For traditional banks, pressure is closing in from many angles. Investors have been pouring money into fintechs and challenger banks. Though few of these digital upstarts can yet compete with traditional banks in terms of market share, challengers are already siphoning away billions of dollars in revenue that legacy banks are accustomed to collecting.
Indeed, most millennials use online-only banking and are more open than past generations to new financial services providers. Roughly a third don’t believe they’ll need legacy banks in the future. Thousands of branch locations have shuttered as consumers continue to shift to online alternatives.
And then there’s the evolving regulatory landscape, with enactment of various open banking mandates that require banks to give third parties access, with customer consent, to transaction functionality and data over which they’ve long held a monopoly.
But despite all the disruption, some banks aren’t moving fast enough to adjust. More than a few commentators s have noted the sluggishness, from my colleague David Andrzejek reflecting on what he observed at Sibos, the annual banking and finance conference, to a recent Accenture report that concluded “only a minority of incumbent banks are making the necessary difficult choices… for the digital age.”
How can traditional banking institutions pick up the pace and position themselves for digital success? Based on our experiences on Google Cloud’s Apigee team, here are three tips to help bank thrive in today’s landscape.
Think about modularity and agility, not just compliance
Though regulations differ, open banking mandates generally involve application programming interfaces (APIs), that provide access to data and functionality. Simply providing this access may be enough to satisfy regulatory requirements—but a failure to push further is a failure both to maximise what APIs can do and to meet digital challengers on their own turf.
APIs don’t just provide access to digital assets—they allow software developers to agilely and modularly combine those digital assets in new ways and for new purposes. Compared to the legacy monolithic applications many banks are used to, APIs allow developers to work much faster, to work in smaller and more autonomous teams, and to experiment and react more freely. For example, one API to enable account creation can be reused across multiple channels such as web, mobile, in-branch, and enterprise. This reduces operational costs and may accelerate new markets.
To many of the challenger banks born online, harnessing APIs for business leverage, rather than just to expose data and functionality, is a natural way of operating. Legacy banks should embrace this approach to APIs to keep pace with their digitally savvy and nimble competitors.
Strategise around customer needs, not device types
Mobile apps have played a huge role in customers’ changing expectations and behaviours for banking—so it’s natural for some legacy banks to focus on mobile as they react to digital disruptions. This focus can be a good thing, but succeeding in digital is about much more than releasing mobile apps.
Some banks’ mobile apps merely put a new, phone-friendly wrapper around their status quo business models and interactions, for example: instead of viewing their account balance or transferring money via a website, an ATM or a branch location, a customer can do those things with a smartphone. This attitude toward digital disruption might have been adequate a few years ago, but today’s customers expect more—not just that a bank is available across a variety of digital channels and interaction models, but that the bank is also providing compelling services and experiences.
For instance, some large banks have recently begun advertising the ability to temporarily freeze or unfreeze a debit card. This service isn’t really new, however; it’s existed as a back-end service for years as part of anti-fraud efforts, and the only new thing is exposing these services through an API to give end users access. This capability has been posed as a differentiator—but it’s also something some digital natives have offered from day one.
Indeed, banks have lost business to digital competitors that offer lower transfer or conversion fees, higher interest rates for deposits, and other services that chip away at incumbent banks’ long-standing revenue streams. As open banking allows third parties more access to customer data and more opportunity to leverage that data for new services, the losses for stagnant banks may grow much larger. Rather than resting on legacy models, banks should shape their strategies from the outside-in, using customer pain points to shape strategies.
To compete in this new landscape, banks should also embrace developers as key players in the value chain—the people who leverage APIs to create new services and experiences that attract customers. Winning today isn’t just about releasing mobile apps; it’s about empowering developers to leverage IT assets to continually delight customers, regardless of the digital channel those customers prefer.
By focusing on developers, banks also enable “long tale” benefits. That is, by encouraging developer communities to adopt their APIs, organisations can pursue parts of the market that wouldn’t normally be worth the attention. The cost to pursue these market segments directly may be prohibitively high, but by enabling ecosystem participants to help spread its services, a bank can still make strides.
Don’t think about owning the experience—think about being everywhere
Many legacy banks are accustomed to being front and centre throughout the entire customer experience. This can be misguided, as it limits the range of possible interactions with customers.
Instead, banks should visualise value chains that consider a customer’s full financial journey—not just banks accounts and transfers but also home mortgages, auto loans, university expenses, investments, and more. A traditional bank may not be able to successfully service all of these needs without significant time and investment, but APIs make it simple for a bank to partner with others who already possess this expertise.
Instead of attempting to own the entire customer experience by forcing customers toward a branch of a given application, banks should work with developers to build open APIs that allow the bank’s capabilities to be inserted into any digital context. That is, a banks needs to meet customers where they are.
In some cases, the bank may be front and centre, such as when a customer uses the bank’s first-party mobile app, but in other cases, the bank may play a supporting role in the experience. Consider banks that have used APIs to create social media chatbots that help customers do their banking from within a social media experience, for instance. As such strategies demonstrate, the point isn’t to carve out and own specific channels—it’s to make a bank’s services available across any channel or value chain where the bank can provide value to customers, either with its own services or by combining them with those of partners.
The time to accelerate is now
There is no mistaking that banks may face big changes. Simply releasing a mobile app or translating an old business model to a new device is unlikely to cut it—not with digitally-native competitors both gaining momentum and facing conditions that are arguably favourable to their continued ascent. And the digital natives aside, no bank should assume its competitors won’t make the digital leap and leave the rest of the industry in the dust. Banking is ultimately about trust, and on this front, startups may not be able to match incumbents and their long histories—but if one of the incumbents combines its advantages in trust and reputation with the innovative attitude and speed of the digital natives, slower-moving banks may fall irrevocably behind.
This is why it is important that banks pick up the pace. No organisation wants to become the Blockbuster of its industry, turned from industry heavyweight to cautionary tale by a more nimble competitor.
Though the task may be big, banks can accelerate their progress both by focusing on customer needs rather than existing models and by leveraging APIs as opportunities for new businesses and partnerships, not just regulatory compliance and IT modernisation. Above all, they can move faster by embracing developers as key actors in the value chain. Digital banking is still in its infancy, and the vast majority of opportunities are still unexplored. Banks that continue to lag will likely face an increasingly tough road, but those that combine their legacy strengths with today’s customer-focused, agile approach to software will have a chance to lead.
Rob Parker-Cole, Digital Engagement Lead, Apigee
Image Credit: MK photograp55 / Shutterstock