Technology threatens European banking model

As I see it, traditional banks face some difficult decisions in trying to reach this market: they can make expensive multi-year investments in attempting to transform their legacy systems, while their margins and market share shrink over time, or they can embrace digital channels on a different infrastructure stack, with a different cost structure to roll out new products and services to reach new customers and compete with the new banking entrants. In effect, like the classic innovator’s dilemma, they need to be able and willing to disrupt themselves through a seperate business/spin-off brand.

So, the poor banks have to get costs down, provide more and better products (while the costs for development on legacy systems are painfully high) face non-bank FIs (described by Bain as ‘digital attackers’ by Bain) and allow third-party providers into their systems – without compromising security. And many bank’s squeezed IT budgets are largely given over to just ‘keeping the lights on’ (regulations, security and performance). A lot to do!

But hey, if banking is being disrupted, can’t banks fight back – ‘disrupt back’? At a recent conference of local government IT departments I was half-surprised by the very forward thinking of several leading councils who were ‘out there’ in terms of early adoption of new methodologies and techniques (Camden, Brent). Surely banks can also take advantage of the ‘emerging business models … using new technology to re-invent key elements of financial services’ that Deloitte refer to and can leverage their market position to defend and grow? A few relatively simple strategies can set payments innovation free from many of the constraints of the IT department.

1. Use PCI-compliant cloud-based services to massively reduce the capital investment needed to obtain new products. For example, if you want to introduce a new disbursement or purchasing product for your corporate or SME customers, using this approach massively reduces capital costs and time-to-market. You could consider bringing it in-house when it’s making money/proven in the market. A veritable App Store of payment products is available on this basis - even on a single platform - including commercial and consumer payment products.

2. Build in self-management and self-service wherever possible. Corporate customers want greater flexibility than many legacy payment programs can offer - often simple things like being able to change the country limitations on a particular card themselves or changing the promotion displayed on a corporate cardholder’s account page. Such simple requests can take ages on PCI-compliant websites looked after by the IT department and eventually clients may go elsewhere. But payment products that enable banks to offer this level of flexibility to its business customers while keeping the project request queue for more serious stuff, are available.

3. Evolve to an ‘open’ approach. Enabling your customers to self-manage and customize and enabling your own non-technical staff to customise and deploy to your customers could be interpreted as being more ‘open’. But the headline of ‘open’ is the technical IT matter of enabling easy communication with and manipulation of supplied functionality by third-party developers. As recommended by Gartner, the provision of APIs with, say, a payment product, is one way a bank can enable third-parties to do so and typically can be used to enable corporate customers to integrate the product with their CRM, for example. But for payment product development, APIs are too powerful to give to other than trusted parties - handling sensitive transaction/identity data - and this will often mean staying within the bank. But tools that enable transactional apps to be developed without compromising security – like the PayML extension of HTML from Ixaris that enables web developers to design and implement great UX without actually accessing the sensitive data (and without the limitations of tokenization) – are now available too. And soon there will be tools that enable non- technical staff to combine and customize different components from several payment products to create new payment offerings. An open approach offers huge potential for product development by those closer to the customer and free from many of the constraints of IT – just like apps in an app store.

These ideas are converging into the mainstream with coverage by Gartner, Deloitte, Bain and others for some time now. And they are no longer just ideas – the products are available. I think we will see more banks adopting some or all of the above approaches and ‘disrupting back’, to defined and grow.