer reporting agency to support its credit products, for example. Conclusion Banks should choose partners that enable them to connect their cores securely and seamlessly to the many third-party financial apps and services many customers are turning to. Interoperability is the bedrock for scalability. And for many banks, middleware is the key to interoperability. “Given the amount of services that these companies provide to banks, they’re getting more bang for their buck with these relationships,” Gaughan said.

“In a way, they’re modernizing alongside their core banking providers.”  

By Tom Nawrocki
Jan 29, 2024 00:00
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