In recent years, European banks have invested up to half of their transformation budgets in digital projects. This is the conclusion of the study “As Banks Pursue Digital Transformation, Many Struggle to Profit from It” by the international management consultancy Bain & Company.
But the expected success on the revenue and cost side is only slow to materialize in many places. Depending on the bank, only a third of the customers are currently authorised for online and mobile banking. And of these, only one in two regularly uses digital access channels.
Agile working methods and cooperation with FinTechs
According to the study, new, flexible strategies and agile working methods are necessary to modernize the IT of the financial services industry. This also applies to software programming. “At least in pilot projects, DevOps and agile development processes such as Scrum are already being practiced at many institutes today,” the consultants state.
Even the FinTechs and RegTechs, which were originally feared exclusively as competitors, are increasingly being integrated as important building blocks in an IT modernization strategy. While the term “FinTech” describes the merging of financial services and technologies, “RegTech” refers to the area of regulation and compliance and describes innovative software solutions to promote the digitalisation of regulatory processes.
The combination with the classical banking business takes place on the one hand via financial products or product components, which are connected to the existing banking systems via interfaces in the sense of Open Banking. On the other hand as SaaS offerings, in which FinTechs make their modern platforms available to more or less extensively established financial institutions and thus reduce the in-house complexity of their banking IT.
EU-Payment Services Directive accelerates platform economy
This is facilitated by the new EU Payment Services Directive (PSD2). It requires banks to provide third parties with secure access to their systems in order to view account data and initiate payments. This will enable financial service providers to create digital platforms on which both their own products and those of external service providers can display a comprehensive range of services and thus more successfully retain customers.
However, the legally prescribed interfaces, which have to be provided by the financial institutes, allow only a limited innovation. The key to success therefore lies in stronger collaboration: the banks give FinTechs access to a broad user base and go beyond the requirements of the PSD2 directive to take a major step towards open banking.
The prerequisite for this, however, is that the solutions on both sides are compatible with each other. The problem: The complex legacy systems of financial institutions are essentially historically grown systems written in long outdated programming languages such as Fortran or Cobol. With new applications, other file formats and programming languages such as C++ and new operating systems such as Unix, Windows and Linux have been added over time. This resulted in silo structures in the data and applications that require time-consuming maintenance.
The complexity of legacy environments also requires relatively long software development cycles – for the programmers in the banks, but also for FinTechs, who want to make their applications available to the financial institutes and their customers. New projects require experts who are familiar with the individual legacy technologies. In addition, it is also very time-consuming to adapt the applications to the complex productive environments. If a new application manages to reach this point, it is often too late to gain a competitive advantage.
Danger from the BigTech competition threatens the industry
Meanwhile, the danger for the financial sector lurks in a completely different place. According to the current World Retail Banking Report 2019 by Capgemini and Efma, 75 percent of more technically savvy customers are already using at least one financial product from a so-called BigTech such as Apple, Google, Amazon or Facebook.
More than 80 percent of customers who are likely to change their main bank in the next twelve months are already making payments via BigTechs and other competitors, using their card offerings and bank accounts, or will do so in the next three years.
The three most important reasons for customers to use financial products from non-traditional providers:
- Lower costs (70%)
- Greater usability (68%)
- Faster services (54%).
In Capgemini’s opinion, a simple open banking approach will not help to survive against this powerful competition in the future. It is rather indispensable to develop this further towards Open X (Open Exchange). In doing so, the holistic experience of the customer and his general financial situation becomes the focus.
APIs break up the monolithic software systems
According to the report, the industry is at the beginning of a fundamental evolution towards integrated marketplaces that offer both financial services and other services of all kinds. In Open X, data can be seamlessly exchanged and ecosystem partners are working much more closely together. This is made possible by the standardization of the Application Program Interfaces (APIs) and common insights from customer data.
APIs are the connectors of the digital world: they break up monolithic systems and create connections by enabling the exchange of data and logic between independent software applications. A modular software architecture offers banks the best prerequisites for keeping the reins in their hands. The modular character offers the necessary flexibility for an individual timetable for API banking.
In the banking world, the ecosystems much propagated in this context will not be created overnight. However, as financial institutions develop innovative power and build growing partner networks, they have the greatest opportunity to consolidate their position of trust and to survive in the long run in a highly competitive financial services business.