Published on the 13/12/2018 | Written by Adrian Melillo
Invest now, or pay later...
Open banking is well and truly on Australia’s doorstep. By July 2019, banks will be required to make data available on credit and debit cards, deposit and transaction accounts. This is an enormous undertaking for traditional banks, requiring them to digitally transform at an unprecedented rate.
While the task may seem daunting, there are a few steps banks can take now to aid them in the years to come. For starters, banks should conduct a health check on their IT infrastructure to ensure it can scale to meet consumer demands. Additionally, banks should put a thoughtful strategy in place for how they will leverage open banking as a competitive advantage. It requires not only investing in the top layer consumed by third parties and customers, but also investing in the layer underneath where the mainframe and other legacy systems reside.
“It’s no longer adequate for banks to simply invest in innovating at the edges. They need to innovate their core.”
If done right, open banking can serve as a powerful competitive advantage for traditional banks, allowing them to open up their products and services in new value chains through partnerships with fintechs and other third parties. If treated reactively and with minimal effort, banks will struggle to compete in a few years’ time as competitors and fintechs go that extra mile to meet customers where they are.
It’s time for an IT health check
If a bank’s core banking platform is its heart, then the many thousands of point-to-point connections within its IT systems are the valves and arteries that keep it alive. These point-to-point connections, while cheap to implement, are costly in the long run. As time wears on, these connections calcify, impacting the infrastructure that they reside in and ultimately creating a technical debt that is hard to overcome.
This September, APRA aired its concerns that critical underinvestment in the maintenance or replacement of banks’ legacy infrastructure would leave banks underprepared for the new open banking regime. It’s a very real concern, as many institutions still rely upon legacy infrastructure like mainframes that often sit in silos and trap valuable business data.
Before Australia is brought into the scope of open banking, these institutions must invest in conducting health checks on their legacy systems and ensuring they are equipped to evolve with consumer expectations. To create this agile environment, banks need to unbundle and drive innovation first at the core and then the edges.
Unbundling with APIs
In the ACCC’s first Consumer Data Right Rules Framework, it has recognised that APIs are no longer a could have but a must have. These new rules mandate that ‘data sharing must occur via an API’, showing the invaluable role that APIs will play as open banking comes into effect.
APIs are powerful building blocks that allow systems, applications and devices to talk to each other by sharing data, regardless of where it resides or what format it’s in. As a result, APIs can allow banks to unbundle their core monolithic infrastructure into agile building blocks that can be reused by internal, as well as external, stakeholders. Unlike rigid point-to-point connections, APIs provide a fluid framework that allows banks to digitally transform at a rapid pace.
Banks that put a thoughtful API strategy in place will be better positioned to not only adhere to open banking standards but also to drive a competitive advantage from them. Whether creating an open ecosystem around their existing products and services for fintechs to plug into or unlocking valuable data from legacy systems, banks can use APIs to drive innovation and deliver differentiated customer experiences.
With the UK’s open banking initiative well underway, several banks such as HSBC and Barclays have already adopted an API strategy to unbundle their core and create an application network that third parties and fintechs can tap into. As market conditions change, these banks can then flexibly plug and unplug business capabilities and data as needed. HSBC, for example, is unlocking its backend systems with APIs to develop a range of new customer-facing services, such as an app that aggregates data from 21 of its rival banks. Additionally, in October, HSBC announced the launch of its Digital Partner Platform, where it’s using APIs to expose its business capabilities to a digital ecosystem that invites partners to participate in the co-creation of value.
Invest now or pay later
With the rise of open banking, we’ll also see the rise of Banking-as-a-Service, where banks become a marketplace of services accessible via APIs. Rather than being the sole provider of services, banks will be responsible for finding the best match to meet the customer’s needs—even if it means an external solution from a rival.
In an increasingly customer-centric environment, allowing customers to bank where they want, when they want and how they want is non-negotiable. According to a recent study, 76 percent of Australians would consider changing their bank due to a disconnected experience. This is a challenge that banks face in the very early stages of open banking and well into the future.
With less than a year left, it’s no longer adequate for banks to simply invest in innovating at the edges. They desperately need to innovate their core. Banks are some of Australia’s largest and most tech-enabled organisations. However, without embracing digital transformation, they risk losing customers to better-equipped rivals.
Adrian Melillo, Regional Director of Customer Success APAC, MuleSoft