The financial market is in the midst of a disruptive transformation. Both customer and market demands have changed fundamentally – each bank now decides whether it will play a leading role in a few years' time or not. Will it prepare its system architecture to react quickly and flexibly to changes, or will it turn a blind eye to the current challenges and hope they will vanish into thin air? For many financial institutions, a modular banking platform connected through APIs might be the last call for boarding before the machine takes off into a new financial ecosystem.
Customers today have different expectations of their financial services providers than they had a few years ago. For most of the digital natives and more and more bank customers from previous generations, it has been a long time since they have seen a bank from the inside. Now that even loan applications or complex project financing can be processed online, customers’ personal ties to a local institution or staff member are no longer decisive.
24/7 availability of services, omni-channel customer journeys and simple usability via smartphone are today’s sales arguments. Yet, many traditional financial services providers are still insufficiently prepared, especially in the digital realm, and now stand with their backs against the wall, facing decreasing profits and stagnating growth.
The Entire Financial Market is Transforming
User experience is a discipline in which primarily fintech companies are scoring, as their business models and technical infrastructures have been designed from the very beginning to meet the needs of an increasingly digital world. They specialize in small segments of finance and meet users where they usually do their banking today: online. Driven by the success of many small suppliers, the market is gradually reshaping. Highly specialized financial services providers are forming networks that allow them to compete with the large traditional financial institutions, and their processes are more advanced and efficient. As a result, the broad but average product portfolio of universal banks is increasingly losing its appeal to customers.
European banking supervision creates additional impetus for fintechs. Banks are obliged to provide open interfaces for payment initiation services and account information services. The former monopoly of banks on the data of their customers is thus ultimately gone – in addition, compliance requirements are constantly growing.
The Gap Between Existing Technologies and New Requirements
Market trends have clearly shown that banks will have to offer new services, easy-to-use apps and open interfaces quickly and continuously in order to do justice to customers and supervisors and participate in new banking ecosystems. This need is often challenged by complex legacy systems that are neither agile nor flexible enough to integrate current IT tools and system architectures and use them across channels. As a consequence, banks have hastily built insular applications in recent years in order to quickly satisfy their customers’ needs for online solutions. However, these applications cannot exchange information, but manage the data in isolated silos. Omni-channel customer journey: no way.
The Bridge from Core to Channel
In order to bridge the gap between legacy systems and channels, banks must create an additional layer that integrates the existing systems and also supports the use of groundbreaking technologies such as cloud, AI or blockchain. The so-called Digital Agility Layer will be populated by modular, domain-specific applications which communicate via application programming interfaces (APIs). The result is an API infrastructure that connects the information of the various existing systems on the one hand and makes it consumable for any channel or external third-party service on the other hand.
In this way, the Digital Agility Layer forms the technological basis for the creation and operation of cloud-native applications, which are a prerequisite for API banking and the development of new value-added services and products. Financial institutions are moving away from rigid monolithic systems towards an open, platform-based model – the Digital Agility Layer builds the bridge from core to channel and paves the way for banks to participate in an API ecosystem.
Closing Knowledge Gaps
In order to fill the new layer effectively, many financial institutions require both technological and business support because their IT departments often lack experience with cloud-native development. Therefore, using a suitable application development framework is crucial for building APIs. Within this environment, developers and banking professionals must be enabled to collaborate, using the tools of their choice, to develop solutions and an API reference architecture that is flexible and extensible. It is advisable to choose an environment that relies on open standards in order not to become dependent on a single technology vendor.
When designing a suitable business architecture, it makes sense to use established models as a basis. The functionality covered by individual APIs is critical when the aim is to gain agility and reduce complexity. The applications should be of small scale in order to provide the necessary flexibility; at the same time, the challenge is not to lose sight of the individual domain and to guarantee that all functionality is implemented within the applications – this is decisive to make sure they are fully independent of other applications. It is therefore advisable to use a reference architecture such as BIAN when mapping the complex business domains in a microservices architecture.
Banks can no longer close their eyes to the necessary digital transformation. If they want to remain successful in the future, they urgently need to modernize their systems and processes. The transition to a platform bank is therefore worthwhile, as it enables the transition to an API ecosystem that allows the use of current technologies without replacing existing systems. This transformation is accelerated by tools that support people in different roles in collaboratively developing, implementing and testing solutions. In this way, business logic can be mapped modularly, bundled, reused and made available for all channels.
Image Source: Teaser: Wenjie Dong - 1094077550 - iStock