How sandboxes and prototyping labs enable banking innovation

Banks are looking for new ways to come up with fresh ideas and be more agile in their product development.

Often they are hindered by their legacy technology stacks, which limit their ability to go fast. Overcoming this obstacle often requires a far-reaching core system transformation. Then again, banks can’t simply jump and surgically remove the heart that keeps their business alive.

In this blog I will discuss two ways banks can accelerate innovation and propel themselves into the digital world: API sandboxes and rapid prototyping labs.

Simply put, a bank (API) sandbox is a closed IT environment designed to experiment safely with new solutions – with lots of flexibility, irrespective of governing regulations. It provides an environment for innovative financial institutions to mimic a production environment and simulate the responses from the systems it communicates with. The sandbox allows external developments to be created and tested, completely isolated from the bank’s production environment.

The ongoing digital wave and open banking initiatives have led to new players and complex ecosystems. New partner collaboration models have emerged from that evolution but managing those can quickly become a labyrinth - with new levels of risk.

Here’s where sandboxes shine. Our experience shows that sandboxes help innovators overcome these challenges, offering a playing field to experiment with new financial products or services. The concept allows new software to be built efficiently with minimal risk and overhead. While in theory the sandbox is a “standalone” playground, it actually complements in-house prototyping or innovation labs, making­­­ it easier for banks to collaborate with fintechs.

Secondly, once some key ideas have been identified and validated in a sandbox, banks may want to represent their ideas in a more tangible and advanced form. Prototyping, a key design practice, lets them do just that.

Prototyping labs can be set up quickly. The return on investment comes quickly too. It gives immediate, valuable feedback and is an essential toolkit if you want to develop new services rapidly.

High quality prototyping labs provide an inherent, continuous integration and continuous delivery (CI/CD) value chain. Prototyping lets you move the best innovation ideas from ideation to production in an automated way, without the overhead. Using novel deployment techniques, banks can create prototyping or proof-of-concept (POC) environments ad-hoc and on demand. Solutions are developed either by the bank or by registered and onboarded developers, internal or external, who can use the bank’s prototyping framework as well as a selection of available tools and services.

What’s in it for banks?

After a basic validation of the prototype solution, banks can invest more time and resources in a first version of the product, gradually opening their back-end system through additional integration points. Once a minimum viable product (MVP) is validated and accepted, it can be deployed and put in the market or made available in app stores, acceleration at its best.

Changing or updating legacy bank systems is a huge investment, and even then banks assume a considerable risk of compromised safety or business disruption.

Starting from scratch in a green field overlay using next-generation technologies is often a safer, faster, and more cost-efficient solution. In that perspective, labs help solve the two-speed IT dilemma, i.e., the mismatch between the high flexibility needs of the front-end and the required stability of back-end systems.

A blueprint for engaging services

Banks generally state that the main hurdles for true digital innovation are their complex IT systems and organizational structure. Valid points, but these can be countered by the novel collaboration models mentioned above. Ultimately, these can lead to centers of excellence and bank developer communities resulting in increased competitiveness and better quality of services.