In other words, it was contended that relying on archaic IT infrastructure has been putting banks at risk for some time now as this is a condition in which they cannot effectively handle the challenges that today’s landscape is fostering. It is commonly discussed that the traditional culture of banks is one of the main hurdles to innovate while some experts claim that the current state of the art of the sector is just the consequence of tight and heavy regulated contexts in which banks have to operate. One of the main consequences of this is that changes brought about by technology tend to be evolutionary rather than just disruptive.
When it comes to the hyper-connected and tech-savvy millennials, banks face the biggest challenge with millennials representing the most difficult segments to satisfy for a bank with 71% of people from the GenY saying they would rather pay a visit to the dentist than one to a bank, research confirms.
It is not just a matter of communication, though, as millennials look at banks for their mobile services, P2P payments and digital currencies. In this perspective, the upcoming European regulation PSD2 (Payment Service Directive 2), which comes into force in 2018 by opening third-party account access (Access to account - XS2A) and banking APIs to payments providers, represents a strategic chance to innovate.
In fact, as “the new rules will mean banks will have to allow much easier access to current account data to regulated entities, with the permission of a customer”, the Financial Times points out, according to specialists PSD2 will act as a real technology accelerator for banks over the 2 years required to comply with the new set of rules.
To put this into practice, banks will have to implement a new framework to create a TPPs (Third Parties Providers) ecosystem in order to deliver customers their services. The center of the system will be the Open API standard. In light of this, the main challenge for banks would be to implement personalized solutions for customers such as customer security credentials to be shared with Third Parties Providers or activate transaction sharing data in the context of an obsolete IT infrastructure not conductive for API enabling.
The potential gain is massive as the higher the level of openness of APIs the higher the potential reach. Let’s consider for instance, how companies not in the banking sector do use this standardized set of requirements which governs how one software application can talk to another: say, Twitter, whose rationale for using API is to create a mutually beneficial relationship between third party developers to enable more functionality and convenience for consumers; or LinkedIn, whose rationale for using Open APIs is to enable access to their large professional database to allow their customers to make better decisions with regard to human resources and professional networking; not to mention Amazon, whose rationale is to extend their offer to other digital platforms so customers can benefit from their large product offering.
There are several examples in this perspective, as pointed out by a recent report from the Euro Banking Association (EBA), which can be of some inspiration for banks to innovate their business models just taking into consideration companies from different industries like the ones from the social media sector which through Open APIs has been thriving for years.
When it comes to the payment industry, EBA itself makes the case for the banking system by reporting the best practice of BBVA whose APIs enables third party access to money transfer and other services on behalf of the client.
In short, Open APIs in the context of PSD2 represent a win-win solution for banks to extend their services while creating additional reach by adopting a truly customer-centric approach.
Therefore, moving towards the new context would imply adapting and changing through restructuring and re-factoring work in order to comply with the new regulation with the support of accredited professionals in order to not miss the appointment with what’s next. At the end of the day, the successful management of change is a fundamental issue for many organizations, academics argue, as companies try to enhance their benefits realization capability from investing in innovation, in this case in IT.
However, in the debate around emergent and planned strategies for transition, we could assume that in the age in which disruptive forces are innovating industries worldwide and building the case for a steady emergent change on the ground, the European regulator is offering the opportunity to adapt to the dynamic new financial services environment in a structured way more attuned to the infrastructure of traditional banks. This would define a path for the banking sector to adapt incrementally going through different stages while maximizing the effectiveness of each stage of transition, allowing for banks to thus bridge the gap that currently continues to threaten their existence on a daily basis.
Luca is a Doctoral Researcher in Entrepreneurship. Holding an MBA from Durham University Business School, he has developed his career in marketing working, over the past decade, with Fortune 500 companies across a number of industries. A former Financial Times blogger, he currently covers alternative finance on his brand-new blog, Oliver*.