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A View From INSEAD
Harnessing APIs and the open banking opportunity
Professor Jean Dermine
Jean Dermine, Professor of Banking and Finance at INSEAD, Programme Director for both Risk Management in Banking and Strategic Management in Banking programmes, discusses how technology is enabling new banking business models and how financial firms should adapt.
How is digital disruption affecting banks globally?
Recently, we’ve seen a wave of digital challengers emerge in the banking sphere. These competitors have embraced mobile and social technologies to create differentiation, using digital platforms such as online portals and smartphone applications to offer customers faster, simpler and more personalised banking experiences.
In response, most banks and financial institutions have moved rapidly to embrace digital and evolve their offerings so that customer experience can play a more central role. At the very least, most have significantly upgraded their web and mobile technologies and are using innovation in payments to help them create new products and services.
Where does the rise of open banking fit in to the picture? What kinds of customer experiences can it help banks deliver?
Regulations are changing ownership of customers’ data, such as bank account balances or transactions from banks to the customers. It allows them to become the new market-makers. This is reshaping sectors and changing how organisations compete. Success in this new world depends on how well and how fast banks can respond.
But the problem is that banks have not been known for their ability to act nimbly in response to changing market conditions and customer preferences. There are good reasons for this, of course. For starters, banks are highly regulated and many run their services on complex legacy systems that make change difficult. Most banks have also preferred to rigorously control all aspects of production and service delivery when bringing new products to market.
But now many banks are starting to realise that they must change their mindsets and adopt the habits and culture of the more agile ‘digitally native’ companies if they are to succeed in the digital economy. This could mean creating their own incubators where they pursue agile development, or hosting ‘hackathons’ to foster intensive digital collaboration. It could also mean moving to an ‘open banking’ model where banks use application programming interfaces (APIs) to deliver the services of multiple third parties.
How can open APIs enable banks to deliver more innovative and customer-centric experiences?
API technologies allow banks to securely connect their customers with just about any predefined service, application or database. So, delivering to clients via an API-based service – directly or in partnership with a third party – can allow banks to create new revenue streams and broaden their core value propositions in more agile ways.
The open banking model also allows banks to ‘test the waters’ when it comes to delivering new products and services. Depending on customers’ responses, the bank can decide to invest in the infrastructure needed to create the product or service itself, or continue down the partnership path.
Another reason for banks to take this model seriously is the threat of the tech giants - the likes of Google, Amazon or Facebook - getting serious about financial services. That would bring about further disruption for banks to contend with.
Can you give us an example of this trend in action?
Here in Asia, we’re seeing key financial hubs like Singapore invest heavily in financial technology, or FinTech. That’s helping to foster an environment in which many innovative financial services providers are evolving, looking for established platforms through which they can reach a wide client base.
DBS Bank recently took advantage of this to launch the world’s largest banking API developer platform. The platform makes a wide array of APIs available – currently 155 across more than 20 categories, from fund transfers to real-time payments – that other brands, corporates, FinTech companies and software developers can plug into.
So far more than 50 companies – including household names such as AIG and McDonald’s – are involved in the DBS programme. It’s a development that has the potential to significantly accelerate DBS Bank’s digital ambition and customer impact.
What challenges does the open banking trend present?
There are inherent risks in sharing data, which is why it is critical to develop good governance processes that support protections for personal data security. Right now, the development of such processes is pretty uneven from region to region due to regulatory divergence. Nevertheless, banks must put a clear strategy in place for determining the regulatory and legal arrangements they need to make open banking succeed.
This includes requiring fintech partners to demonstrate the requisite security measures to obtain bank accreditation to be a trusted third party.
A new set of skills is needed to proactively manage the banks of the future. What kind of strategic leadership capabilities best support innovation?
New kinds of strategic thinking will be needed to drive the platform-based model that enables open banking and blends product development with IT operations. Senior leaders will also need to collaborate holistically to embed the new approach and ensure it succeeds.
It’s important that organisations get ready because more change is coming – disruption has only just begun. Automation, integration and big data tools are all merging to give banks the opportunity to make critical decisions with more accuracy than ever before. That means the shape of organisations is changing dramatically and so are the capabilities needed to succeed in this new environment.
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