Inside-Out bank focus & Outside-In partner focus: less risk, less cost, more speed
Now that we have hit the start button on Open Banking there has been plenty of debate and discussion around who will be the winners and losers. The majority of the discussion centres around the open ends, the security & data concerns and how regulators & banks are not ready for this brave new world. So once again, we swap out the opportunity for the threats for they are now top of mind. However, one then risks losing the strategic focus. I, for one, firmly believe that Open Banking is an opportunity, and not just because of the most obvious reason: the customer will most likely trust banks over other third party providers, not to mention the hate of hassle and change.
There are some other very real benefits that will arise from banks being forced to API enable their core systems and expose their data. With a track record of over 25 years in the payments industry as a product technology supplier to banks, I have experienced that the biggest area of risk, cost and difficulty was always in integrating the product into each and every unique set of systems. The idea of a ‘one size fits all’ payments solution, particularly in the area of domestic low value payments is hard to execute on an operational level. Each bank has its own version of a so called standard platform, whether that is BACS or Faster Payments in the UK, SEPA in Europe, ACH in the US, and the list goes on. This issue is compounded by every new asset that needs to be integrated into the core, be it CRM, fraud detection or..
The cost for a bank to implement solutions is high, it takes a long time and the risk of failure is omnipresent. The majority of money spent has not been in paying licence or maintenance fees to the vendor, but is in fact the systems integration fees often paid to a third party to shoe horn the product into the bank’s somewhat antiquated unique core infrastructure. Estimates range that well over 50% of project cost is attributable to the integration.
Focus on Inside-Out for banks
So, perhaps an as yet relatively little discussed major benefit of Open Banking, and in particular API enablement of a bank’s core systems, is the delivery of an abstraction layer that if done correctly and comprehensively should deliver an outcome that radically reduces the cost, risk and time for product implementation. This requires banks to think beyond open and to embark on a complete API enablement of their core systems and expose as much data and as many APIs as is possible. Banks IT departments should be tasked to concentrate on the inside-out whilst delivering the obvious needs of compliance, resilience and availability at the most efficient cost rate.
Focus on Outside-In through partners
In doing so they will pave the way for long term fruitful partnerships with technology companies – established and fintechs - who can concentrate on providing the outside-in services. Such a model presents a win-win. The technology company can leverage the banks’ API systems, whilst utilising their regulatory status, but most important of all get access to the banks’ millions of customers. In other words the bank becomes a distribution platform. In return the bank effectively creates an R&D pool of technology partners where the risk and cost is transferred from the bank’s balance sheet to the balance sheet of the technology companies, and, at the same time the time and cost of integration for these products has been slashed compared to the ‘good old days’.
In order for the banks and their innovation labs to move forward and embrace Open Banking they have to reinstate their own internal heroes – the IT department – with a clear and focused task: keep the bank’s systems secure and operationally fit at the best possible price. That alone is a mammoth task in today’s world of cyber security risks. Hold the fort without being asked to do that other job as well that is almost contradictory to that task: innovate fast and agile with new and unproven technologies. If the bank’s IT department get a chance to work with fintech partners and truly exchange expertise on risk and operational practices versus new tech, a solid foundation is built for all to be rewarded in their jobs, and have a sound technological eco system. An eco-system where experience meets curiosity, where operational focus meets innovation.
Inside-Out winning with Outside-In
Banks have their heroes already and they reside inside: the IT department – let them build winning teams whilst keeping their eye on the ball: security, low cost of development, operational excellence and low risk. We appreciate this requires a very open and collaborative mind set to be a success, but it also demands support from the top and the business line. Guarding the bank is no mean task and creating a secure infrastructure for ‘others to work in’ is an Olympic achievement. Together with the business they can then open up new and revenue sharing services whilst deploying the skills, tech and expertise of the fintech community.