How banks can unlock the potential of open finance
As banking increasingly becomes a technology play, the usage of internal and external application programming interfaces (APIs) is surging. That’s why API management platforms are crucial for financial services providers to reach true digital leadership.
Legacy business models and operations of incumbent financial services providers are increasingly maladapted to fundamental shifts in the market environment. One specific trend is the ongoing transfer from a linear, industrial financial services value chain towards open platforms and embedded financial services. It will inevitably result in a far-reaching market shift that disintermediates the manufacturers and distributors of financial products. Consequently, the strategic moves of traditional financial institutions have increased exponentially. This opens up an unprecedented opportunity to re-design financial services for maximum scalability, efficiency and resilience.
The biggest bottlenecks to unleash true digital transformation in banking
In the first phase of digital transformation, most financial services providers created digital twins of their prevailing business models, products and channels. These digital twins often run on top of legacy IT infrastructures, legacy business models, legacy cultures and legacy operations. Like other incumbent firms of digitally disrupted industries, this approach results in several challenges:
High cost-to-serve
The low-interest rate environment coupled with loan losses due to the Covid-19 crisis makes cost management ever more important for traditional financial institutions. Yet, legacy IT continues to be a huge cost factor and absorbs most digitalization budgets. Highly customized, monolithic, siloed, on-premise banking infrastructure becomes a serious competitive disadvantage that prevents the whole organization from innovating. Digital twins that mimic modern fintech front-ends, but still run on top of the cost base of a legacy backend, will never enable incumbents to seriously compete against truly digital-first competitors.
Slow time to market
Digital banking is effectively a red ocean. New entrants from within and beyond the industry have set high customer experience benchmarks. Once unique features become market standard within months, such as Apple Pay, instant loans or expense tracking. However, established financial services providers can only innovate as fast as their technology stack and operational agility allows them to. Monolithic core banking infrastructures, product silos, fragmented IT landscapes, vendor lock-ins and hard-coded integrations significantly limit the speed of innovation of established providers and leaves them trapped in an endless cycle of playing catch-up.
Limited scalability
The cash cow products at most banks, such as loans, mortgages or savings products, have become even more commoditized as product discovery and distribution moved online. Commodity banking products need to be manufactured at the lowest cost and distributed at maximum scale, while at the same time banks need to find opportunities for differentiation through personalization. The current technology and data models in production neither allow horizontal scalability across platforms nor the ability to create unique customer experiences.
Technology debt and fragmentation are still one of the biggest bottlenecks to boost innovation, agility and growth. It doesn’t have to be that way, as new technologies and cutting-edge fintech providers offer valid alternatives to the current infrastructure challenges.
Embracing technology as a key competitive advantage
Over the last years, upgrading core architecture platforms has been a key priority at incumbent banks. The end-goal of such migrations is to cut operating costs and to increase agility. In order to manage these massive transformations, banks usually follow one of three options:
One-off core migration events
Hollowing-out components over time and rebuilding them as microservices
Greenfield build
The adoption of cloud-native, composable architectures, independently deployable microservices and third-party integrations has replaced proprietary vertically integrated technology architectures with platform-based stacks:
Next generation banking platforms are built on a composable system design, i.e. a combination of independent, best-in-class systems that are deployed to fulfill a specific function. This design allows them to operate on much lower cost structures and become more agile and responsive to market dynamics and customer expectations. Moreover, next generation composable banking platforms allow maximum freedom to integrate best-of-breed fintech solutions.
API-first approaches in banking
Next to the internal APIs, who mostly enable the infrastructure and services level, new digital distribution possibilities make banking capabilities ever more accessible and embedded across an ecosystem of financial and non-financial third parties. The Second Payment Services Directive in Europe (PSD2) set the groundwork for opening up account and transaction data for third parties. This is only the beginning of a larger open finance trend, which will ultimately separate the manufacturers and distributors of financial services.
That’s why next to the APIs required by regulations (such as PSD2), forward-looking banks are now figuring out their API strategies and are exposing partner or premium APIs to third parties in order to become the preferred manufacturer of choice. Simultaneously, they are integrating third party services into their own apps to curate new services for their customers.
The shift towards cloud-based, composable banking and open finance has unleashed enormous demand in data integration and governance. With the explosion of data and API connectivity, the management, monitoring and optimisation of APIs has become an essential success factor for digitally-enabled banks.
Getting started
The market-leading financial services providers of tomorrow leverage technology as a key competitive advantage and enabler, rather than a cost centre. Digital transformation is about re-defining the end-customer experience, enabled, not defined, by technology. It is about pioneering new products and business models, as new technologies create new possibilities across the entire infrastructure stack. It all starts with a coherent digital business strategy, evolved capabilities and cultures as well as new technology use cases in high-impact/low-risk business areas.
Source: https://rossrepublic.com/how-banks-can-unlock-the-potential-of-open-finance/
About
Adrian is an expert in building digital business in the financial services sector. He has a background in Fintech and Consulting, and specialises in market research, digital service development and lean venture building.