The Need for CROs to Address API Risk in Credit Unions

From fully remote fintech brands to software tools in traditional brick-and-mortar financial institutions, technology is transforming the banking industry at every turn. 

APIs (application programming interfaces) are a big part of this evolution.  

APIs allow various applications to interact with one another. This has countless benefits and near-infinite potential in the finance sector, from helping with KYC (know your customer) to compliance, data accessibility, and a better overall customer experience. 

While APIs are the future, they aren’t foolproof. On the contrary, there are several areas of risk credit unions should be aware of as they invest in increasingly sophisticated API solutions. 

5 API-Related Risks for Credit Unions 

Here are five areas that C-level credit union executives should keep an eye on when overseeing the use and introduction of APIs within their organizations. 

1. APIs Can Introduce Security Risks 

APIs connect between various applications — including third-party apps. This means APIs can introduce cybersecurity vulnerabilities if they are not properly secured. Failure to address these security measures can lead to unauthorized access, data breaches, and financial losses. 

Credit union IT staff must ensure that APIs are designed with the right security in place to prevent unnecessary cyber threats. This includes strong authentication mechanisms, access controls, encryption, and data integrity checks.  

2. APIs Can Weaken Data Privacy and Compliance

Credit unions deal with sensitive customer information. This also means the financial industry is particularly subject to numerous regulations, including those related to data protection, privacy, and consumer rights. 

APIs open up more ways for the personal information of a credit union’s constituents to become exposed to data privacy breaches. In addition, failure to comply with applicable laws and regulations when implementing APIs can result in regulatory fines, legal consequences, and damage to the credit union’s reputation. 

To address this two-part concern, credit unions must implement robust privacy controls, consent management, and data anonymization techniques to protect their customers’ data when using APIs. It’s also crucial that they remain compliant with data protection regulations, such as the EU’s General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA). 

3. APIs Can Create Integration Risks 

While less dangerous than security, privacy, and compliance, integrating APIs introduces another risk as it relates to your customer experience. Integrating APIs with existing systems and third-party services can be a complex activity.  

Compatibility issues, data format discrepancies, and version control challenges can be factors. These risks can result in service disruptions and data inconsistencies, which translate to customer dissatisfaction.  

To address this concern, credit unions should thoroughly test and validate APIs before implementation. They should also maintain effective communication with API providers to mitigate integration risks over time. 

4. APIs Can Open the Door to Operational Risks 

APIs aren’t flawless. On the contrary, their evolving technology can create consistent weak points in your operations.  

API failures can lead to downtime. Performance issues can impact critical banking operations, too, such as transaction processing, account management, or loan applications.  

Credit unions need to establish robust monitoring and alerting systems to quickly identify and address any operational issues that arise. They should also have contingency plans and disaster recovery mechanisms in place to minimize disruptions and ensure business continuity. 

5. APIs Can Bring Third-Part Risks Into the Picture 

APIs don’t just connect internal applications. They can also involve external service providers, and credit unions often rely on these third-party API providers for various services. As with any outsourced activity, the introduction of an external entity or program creates a weak point in a financial institution’s system. 

Inadequate due diligence of third-party applications and the organizations behind them can expose credit unions to increased risks. This includes poor service quality, contractual breaches, and potential regulatory non-compliance (not by the credit union, but by the API provider). It is essential to evaluate the reputation, reliability, and security practices of every API provider that you work with. 

The Need for Competent CROs in Credit Unions

APIs are invaluable finance tools, and they won’t go away any time soon. This necessarily introduces a variety of risks into a credit union’s operations. From compliance to security, operations to integration, credit unions must address the risks that come with utilizing APIs. 

“From compliance to security, operations to integration, credit unions must address the risks that come with utilizing APIs.” 

As the five-part list above demonstrates, the number of API-related risks is numerous. It’s too much responsibility to pass off as a minor part of someone else’s job. It requires a dedicated Chief Risk Officer (CRO).  

A CRO can keep their finger on the pulse of API-related risk within a credit union at all times. They can mitigate that risk, as well, through comprehensive API risk management frameworks that manage risk through a variety of initiatives, from thorough risk assessments to robust security measures, ongoing monitoring and testing, regular audits, and proactive collaboration with API providers. 

Managing API Risk in Credit Unions

The future may be bright for the finance sector, but it’s one that must be approached with care. Hiring CROs to proactively mitigate these risks is one of the best ways to ensure a credit union can cash in on the benefits of cutting-edge technology without exposing themselves to unnecessary risks along the way. 

At Stanton Chase, we are intimately familiar with the need for risk management in credit unions. We have and continue to use our experience, resources, and vast talent network to place CROs in financial institutions looking for ways to manage the growing risks that come with 21st-century banking. If your credit union is exposed to unnecessary risk, we can work with you to find the best CRO to ameliorate the issue and keep your organization safe and strong moving forward. 

About the Author 

William Brewer, CCP, is a Director at Stanton Chase Los Angeles. He is also Stanton Chase’s Global Human Resources Practice Leader. Prior to moving into executive search, Bill had 25 years of experience in corporate human resources. In addition to his executive search career, Bill is an adjunct Professor at the University of Redlands. Bill also serves as a mentor for the MBA program at the Paul Merage School of Business at the University of California, Irvine (UCI) and has been a mentor with the School of Business at the University of Redlands.