Banking and payments are no longer limited to banks, and it’s a transformation that’s only just begun. People want banking integrated into their daily lives and payment services that eliminate friction. In this blog we take a look at what banks need to do to adapt.

Almost all bank systems and processes are firmly rooted in the past, reflections of an analog age when computer systems mimicked manual processes and physical artifacts. The best roadmaps to digitalization won’t perpetuate this, they’ll plot an all-new journey.   

Digital technologies and open banking are changing banking forever. People need banking, but they don’t need banks per se. They’re showing indifference towards banks by avoiding them – over 70% of bank interactions are now digital.* When people visit a bank it’s usually to receive specialist advice, or perhaps access safe deposit boxes, rather than to complete transactions.

Payments, like banking, is a service business. Customers want frictionless payments delivered in context. Amazon excels at this and is gaining market share accordingly. Amazon Pay has seen tremendous growth in active merchants and revenue since 2017, and their markets globally showcase double-digit growth. Amazon has travelled light years since its origins as an online bookstore.  

Open Banking, Instant Payments and Mobile  

Open banking initiatives around the world seek to align financial services with the real world by putting bank customers in control of their own data. Technically, this is enabled by application program interfaces (APIs) which empower customers to combine data from accounts (even at different banks) and integrate payments into retails apps. This simplifies shopping, but that’s just the tip of an iceberg.

Open banking, APIs and real-time payments are driving impactful innovation throughout the banking industry. New market entrants offer a tech-first approach to banking that’s continually raising the bar of customer expectations. A “storm of creative destruction” is raging throughout the global industry and is redefining what it means to be a bank.

For incumbent banks, the implications of this turmoil are plain: Digitalize or die. This may sound blunt, but it’s what banks need to do to “future-proof” against an uncertain future. Too many banks are hampered by their heritage. Branch networks that once were the pride of high street have become quiet and costly; technologies that once offered scale and efficiency have become unwieldy and expensive to maintain. Worst of all, the ”stovepipe” technology infrastructure encourages a conservative culture which throttles innovation and improvement. What is needed is revolutionary thinking. The current state of the banking industry shows that a proud heritage does not ensure a prosperous future.

Thinking Outside the Branch

Banks globally need to modernize, and the vast majority indicate they intend to do so. Transformation may seem like a Sisyphean challenge from Greek mythology – rolling a boulder uphill, the harder you push the stronger the countervailing forces become, and the boulder rolls back down the hill. This mythology highlights a fundamental truth: Banks don’t need to push harder, they need to do things differently and do different things.

So where should they start?

Faced with an uncertain future banks need to adapt by modernizing a triad of investments – core, channels and payments. These terms are in themselves “bankspeak” that are of no obvious relevance to customers, but they’re essential underpinnings for sustained business success. Any bank platform that does not revolve around the customer will become irrelevant and fail. But, with modern technologies – especially APIs – these three stalwarts will converge as banks shift focus and put the customer front and center.

A Blueprint for an Uncertain Future

Now let’s consider how the three key pillars can evolve to create a bank that is customer-centric, future-proof, and infinitely flexible.

• Core. Legacy cores are typically closed monolithic repositories of customer/account records with a transaction engine. In the digital age, the core needs to be open and nimble, process in real-time, communicate with a large and growing number of devices, integrate easily, and support any number and variety of accounts and products. Modernized banks harness the power of data to offer customers products and services that anticipate and improve their financial wellbeing. Only a truly digital core can facilitate personalization and seamless deployment across all channels, and potentially, third parties. Banks with scalable and open technology can use APIs to develop new revenue streams, create unique offerings, interact with third parties, launch new value-add products, monetize services, and more. Modernization translates to a competitive advantage that enriches the customer experience and the bank’s bottom line. With the right platform, new business models are limited only by the imagination.  

• Channels. Mobile, wearables, and augmented reality technology are blurring the distinction between reality and digital. Banks must respond with a deeper level of customer engagement that facilitates choice and self-service, supported by audio, video and humans where appropriate. Banks must become data-driven so every interaction on every channel is an opportunity to improve the customer relationship. Most banks have already implemented virtual assistants, while artificial intelligence (AI) and machine learning (ML) promise a whole new world of possibilities regarding customer insights, service, and engagement.

• Payments. Once the preserve of banks, payments are undergoing a global revolution that’s far from over. The rise of real-time payments shows us that people value the convenience, immediacy and security of alternative payments. Being able to initiate, validate, route, clear, settle post, and inform – all within seconds and seamlessly for the customer – enables the transaction itself to become cheaper, certainly less risky, and improves the client experience. Table stakes for a modern payments hub include a central repository of transactions with API access, full transaction history, optional routing and the capability to be augmented with rulesets, limits, fraud, anti money laundering (AML) and velocities. Legislation is encouraging new market entrants, so if your bank doesn’t deliver modern payments, another firm will – alternatives that not only threaten existing bank revenue streams but also the loss of direct customer relationships.

One thing is certain in these uncertain times: The time is now for banks to transform.

* Statistics from McKinsey 2019