Hans Tesselaar, Executive Director of BIAN
As Brexit continues to cause chaos for industries across Europe, investment in innovation has waned. But investment in financial services continues as banks look to put their money where their mouth is by encouraging the growth of high-tech, user friendly services, compliant with UK and EU regulations.
As we continue through the year, I foresee several trends revolutionising the UK banking system, which, if implemented correctly, could prove a useful benchmark for other countries to draw upon.
Trends around PSD2 and Open Banking will continue driving the banking and fintech landscape in the UK. Open Banking standards put in place in January 2018, and the resulting suite of regulations surrounding this implementation, are all set to encourage competition and choice through facilitating market entry for regulated non-bank players, and to drive more transparency and customer protection.
Opening up data to third party providers (TPPs) is one of the most contested aspects of Open Banking. While banks are concerned that publicly disclosing prized insights and consumer data may leave them vulnerable to competitive threat from new and agile challengers, doing so will enable them to better collaborate with new fintech players. Joining forces will open up the possibilities of being able to grow new revenue streams, capture a broader customer audiences with product offerings, and progress towards an extended ecosystem. Further to this, developing and opening APIs will allow banks to finally pivot away from cumbersome core banking systems to take full advantage of cloud-based solutions that make them more agile.
If banks are to comply with and benefit from developing regulations, they must build new functionalities. It is a common misconception in the industry that APIs are somehow already “packaged up” behind the scenes, ready to be declared ‘open’ for use. In reality, opening these APIs involves lengthy and complicated integration processes with banks’ legacy, as well as their regulatory and compliance functions.
Using APIs to move to micro-services
Regardless of the difficulties, banks will continue to push ahead with API development and the associated move to micro-services. APIs have showed us that it was possible for computer browsers to remember and recognise basic personal data during login points, such as email address and passwords, to make it simpler for users to log into their public accounts.
As we move toward 2020, we can expect to see organisations building increasingly complex and focused APIs, allowing customers to do anything initiate a loan, or apply for a mortgage, safely and at lightning speeds.
And as this shift occurs, the entire ecosystem will gradually reduce its reliance on core banking systems, causing a fundamental shift in the way not only that banks work, but in how software providers have to design and create solutions for them.
Untangling the web
Before banks can open up their data, they must first untangle old and inefficient webs of infrastructure. Only then can APIs be designed to sync up with the core architecture.
The wider issue here is this: every bank is shaping its own set of APIs, which limits openness and defeats the very principle of collaboration and standardisation that sits at the heart of PSD2 and Open Banking.
This problem continues because there is currently no universally accepted reference for standard definitions of all the various banking business functions. Without this, it’s almost impossible for banks to visualise the different information flows of every single banking capability within their models, let alone understand how these capabilities are connected and how they can be reconfigured using APIs.
Once processes have been mapped, banks must then address the question of whether to keep these various business capabilities in-house, or simply consume them off the cloud as and when required. Without clear sight of what they have in play at any particular time, how can they possibly move ahead? A global standard and model for API development will be crucial in taking this innovation forward and allowing banks to realise their full potential.
Though PSD2 and Open Banking are aimed at the UK and Europe, slowly the rest of the world is having to adapt and adjust as regulations spread. And beyond these regulations, there is a strong business case for bringing standardisation and interoperability to APIs to promote an open banking standard. Rather than playing the waiting game on when this legislation will travel abroad, banks outside of the EU would be wise to get ahead of the game before it’s too late.
In addition to the modular approach to innovation that this technology enables, banks can also start embracing partners from overseas. The problem of tangled and complex systems through years of layering on technology products is by no means limited to Europe, and has been a particular issue Islamic banks, which have traditionally developed tailored, in-house banking technology systems to ensure they comply with Sharia law.
Standardisation is everything
Progress across the global banking ecosystem will come to a grinding halt unless banks change their mindsets and approaches, particularly around innovation. We’re already beginning to see banks realise this as they turn to more consumer-centric business models and enlist the help of technology vendors.
Other countries should pay close attention to learn from the mistakes our banks have made, and enable faster success within their own home markets. As it stands, the current architecture of traditional banks across the world right now does not fully facilitate collaboration. To capitalise and ensure progress at a global level, the entire industry must adopt a standardised IT framework.
Once this is in place, banks will be able to re-allocate IT budgets from operations to innovation, ushering in the emergence of new players, new rules, and a new era of competition and innovation.