The battle for traditional banks’ customer relationships has intensified in the last few years, with digital-first start-ups gaining market share and maturity. Big technology companies are also nibbling away at the edges of some areas of banking business, including small business lending and consumer credit.
Recognising that often non-interoperable legacy IT systems get in the way of innovation and create inefficient processes, many banks have responded to market conditions by accelerating the transition of their operations to the cloud.
As a result, they have unshackled their operating models from outdated technology and opened opportunities to deliver more relevant customer experiences, while reducing total cost of ownership, and without increasing risks associated with managing security and IT infrastructure.
This transition to the cloud has driven the rise and adoption of banking platforms as well as the use of open application programming interfaces (APIs), which serve to enable collaboration between banks and other third parties, such as information providers and fintechs.
Instead of trying to build every new process from the ground up, banks can partner with providers of services that improve back-office processes such as credit checking or anti-money laundering (AML). This in turn helps to improve services provided to customers, who can potentially get a loan or credit card decision in minutes rather than days. The knock-on effects include a faster time to profit for the bank, greater customer loyalty, and lower customer churn.
It is no longer a question of whether banks take new strides towards a strategy for how to keep pace with technology innovation, but when. Competition will only continue to increase in the decade ahead, driven by ever more powerful, smart technologies available to all players in the financial services sector.
Banks that fail to take action run the risk of being overtaken and left behind in the race to win new customers. The good news is that there are now a number of ways to move forward smoothly with programmes of digital transformation.
One of these is to tap into an internal platform that can facilitate innovation by exposing core infrastructure via APIs to fintechs and developers, with banks selecting the most relevant to provide products and services for customers.
With this approach, banks can access and leverage external expertise to launch the new services that customers want to see, or the processes that improve the customer experience overall. However, building a proprietary platform is made more complex by the need to ensure integration and interoperability with existing legacy systems, while also creating a more flexible and agile DevOps based architecture. It also requires significant investment of time and resources at a time when skills shortages are rife, particularly in the areas of software development and digital transformation.
A viable alternative is to bypass the process of building a platform altogether and to connect instead to a proven, robust third-party platform for open innovation like Finastra’s FusionFabric.cloud. The benefits of using a third-party platform are clear: it removes the overheads of managing and running the platform and allows banks to focus on delivering a great banking experience to customers.
The best third-party platforms create triple-win advantages for banks, fintechs and customers. Banks gain access to a range of innovative apps from fintechs that have been tested and pre-integrated with the core banking platforms they are already using. Fintechs have a ready-made marketplace that opens up sales channels to customers, rather than having to address a new market from scratch. And customers benefit as quickly as possible from new apps and functionality that banks incorporate as part of their offerings.
Once a platform-based approach is adopted, it opens up even more possibilities for banks and their customers via the growing trend of banking-as-a-service (BaaS). With this model, banks expose specific back-end services via APIs to non-banks, enabling them to offer services directly to customers. These services could include streamlined account opening, automated AML and know-your-customer services, and regulatory compliance.
Embedded finance is another operating model that is enabling banks to find new markets and build scale. Non-bank players are using embedded finance to add functionality, such as payments, directly into their apps and services to reduce friction and improve customer experiences.
As soon as banks open their eyes to the almost limitless potential of models such as platforms, BaaS and embedded finance, the only limit on the new services that they can provide is their imagination. Open APIs and open banking mean that services such as buy-now, pay-later finance for retail transactions or embedded mortgage provision through real-estate agents are now a real possibility.
Adopting a cloud and platform-based approach opens up a range of exciting opportunities for banks, especially when it provides access to an ecosystem of tried and tested apps. And as the struggle to win market share and customer loyalty continues to intensify, financial institutions will surely be adopting many, if not all, of the approaches that are now available to them.
Eli Rosner is the chief product and technology officer at Finastra
This article was originally published in the Spring 2021 issue of The Record. To get future issues delivered directly to your inbox, sign up for a free subscription.