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Open innovation is undoubtedly one of the drivers behind PSD2. However, the trend towards open banking and APIs is a global one that goes beyond European legislation. And effects more than just technology or IT departments within banks.
In the last blog Open for business I looked at parallels between the telecoms and financial services industries in moving to a more open, platform-based ecosystem. Plus the role of banks in the new open era.
In this blog, I consider how banks go about establishing platforms.
Banks are good at doing things that banks do. They are trusted to look after people’s money. They understand banking, the risks involved and have a head-start on managing compliance — more so than new entrants. They also have banking licences, historic data and scale.
However, there is always room for improvement. Banks don’t always get risk management right. Compliance is an ever-increasing burden. And data goes under-utilised. A philosophy of continuous improvement and incremental innovation is all very well in large incumbent organisations. But in the new platform era, perhaps there is need and scope to be more radical.
Banks need to disrupt themselves before they are disrupted — and disintermediated. They need to consider whether they continue doing what they have always done. And in the way they have always done it. Is there an opportunity to stop doing anything? Or do it in a different way?
Caught between the twin constraints of a legacy infrastructure and cultural fears about protecting existing revenues, banks have traditionally innovated in three ways: build, outsource or cooperate. Or Do-It-Yourself, Do-It-For-Me or Help-Me-Do-It. The third more collaborative way is now in the ascendant for a variety of reasons.
How do banks implement more collaborative and platform-orientated ways of working? Firstly, it’s important to recognise that it’s not just about technology. It’s about changing the whole business model. Banks can learn from telcos in this regard.
There have been so many initiatives over the last 15 years in the telecoms industry. MNOs wanted to create a platform ecosystem, but it was difficult for them to create content/value and scale it. They wanted to start working with gaming and music companies, but did not have a culture of doing so.
Banks have to acknowledge that they have a silo culture. Account information, cards, internet banking and cash management are different functions in different areas of the bank. They must learn to partner better across the organisation as well as externally. Tieto has a proven co-innovation model, which we can share with those interested in evaluating, fast-tracking and prototyping new ideas.
As to the functional part of partnership, banks must improve their data management capabilities. They need to segregate the data they share with partners via APIs and manage it differently. This includes layering the data, analysing it, managing fraud and so on. Tieto’s virtual account management (VAM) solution exists as an overlay on existing back-end systems. Banks can use it to extract relevant information and create new value propositions for both corporate treasury and personal finance customers.