The initiative to open up bank APIs to third parties, driven by regulation and market forces, is causing a rush toward digitalization.
But banking is no stranger to digitalization; banks have been in the process of incremental digitalization for decades. The first bank machine/ATM was introduced by Barclays 50 years ago and Citi launched the first online banking portal 20 years ago. Banks’ mobile apps have progressed so far that customers’ behaviors are changing as usage is starting to cannibalize web banking and branch visits plummet in places like the UK.
Why the urgency with digital transformation now? Open banking. And what does digitalization mean for the continuing evolution of technology within banks? There are broadly three phases to digitalizing banks in preparation for open banking.
Phase I: Data exchange
The first phase of open banking is all about sharing data – both inside and outside the bank. For years banks have been using private APIs and other integration technologies to overcome the legacy of siloed applications and data inside the bank. Now they are about to see the exponential growth in open APIs that will make data and functionality available to third parties. Indeed, the EU’s PSD2 requires banks to provide open their APIs by January 2018. The growth in APIs will test the strength and scalability of internal integration, starting with payments right out of the gate. The role of APIs in banks is evolving far beyond internal integration and compliance to being a key technology to deliver new services quickly.
Phase II: Services exchange
Some banks might be tempted to stop at Phase I, slapping a layer of APIs on to be compliant with PSD2 and operationalize a few opportunistic fintech partnerships. This would be shortsighted because it threatens the bank with disintermediation from their client, and creates the possibility of the bank evolving into an invisible financial services plumber behind the scenes supporting competitors’ superior customer-centric offerings.
Banks need to be prepared to deliver real-time, dynamic, contextual, scalable experiences such as consumers experience with other industries. This preparation requires disciplined automation of processes and ruthless documentation, governance and rationalization of applications. While enabling the banks’ hyper-relevant future, this preparation frees up the IT budget from maintenance, leaving money for innovation and creating the confidence and agility for that innovation.
Phase III: Knowledge exchange
Forecasting the doom of banking is popular. Recently former Barclays CEO Anthony Jenkins said he foresaw a “Kodak moment” where some banks become obsolete at the hands of fintechs and challengers in 5 years’ time. Yet, there are banks that understand that the future means being “integrated seamlessly into the consumer’s everyday life” as BBVA describes it.
So, what does this require? It requires artificial intelligence; an intimate understanding of each individual client’s behaviors and the ability to anticipate his or her needs and actions. And this intelligence operates without the customer having to log in to their account or seeking it out.
Deciding where your bank is heading requires thinking carefully about each phase. In my next blog, I will examine Phase I in detail in terms of technology and use cases.