Interoperability, API Barriers, and Cybersecurity in Banking

Modern banking runs on connectivity. Real-time payments, fintech partnerships, digital account opening, embedded finance every meaningful innovation depends on the ability to move data seamlessly between systems. For banks and credit unions, that connectivity flows through APIs, and APIs flow through Core Service Providers (CSPs). When the core platform is open and well-architected, integration is manageable. When it is not, financial institutions find themselves walled off from the very capabilities they need to compete with. In this sixth installment of our series on the OCC’s Request for Information (RFI), I examine the interoperability challenge, the specific barriers banks face with APIs, and the cybersecurity risks that accompany every integration decision.

What is the interoperability gap? Banks rarely operate on a single platform. A typical institution may rely on its CSP for core processing, a separate vendor for digital banking, another for loan origination, and still others for compliance, payments, and fraud monitoring. The issue is whether these systems communicate with one another, and unfortunately, they often do so ineffectively or not at all.

Legacy core platforms, many built on decades-old architectures, were not designed for the modular, API-driven ecosystem that defines modern financial technology. Data sits in silos. Formats are proprietary. Integrations require custom coding that is expensive, fragile, and slow to implement. When a community bank wants to plug a fintech’s real-time lending tool into its core, the project that should take weeks takes months and the result is often a brittle connection that demands ongoing maintenance.

At CCG Catalyst, we see this dynamic inhibit innovation at every stage. Banks defer digital initiatives because integration costs are unpredictable. They settle for inferior bundled products from their CSP because unbundling and connecting competitive alternatives is impractical. And they watch fintech competitors, unencumbered by legacy infrastructure deliver seamless experiences that their own customers increasingly expect. The interoperability gap is not just a technology problem. It is a competitive threat.

APIs are the connective tissue of digital banking, yet the barriers banks face in establishing API connections between core and non-core providers are entrenched and multidimensional.

• Technically, legacy cores often provide limited, proprietary, or outdated APIs with format mismatches, rate limiting, and authentication hurdles that require custom adaptation. Documentation is inconsistent. Endpoints vary between providers. There are no industry-wide standards governing how banking APIs should function, meaning every integration is effectively bespoke. Banks that lack in-house development teams, which is most common in community banks. Many must hire consultants or rely on their CSP’s timeline, both of which add cost and delay.
  
  
• Economically, providers frequently charge “click fees” for API usage, per-transaction costs for integrations, or premium pricing for access to more capable API tiers. Combined with development and testing expenses, the cost of an API-driven integration can strain a bank’s IT budget, particularly when the bank is already paying for a bundled suite that does not meet its needs. The pricing structure discourages experimentation and locks banks into the provider’s ecosystem.
  
  
• Strategically, some CSPs resist API openness because closed ecosystems protect their market position. If a bank can easily connect competitive solutions, the core provider’s bundled products face competition. This misalignment of incentives is a structural feature of the concentrated CSP market, and it directly disadvantages banks that need flexibility to compete. We have worked with banks where the CSP explicitly limited the number of third-party API connections permitted under the contract, forcing the bank to choose which innovations it could pursue and which it had to abandon.
  
  

Every API connection is a potential cybersecurity attack . Banks understand this, and so do their examiners. The challenge is that banks cannot avoid connectivity digital banking demands it, but they often lack the resources to secure it at the level the threat landscape requires. Third-party access vulnerabilities, token leakage, broken authorization controls, and supply chain risks through subcontractors all increase with each integration. A breach at a single connected vendor can propagate across the bank’s ecosystem.

CSPs play a dual role here. At their best, they provide secure infrastructure, encryption, authentication, and real-time monitoring that extend protection across connected services. At their worst, they become a single point of failure. When a dominant CSP serving hundreds or thousands of institutions suffers a cybersecurity incident, the systemic implications are significant, a point the Financial Stability Oversight Council has raised repeatedly. Banks are caught in the middle, they depend on providers for security capabilities they cannot build internally, yet that dependency concentrates risk in ways that regulators and banks themselves find uncomfortable.

The fear of cyber risk also chills innovation. Banks that might otherwise pursue fintech partnerships or open banking integrations hesitate because the cybersecurity due diligence burden, assessing each new connection for privacy, fraud, and regulatory compliance can overwhelm limited staff. The result is that security concerns, rather than driving better architecture, become a reason to stand still.

What should change? The regulatory such as the OCC can move the needle on all three fronts. It should update TPRM guidance to emphasize open APIs and data portability as expected features of CSP relationships, with proportionate cybersecurity protocols for different integration risk levels. Through OCC’s Project REACh and industry consortia, the OCC should encourage development of standardized API protocols and shared due diligence frameworks that reduce per-bank costs. Using its Bank Service Company Act authority, the agency should examine CSPs for restrictive API practices, including contractual limits on third-party connections and punitive click fees and promote transparency through its proposed provider database. And it should offer safe harbors for compliant API integrations that meet baseline security standards, reducing the supervisory uncertainty that deters banks from pursuing connectivity improvements.

Interoperability, API access, and cybersecurity are not separate issues, they form a single continuum. A bank cannot innovate without connectivity, cannot connect without APIs, and cannot deploy APIs without managing cyber risk. Banks need CSPs that treat openness as a design principle rather than a concession, regulators that balance security with the imperative to compete, and practical tools that make integration achievable at community bank scale. The institutions that solve this equation will thrive. Those that remain walled off by legacy architecture and closed ecosystems will not.

CCG Catalyst advises banks, credit unions and fintechs on integration strategy, API negotiation, and cybersecurity readiness across the provider lifecycle. Reach out to our team for tailored support. Stay tuned for the next installment in our series: Due Diligence, Transparency, And The Case For An OCC Provider Database.