Google Cloud insight: adapting to open banking
In this month's FinTech Magazine, Rob Parker-Cole, Digital Engagement Lead for Google Cloud’s Apigee team, discusses the changing finance landscape and how organisations can adapt to open banking.
The finance sector is constantly evolving alongside technology, with innovations coming in thick and fast: first online banking, then banking apps and now mobile-first challenger banks. Now, open banking is causing more changes in the financial landscape. Generally, this new landscape requires that with a customer’s consent, banks must make payment initiation and account transaction data available to third parties via application programming interfaces (APIs), a shift that enables new players to compete in areas banks have traditionally controlled, forcing legacy banks to reassess their approach.
A recent Accenture report concluded that ‘only a minority of incumbent banks are making the necessary difficult choices for the digital age’. Open banking is one instance in which this is clear. While its uptake by challengers has been significant (according to Ernst & Young research, 94% of fintech firms view open banking as a source of opportunity and 81% are actively preparing for it), one recent report noted that only 1% of US banks are designing open banking platforms.
In other words, open banking and the ability to make financial data available to third parties will be of benefit to customers, but many incumbents are not taking advantage of this and will need to adjust their focus and embrace new ways of operating. Here are four tips to help banks chart the right journey.
Focus on agility over compliance
The open banking regulations introduced in January 2018 require financial institutions to grant third party providers (TPPs) access via APIs to data and functionality if requested by the customer. However, using APIs for compliance is mere table stakes – an organisation cannot distinguish itself in the market by taking a compliance approach.
Instead, businesses should manage their APIs like a product, designed to be intuitive and easy for developers to consume, supported by documentation and sample code, and improved based on user feedback. There can be an immense gap between satisfying a regulation and actually seizing the opportunity to offer better services to customers.
APIs are the backbone of modern software, providing the interfaces that let different software systems communicate and helping developers to quickly combine data, functionality and other digital assets for new services and digital experiences. Compared with legacy approaches to software development, API-first approaches enable developers to work more quickly, efficiently and independently.
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This agility creates space for experimentation and innovation where traditional ways of working necessitate some stasis. Many fintechs and challenger banks already operate naturally in these more modern ways. This gives them a potential advantage over traditional banks with slow-moving legacy techniques.
In order to effectively compete with challenger banks, incumbents need to properly embrace this new way of working, leveraging APIs for business innovation coupled with insights derived from highly valuable internal data assets, instead of merely using them for compliance or systems integration.
Improve customer experiences instead of repackaging existing experiences
Mobile apps are a great example of how evolving technology has played out in finance. Yet some incumbents reacted to this by simply putting a mobile-friendly wrapper on their traditional business model, merely enabling customers to perform the exact same functions they would have in a physical or online bank but on their smartphone.
Challenger banks and fintechs, in contrast, have often focused on ways to improve customer service, from omitting fees characteristic of traditional banks, to supporting biometric authentication, to layering financial analysis tools over account information. Challenger banks have repeatedly found ways to target areas in which traditional banks’ services aren’t quite in line with customer expectations.
Legacy institutions need to adjust their approach in line with these customer-focused fintechs. Incumbents have the advantage of having a large number of already developed services, and these can be exposed and monetised using APIs. By carefully assessing what customer pain points can be eased, incumbents can then use their existing processes to deliver innovative solutions to those problems via API products.
Meet customers in their preferred spaces
Expecting customers to come to you – and only you – is an ineffective way of ensuring their support. While legacy banks have traditionally been involved in the full process of the customer’s financial experience, today’s landscape necessitates a closer look at which parts of this should be reserved for the bank itself, and which services can be outsourced to partners or third parties.
Put another way, sometimes a customer may be happy to open up a given bank’s app to complete a given transaction, but in many other cases, that customer may want to complete the transaction from within the context of whatever they’re already doing. In these cases, a bank must be able to insert its business capabilities wherever the customer demands them, not just within a first-party app. APIs are essential to this process.
Don’t wait to accelerate
The banking industry is facing seismic shifts in the way it looks and feels and incumbents need to accept that they are facing a new era. Rehashing old technology and ways of working will not cut it against the fast-moving, digital-first competitors who are continually gaining traction. One advantage legacy banks do have is long-time brand equity and the customer trust it has engendered, and this trust should be the cornerstone around which they build a new dynamic approach.
In a very real way, the APIs that banks create represent their brands as much as their mobile apps or even brick-and-mortar branches do. APIs are the way their brands will interact with third parties and in many cases, the way the end user will experience the bank’s services. If its API programme doesn’t continue a legacy of trust, a bank is likely to face significant challenges.
Crucially, legacy banks need to stop relying on historic loyalty and support from their customers to ensure their continued success. The time to accelerate is now: millennials are already beginning to challenge the accepted wisdom of banking in-branch – and who is to say that by the time the next generation comes around that this will still be accepted wisdom?
This feature was first published in the March issue of FinTech Magazine.
