Banks need to come to the 21st century by replacing everything from the core on out.
The stats are in: building digital channels improves the customer experience for retail banks. A better digital experience leads to more trust between consumers and banks, higher loyalty rates and better retention.
All that is well and good. But banks can say they want to build digital products and infrastructure, but what does it actually take to be a digital bank in 2017?
The banking and financial services industries have traditionally been digital laggards. Banks core product—the storage and management of money—has long been protected by their status as incumbents in a highly regulated industry. Banks have been slow to adopt new channels like the Internet or mobile. When banks have decided to move into digital arenas, progress has been slowed by lack of knowledge, inability to hire top tech talent and dated infrastructures that make scaling new solutions difficult.
Retail banks have significant incentive to accelerate the move to the digital economy. In an era where digital eruption is covering every surface area of business and consumer behavior, banks cannot afford to become the dumb pipes of the financial ecosystem.
Cable companies and cellular operators have already fought this battle (to greater or lesser success). As the Internet emerged, the danger for the telecom industry was that it would be reduced to the simple role of moving data from one point to another over fiber or cellular waves. In reaction, the telecoms introduced wholly-owned digital products, bought technology and content creators and fought emerging over-the-top industries and regulations. There’s a reason that Comcast owns NBC Universal and net neutrality has been such a big fight.
What do banks need to do to truly build digital ecosystems? Let’s break down five ways banks can embrace digital and transform from the staid and plodding enterprises they are today to agile and dynamic businesses that will define the next decades of companies.
Open Banking: Embrace The API
One of the seminal moments of our current era in technology was when Facebook opened it platform in 2017 to let developers use its application programming interfaces to build new features on top of the social network and leverage its community. The move allowed Facebook to go from just another social network into a ubiquitous super platform that touches every part of the Internet.
Facebook’s biggest strength was that it had people—and their data—on its platform. Banks have an equally impressive treasure trove: the data of the world’s money.
Embracing APIs in the financial world has a term attached to it: open banking. Open banking is the act of banks creating APIs so that third party developers can build services on top of the financial institution (also the use of open source software and data transparency).
For banks, APIs are all about push and pull.
Push: build APIs so that developers can use bank resources and data to build features and services for consumers. This allows a bank to extend influence into the community by pushing its data out to others that may find it useful and thus also build an ecosystem around the services of the bank.
Pull: use third-party APIs to bring in data, functionality or services that the bank does not already have. The bank pulls in outside resources to strengthen its core offerings and break into new markets or functionality.
A good example of the push method is what Capital One has done with its new developer portal. Capital One released three APIs on its DevExchange platform centered around authentication, digital identity and trust. A good push example might be where you log into a third party financial service (say, a robo-adviser) not with a Facebook or Google account, but through your bank. Consumers trust their banks with their money a lot more than Facebook or Google and consumers can link their bank details to the fintech service for easy transfers or withdrawals, at the click of a button.
“Typically, you don’t keep your money with Google. You keep your money in a bank. And you trust your bank a lot more with the security,” said Naveed Anwar, head of Capital One’s developer platform.
On the pull side, banks use third-party APIs all the time. In many cases, the banks have no choice because there is very little chance that a bank has internal developers or expertise to build certain features on its own. Banks are notorious for outsourcing development to agencies or software-as-a-service provider. And yet, by adopting APIs from third parties, banks can draw those providers closer into their orbit to help build a full stack of features to benefit consumers.
Update The Infrastructure
A 2015 report from Finextra and Five Degrees stated that 80% of banks were considering overhauling their core infrastructure within five years.
Because it is absolutely essential.
Banks face many of the same problems that legacy retailers do. Their infrastructures are dated, IT-driven systems that keep data in silos, updates to a minimum and new features to a crawl. Just as retailers do, banks want to serve people on the omnichannel: any device, any time, anywhere. And yet, that is incredibly difficult when data for desktop website banking and in-person branch banking are kept on different servers. The data built through email marketing campaigns is often not accessible to the websites or apps that people actually want to use.
It’s a cluster and there is no easy way to fix it other than to take the time to rip out the core systems and move to a cloud-based system that allows for data to flow freely between properties, updates to be sent quickly and analytics and insights easily taken out.
As more banking interactions become digital, the strain on internal systems continues to grow. The 2016 Capgemini World Retail Banking Report survey said that 87% of bank executives do not believe that their core systems can keep up with the demand for digital. That becomes an issue on the consumer front when apps and websites lag and information that should be a second and a touch of a button away for a consumer on the go is not available at all.
And yet banks, the cautious players that they are, are often hesitant to upgrade backend systems because they often do not contribute directly or immediately to return on investment. Compliance issues on data transportability are problematic in a highly regulated industry.
Adopt The Omnichannel
Every item in this list is interconnected with the other. Updated infrastructure is not as efficient or effective without API adoption that effects omnichannel integration that is essential to personalization.
The omnichannel only works when data from the bank’s core is available to all the channels customers will interact with and can scale as needed. To see more about how banks can optimize digital channels to reach customers everywhere and anywhere, read this article on omnichannel banking.
Personalize The Experience
Infrastructure, omnichannel, APIs … none of it actually matters unless it is contextually relevant to each individual customer.
Banks have a two-sided data model: deep understanding of both the markets and consumer financial behavior. The goal for banks is to use both sides of the data market to create an analytics dashboard suited directly to individual customer needs. In this way, banks can become real-time advisors to customers through both person-to-person and automated channels.
For instance, if a bank really knows a customer, it can use data to monitor the markets to advise that person when it is the right time to apply for (or refinance) a mortgage, based on that individual’s spending habits and portfolio and market conditions.
As the open banking ecosystem matures and more participants are brought into the system, banks will be able to use payment and localized data to alert customers to deals based on individual preference. For example, like organic blackberries from southern California? Whole Foods has them in stock now. Even if the bank does not directly profit from such an interaction, it creates goodwill between the bank and the customer that will help the bank with retention and other loyalty programs.
Building personalized experiences at scale is a top of the ladder functionality. Personalization cannot be done at scale without first updating the core banking infrastructure, integrating algorithms and APIs and knowing the customer well through the omnichannel.
The Massive Opportunity To Partner With Fintech
Banks have a tremendous opportunity as the primary hub in the financial wheel. Banks—retail, commercial, investment or otherwise—are the locus of all data when it comes to money. Think about a consumer transaction: it starts with a bank issued card that is run through a merchant, processed by a technology partner that takes the money from the bank and runs it through the payment networks where it … goes back to a bank.
As the center of the financial world, banks have the ability to partner with financial technology firms to improve customer experience, build new functionality and exert more influence over the entire economic landscape.
According to Capgemini’s survey, 59.1% of U.S. banking customers have a relationship with at least one fintech firm. Of those people, 64.7% of them have a relationship with one fintech firm while 14.7% have a relationship with at least three.
People tend to use fintech services because they are easier than similar services from banks or other providers. According to Capgemini, 81.9% of people cite ease of use as the reason they use a fintech service. Fintech companies are often established technology companies (Android Pay, Apple Pay etc. are considered fintech) or come from startups where people understand the digital model of easy, simple and clean interactions. Fintech companies are driven by product iteration, which means they tend to work in agile bursts to release products to the market, which increases speed to market significantly over what traditional banks have historically been able to do.
Banking executives see six primary opportunity areas to partner with fintech firms: cards and payments, loans, financial awareness, accounts and investments, financial advice and mortgages.
A debate among banking industry executives these days is whether or not banks should enter the digital wallet/payments space. No two metrics or surveys seem to agree on this particular question. Capgemini’s data shows that people trust fintech companies more than banks, which means people will choose options like Android Pay or Apple Pay instead of a digital wallet from a bank. Other people think that the banks, which have long been on the sidelines of payments, should embrace the opportunity that the digitization of transactions presents and exert more control over the area. Banks can work with fintech companies to build their own branded digital wallets or white label wallets that work on banks’ core infrastructure.