Into the great wide open bank: Digital banking and the new financial horizon
The past few years have spawned a new, cooperative FinTech ecosystem: No longer are startups, traditional banks and financial services companies at loggerheads. Rather they recognize each other’s strengths and the mutual benefits that hang in the balance.
The leaders of FinTech startups now realize that disruption has its weaknesses, and tradition its strengths. Established banks excel in economies of scale, brand equity, regulatory understanding, infrastructure and go-to-market experience: advantages that cannot be ignored. Meanwhile, many banks struggle to match FinTechs in terms of their nimbleness, customer centricity and ability to create powerful product experiences in a mobile-first world. Thus we now see companies marrying the best qualities of each sector as with solarisBank, a Berlin-based outfit that positions itself as a “tech company with a banking license.”
As of 2017, one-third of global banking customers are banking with a non-traditional provider and we’ve seen banks respond with different strategies:
- Emulation by creating their own innovation centers
- Taking equity in FinTechs
- Full FInTech acquisitions
Other banks unfortunately have their heads stuck in the sand and avoid any FinTech engagement, believing they can adjust to this new world by themselves. Yet the challenge is as much attitudinal as operational: wariness over regulations and the protection of data can cloud the view of what’s possible.
That understood, how should banks assay the FinTech environment going forward? I would argue that in the future, banks must fundamentally change their overarching mindsets and organizational cultures. Today’s banks that wish to lead must transition to open, digital-first institutions.
API: change or die
The role of banks will and must change. In the future, they will unite a range of apps and application program interfaces (APIs) developed by FinTechs and turn them into a one-stop shop for customers. If they fail to do do this, digital-first banks that can will fill the void. Leading banks will build less and less—and instead create third-party ecosystems more and more.
Organizations such as the Open Bank Project (an open source API and app store) offer a novel way to drive banking innovation. The OBP makes it easier for banks to engage with FinTech organizations and individual developers, with the source code on GitHub. In terms of APIs, these interfaces should lie at the heart of a bank’s digital transformation strategies. This is because APIs help the bank to provide new front-end services such as via mobile applications without making fundamental and difficult changes to back-end legacy systems (until a more opportune time). This means banks can rapidly speed up time-to-market for new services.
In my organization’s work with a large Latin American bank, we are helping them develop new applications such as one that enables money transfers with a phone number as opposed to an account number. But new application development is not as important as what that effort can create behind the scenes: again, a wholesale change of thinking and organization. Why is this so crucial? Simply , it can turn a conventional bank into a digital bank. (Transformation? To quote the famous Apple ad, there’s an app for that.)
The path to digital requires a willingness to work with third parties rather than take the typical approach of financial companies—which is to do everything themselves. It means much more than hiring a chief digital officer. Rather, it demands the pluck and courage to make fundamental changes, such as adopting agile development, and empowering people to take the same sort of risks as a typical Silicon Valley startup.
Already, we’re seeing early examples of this new ecosystem emerge. The German bank Fidor has created a community where developers can integrate their APIs into different products. This allows Fidor to provide services to their customers that they do not want to offer directly. They also hold “developer days,” similar in spirit to hackathons, that gather programmers together. Meanwhile, the Danish bank Saxo has a dedicated open banking strategy that uses APIs, and has created a developer portal to foster new products and services for customers.
Looking ahead, the optimal and only strategy for banks will combine digital business transformation and open banking. Piecemeal approaches, such as creating a nifty new app, might have worked well in the past. But soon we’ll view that kind of tack—just as we do the first tentative steps some companies took into the cloud in the 2000s—as unnecessary over-caution at best, and missed opportunity at worst. Technological transformation has given rise to the need for organizational transformation—that is, open minds for open banking.
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