In the 1990s, Bill Gates famously suggested that:

Banking is necessary, but banks are not.

Bill Gates Banking

At the time, most scoffed at the notion that customers would ever stray from their trusted brick and mortar financial institutions. But it wasn’t so much the idea that banks had to go away, but rather the manner in which individual consumers interact with banking products and services would evolve to the point where you would no longer have to visit a physical bank to execute your transactions.

In the years since we’ve seen much of Bill Gates’ vision come to fruition as digital banking has become the pervasive customer experience for everything from payments to deposits. Today, digital banking (or “open banking”) has taken over as the preferred method for customers to interact with their financial institutions.

Then in 2015, James Haycock and Shane Richmond, published a book called “Bye Bye Banks?” that really elucidated the disruption tech companies are bringing to the global retail banking industry in the age of modern digital banking.

The authors state that:

The corporate playing field has been changed irreversibly in recent years by a new generation of companies and leaders who have torn the rulebook to pieces, adopting new technology, new work practices, and serving customers whose lives are increasingly oriented around their mobile phones.

They go on to point out how the problem with banks today is that they are “hamstrung” by legacy technology, processes, and thinking – making it almost impossible for them to react to the speed of this new, more nimble, non-traditional competition. In short, big elephants move slow…

Digital Disruption in the Global Banking Sector

Haycock and Richmond describe three phases of this disruption:

  • “Displaced”
  • “Diminished”
  • “Disintermediated”

Haycock and Richmond describe how in the first phase:

[banks become displaced as] day to day interactions move from bank owned interfaces to startups who offer a better experience and price.

PSD2

Basically, this new competition begins to take over the “eyes of the consumer” and guides them to products and services that are delivered faster and cheaper than those offered by incumbent banks. Once these new industry disruptors control the eyes of the consumer, banks then become diminished. That is, they become “utilities” where price and rate shopping now happens seamlessly behind the scenes. Without the personal interaction with their bank, consumers become less concerned about where they get their products and services and gravitate towards the best rates, rewards, etc. And finally, banks become disintermediated.

The new competition begins to realize they don’t need banks and begin to challenge revenue streams by offering traditional banking products and services with speed and digital agility, and with a customer experience that incumbent banks simply cannot match.

If you look at the retail banking industry through the lens of these three disruptive phases, you can see that we are well along this path and business models are evolving and changing at an ever-increasing pace.

This all brings us to today.

PSD2, Explained.

In January of 2018, the EU’s revised Payment Services Directive II (PSD2) went into effect. In the UK, this significantly impacts the big 5 (Barclays, HSBC, Lloyds, Santander, and Royal Bank of Scotland who collectively control 80% of the banking market share), as well as for every other banking institution in the region.

PSD2 has a number of disruptive provisions associated with it such as the public disclosure of fees, but none more disruptive than the requirement that banks make their data available to third parties through open APIs (application programming interface) upon request and authorization from individual customers.

How Will PSD2 Impact Banks?

This opens the door for new competitive threats to traditional banks in the form of “aggregators,” reinforcing Haycock’s and Richmond’s concepts of displacement and diminishment.

Why navigate the websites or mobile apps of each of your financial institutions, when you can go to a single place to see all your information regardless of where it resides? And if that aggregator can then offer you a better rate or fee structure at the click of a mouse, why wouldn’t you change? After all, UK banks have an average net promoter score of only of 15 points which does not lend itself well towards customer loyalty. So, incumbent banks end up doing all the work, assume all the risk, and potentially get none of the rewards.

Avoid Disintermediation by Modernizing Information Systems

So how do banks respond before they become disintermediated? PSD2 provides for two entities that are creating new competitors for their customers: AISPs (Account Information Service Providers) and PSP’s (Payment Service Providers).

Rather than be disrupted by outside competition, banks can take on these roles and become the disruptors themselves.

But to accomplish this, banks need to be fast, nimble, and above all else, customer focused.

Unfortunately, most legacy systems in place today within banks lack the digital agility needed to move at the speed of changing market dynamics. Rather, they tend to be monolithic, static, applications that are slow, difficult, and costly to modify and maintain. In order to break loose of the restraints of legacy applications and legacy thinking, banks need a smarter, more modern, approach to delivering products and services.

Modernizing antiquated information systems is a fundamental step in order to not only fully take advantage of the new open banking standards and PSD2, but also to ensure you can provide an optimal experience for customers. Simply ripping and replacing one legacy system for an updated version of basically the same thing no longer makes sense. Banks must decompose monolithic business applications into a set of robust services exposed through API’s, and leverage those API’s with a platform that allows them to quickly assemble not just one business application, but multiple business applications from reusable services.

This is the only way to match the speed and digital agility of the non-traditional competition.

By adopting a platform approach based on API’s vs. a monolithic product approach, banks realize several benefits:

  • Meet the Mandate of PSD2: An API-first approach will allow banks to comply with the interoperable access to data and transaction required by PSD2.
  • Leverage the API Economy: Banks will be able to leverage the API-Economy and the tens of thousands of APIs that are publically available. Why reinvent the wheel, or invest valuable time, money, and resources, building functionality that already exists or may not be relevant to your core competency?
  • Become Part of the API Economy: Banks can monetize their own APIs by making them available on the marketplace. Numerous organizations like Salesforce and Expedia generate substantial revenue by exposing their APIs through third party providers.
  • Extend the Development Team: Because APIs are self-contained units of functionality, they do not require the efforts of a single development and maintenance team. API creation can thus be distributed across the organization to areas with the expertise best suited to create that particular capability.
  • Future Proof Your Business Applications: Because functionality is decomposed into unique services exposed through APIs, they can quickly be swapped out as new technology becomes available.
  • Expedited Testing and Deployment: Since APIs represent independent business services, when one service changes, you need only focus your development and testing efforts on that particular service rather than regression testing the entire application stack.
  • Performance and Scalability: Platforms tend to be built on architectures that allow individual components to be scaled independently. If you need more compute power, or more search power, or need to expand the database, you need only scale that particular component rather than having to scale the entire application.

Banks of Tomorrow Will be Driven by Open Banking Standards

Open Banking PSD2

How banks leverage open standards in order to deliver an open banking environment will determine their ability to deliver a positive customer experience, and delivering a positive customer experience will determine who wins and who loses in the digital economy. Incumbent banks may feel they’re at a disadvantage when pit against non-traditional competition intent on displacing, diminishing and disintermediating them. But incumbents have a clear advantage: They have a wealth of transactional data regarding payments, savings, credit, etc. and decades of customer relationships on which to build. They simply need to commit to modernizing their information systems in a manner that enables them to harness this data for a competitive advantage.

At Nuxeo, we help banks take this leap with the most modern Content Services Platform (CSP) on the market. With Nuxeo, banks can deliver customer-centric business applications that meet the needs of today’s most demanding customers.

Contact us today to learn how we can help transform your organization.