The Digital Banking (Threat) Opportunity

Banks’ IT systems are under a lot of pressure to enable the transition to digital financial services. However, their heavy infrastructures were designed in the 1970s and have evolved into increasingly complex systems. Legacy bank IT systems are difficult (some say impossible) to modernize. Rebuilding a complex legacy system from scratch can take years to decades to complete. Worse, it often results in failure.

New competitors without the baggage

At the same time, banks are threatened by younger companies that are building fresh digital banking services. If you look up digital banking at, you’ll find a variety of bank replacement businesses.

With one telling comment: "Whoever reads this book without swiftly moving to action may regret it." - Guido Poli, Head of Market Intelligence, Banca Monte dei Paschi di Siena

According to Tunde Olanrewaju at McKinsey & Company, European retail banks are very slow to follow this advice. They report that only 20-40 percent of retail bank processes have been digitized in Europe. Ninety percent of the banks invest less than half a percent of their spending on digital. McKinsey & Company believes that it would be profitable for banks to fully transform their business and thereby “realize improvements in earnings of more than 40 percent over the next five years.” The clear need for digital banking services and the challenges for legacy banks to modernize is a clear opportunity for IT solution providers who understand the market.

Moving forward is imperative and challenging

How should banks progress? Some believe that the only way to go is to replace banks’ legacy systems. A more pragmatic approach is to build on the foundation of existing technologies, taking advantage of agile solutions that enable specific processes to be transformed and attack those key processes in stages. Not all the business processes must be transformed at once.

Since the first generations of transformation processes, which often resulted in failure (25%), IT solution providers have gained valuable experience and are leveraging those failures into winning strategies.

One critical strategy for banks’ successful digital transformation is API technology. According to Forrester, “APIs are perhaps the most important technology… to deal with complex webs of legacy systems that took years to build and now slow business change. Organizations will use internal APIs to increase agility by insulating customer experiences and business processes from underlying technology constraints.”

APIs support an open platform that can connect fragmented services in the value chain, both within the bank and between the bank and external parties. API technology is already being recognized by financial regulators, for example, at the British HM Treasury and Cabinet Office and the European Commission.

A report from HM Treasury and Cabinet Office on Data Sharing and Open Data for Banks describes APIs as: “the de facto standard for sharing data.” They recognize that “where API access to this kind of data (banking) has been made available, such as by accounting software providers and the Open Bank Project, it has resulted in successful ecosystems of third-party applications. These could be replicated by banks.”

Another financial innovation indicating the acceptance of APIs as a standard in banking is in the European Commission’s Payment Services Directive 2 (PSD2), which includes an Access to Accounts (XS2A) rule that will require banks to enable access via APIs.

Many motivators are driving banks to adopt API technology as part of their digital transformation. Banks are increasingly seeking outsourcing service providers with proven experience in transforming core banking services. In turn, these successful IT consulting firms who specialize in core banking services are seeking out agile technologies that can simplify and speed up the transformation process.

A few different approaches to harnessing API technology for modernizing banking services, include:

·         Traditional ESBs, which provide API integration and governance using a black box design, without an API architecture. This approach is hard to migrate, offers standard security, does not automate, and is not cloud ready.

·         Cloud-based ESBs and multi-tenants, which provide integration and cloud deployment, however are locked in to the vendor- or cloud-platform provider with a black box design. These approaches are hard to migrate, offer standard security, and do not automate. While they offer an API interface, they do not offer an API architecture.

·         API Platforms, which provide API management, analytics, and security without integration, delivery or use of the existing governance investment.

·         Open-standard, hybrid solution with all the above benefits, without their limitations

Fintech / banking IT service providers who incorporate API technology in their offering are expected to be in demand. Those who choose a solution that offers automation in the development and delivery of API solutions with API management and caching and security - both in terms of content and context - will be successful. Having an open source and open-standard solution will keep their customers empowered.

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