The digitalization of the banking industry presents both threats and opportunities for the UK’s smaller banks. The most successful of these alternative players will be those that meet customers’ evolving expectations and reach new markets using cutting edge technology.
We believe that small banks can avert the most pressing threats and maximise on opportunities.
We’ve spoken to many seasoned CIO’s, digital leaders and API integration consultants, and spent thousands of hours researching how smaller banks can use API’s and Microservices to accelerate digital adoption. It’s clear to us that these types of organisations will benefit most from digital integration.
FinTechs and TechFins
FinTech offerings generally fall into two categories: They streamline access to traditional financial products and services or they create new products and services by bypassing traditional providers. Both pose a threat to banks – especially smaller banks – which can’t afford to capture these innovators by investing in them or buying the outright.
TechFins are a different kind of beast. These are the huge, technology-led businesses that are using their technological prowess and consumer reach to extend their businesses into financial services. Apple, Amazon and Ali Baba are three examples that have already made significant financial product introductions, and it seems likely that several of their competitors will do the same. For established banks these tech giants constitute a new threat. The CIO of nearly every bank, regardless of size, must envy the newcomers’ modern technology platforms., Even the largest banks will struggle to match them on scale. Smaller banks have even less chance of competing.
Of course, there is more to banking than scale and processing power. The established banks still have numerous advantages – large pools of interest earning accounts, deep penetration into both consumer and business markets and institutionalized knowledge of how to measure, manage, package and profit from the risks associated with borrowing and lending. However they cannot afford to be complacent in the face of these new forms of technology-driven competition, and an increasingly technology-driven consumer population.
Big banks have always posed a treat to their smaller rivals, and the digitalization of the industry is increasing that threat. The main reason is the difference in investment capacity between large banks and small banks. As already noted, the large banks are able and willing to fund and acquire FinTech start-ups. The biggest banks’ enormous IT budgets (for example, Citigroup’s $8 billion in 2018) also allow them to run digitalization projects at a scale that would be inconceivable for the smaller players. With these financial resources at their disposal, the big banks can afford to keep plugging away until they find successful formulas for more deeply engaging their customers or opening new markets. The smaller banks, drawing from shallower pools of investment funds, must make every dollar count; they can’t afford costly mistakes.
On the other hand, the established banks have to contend with cumbersome systems and processes which might not lend themselves to cutting edge tech and applications. This gives the new and smaller contenders an advantage of agility.
The Regulatory Imperative
Regulations are the wildcard in technology investment. Regardless of a bank’s strategy or plan, it has no choice but to make whatever investments are required to achieve compliance with the rules established by the regulators who have the power to shut it down. This existential category of investment is a burden on the largest and smaller institutions alike. The former would have older, more complex and less agile systems to work with, but the smaller players would have to spend proportionally more time and budget to meet regulatory requirements – potentially at the expense of the digitalization work vital to their business.
Enhanced Customer Experience
So, what can a small bank hope to achieve with a well-conceived digitalization program? First on the list is making the banking experience more compelling for its existing customers. Carefully designed mobile applications shine in this domain, ideally delivering the bank’s capabilities to the customer regardless of time or location.
Value Chain Participation
Creating secure ways to present the bank’s capabilities over the internet paves the way for the bank to be integrated into other workflows valued by its customers. For example, for a customer who is executing a major purchase, the ability to integrate her account balances or available credit lines into the purchasing process may make the purchase easier and might even allow her to get improved purchase terms.
New Modes of Distribution
Here is an example derived from work that Integrella did recently for a client in a non-bank financial services business. This company’s internal capabilities allow it to price, sell, issue and manage financial instruments. Until two years ago, all of its business was conducted under its own brand name. In a major strategic growth initiative, this client decided to provide its capabilities on a white label basis so partners in other industries could offer these same products under their own brand names. The potential for banks – including smaller banks – to pursue similar strategies is clear. In this case, FinTechs focussed on streamlining (as opposed to disintermediation) may turn out to be natural partners for smaller traditional banks.
Applying the Technology
Creating Composable Services
Banks may choose to decompose its systems capabilities into distinct services to create more convenient options for their customers. For example, the processes for on-boarding a new customer, opening a new account, granting a new loan or accepting a deposit or payment could be packaged as a distinct microservice fronted by an API and allowed to interconnect using the bank’s application network. This kind of architecture transforms the bank’s systems into building blocks for innovation.
Providing Access to Partners and Customers
Individual services, as well as higher level business functions that have been built by assembling them, become outlets through banks can provide value to customers and partners. They do this either through the bank’s own applications or through third party applications and business processes that make use of them. To achieve this, the services and business functions, are exposed over a secure, scalable platform providing complete management control over how and by whom they are used. This is all accessible through APIs.
Achieving Operational Agility
To complement the change in business application architecture, banks will adopt tools and processes to accelerate building, testing and releasing changes to their microservices-based suites of functionality. They will also automate managing the environments in which these services run to provide advanced cloud-compatible operational capabilities. These include automatic scaling and fault detection and resolution, capabilities that have been developed and perfected. When deftly implemented, these DevOps-driven techniques and the tooling that supports them position the bank to respond effectively to changes in demand for its services and the functionality that those services provide.
If you’re in the banking industry and would like to find out more about our research, we’d like to offer you a free consultation in order to share our thought leadership with you.
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Integrella has been focusing on digital integration since 2015. We continue to invest in making our own business digital through our employee and customer portal projects. In our API lab we have implemented our cloud-ready API reference architecture and undertaken an exhaustive study of how best to meet requirements in non-functional areas such as security, performance, scalability and availability. We can bring all of this experience and many associated artefacts to bear on client projects of all sizes and shapes.
We have completed numerous successful engagements for our FS clients, including integration capabilities assessments, API Factory enablement, technical strategy development and API delivery. Unique among our competitors, we also provide operational support as a managed service. Built on our proprietary monitoring technology, this service lifts the burden of providing out-of-hours support of their integration platform from our clients’ IT teams, allowing those teams to be optimised for delivery of business value.
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