Pedro Alexandre Salgueiro - Business Development Director, CRITICAL Software
Right now, the banking sector is rife with talk about ‘APIs’, ‘PSD2’ and ‘fintech’ companies. It’s clear that something’s going on, so what is everyone talking about?
Simply put, banks are facing the prospect of a huge business transformation, one that may even surpass previous introductions of disruptive technologies.
A number of non-traditional players have introduced new technologies to the finance sector that better address the needs of customers. This has put banks’ existing infrastructures and ageing systems under pressure to evolve and to do so quickly.
But banks are not only having to cope with a different type of competitor entering the market and increasing the level of competition. They are also having to deal with some big regulatory changes too.
One major adjustment is the ‘Directive on Payment Services’ (PSD2). This brings with it new rules that, among other things, increase consumer protection and encourage the use of better mobile and online banking processes. PSD2 has been hailed as the first step towards more open, customer-friendly banking, thanks to its support of application programming interfaces (APIs).
In a similar way to how Facebook allows third-parties such as YouTube to embed within its own platform via an API, banks will allow their services and data to be built on by third-party applications too. In this way, third parties will be able to access a bank’s data or services in a secure manner, within defined parameters.
With this new technology, customers will have more options when it comes to interacting with their banks. It will enable third-party companies to provide enriched services to their own customers too, adding more value.
That’s good news for the public, but what about banks? We’re not just talking about a technological change here; this era of increased access will also impact business operations and internal processes. Exactly what effect this will have on our traditional financial institutions is up for debate, but some things – operations, processes and the technology used – will definitely need adjustment.
Banks will undoubtedly come to a crossroads in how they provide customer service. They will have to decide how to adapt their interactions with customers to incorporate a new type of banking. A lot of noise is being made about ‘omni-channel’, digital transformation, different types of services, mobile banking and more. Right now, there is no clearly defined path to help banks navigate through these disruptive changes. What does exist is the opportunity for banks to join forces with the new market players and create new disruptive offers together. This relationship could work very well with the younger company positioned in the research and development field, allowing the well-established bank to test new ideas as they arise. In this case, banks have to decide who they want to partner with and which services they are going to expose through APIs. They will also have to work out new business models to cover usage costs.
When it comes to processes, this new API-rich environment will require new methods and ways of doing things. As time goes by, banks will likely interact with hundreds of different APIs and work with many different partners too. This means API governance is an important thing to get right from the get go. Implementing a process of approval for partnerships is also necessary. Many companies will likely apply to connect with well-established banks but only those that can comply with strict rules should be authorised to do so. Something else to consider is that, to ensure speed and accuracy while keeping costs down, banks will need to automatise these processes as much as possible.
Last but not least: Technological changes. This is possibly the easiest part of the change for banks to deal with. There are several components and products available now that, when combined, can address the issue of exposing data in a secure and controlled way. Using technology to support new processes can really help banks to adjust to disruptive technology. Some banks have already embarked on their digital transformation journeys and have put some of these components to work:
- SOA (Services Oriented Architecture) – with an ESB (Enterprise Service Bus) and governance model in place, likely supported with an API gateway
- BPM (Business Process Management) – with a BPM plan, it is much easier to automatise and monitor processes
- CRM (Customer Relationship Management) – traditionally used for the banks’ own customers, this will need to be applied to partners as well
For fintech companies, 2017 looks set to be a truly ‘API year’. Using APIs, companies will be able to offer their customers enriched services and better value. For banks then, the question remains: will they partner with the new industry players or will they try to develop everything on their own? APIs support the concept of ‘banking-as-a-platform’, offering traditional institutions the chance to expand their reach in an increasingly challenging and competitive landscape. If banks can use these technological developments positively, 2017 could turn out to be an ‘API year’ for them too.