Digital Transformation and the Rise of the API Economy​

 For the banking sector, 2020 will be remembered as a difficult year packed with obstacles and lessons learned. While the internet and mobile banking were gaining traction before the pandemic, the worldwide crisis made going ‘digital’ the sole option to reach out to customers, engage them, and service their requirements during lockdowns, making it more about a bank's actual existence than a box to be ticked. Banks must adapt to be relevant, prosper, and grow as customers increasingly turn to digital alternatives.

The growth of the API economy is another key trend linked to digitalization. Open banking, facilitated by open APIs, is now firmly established in financial services, giving clients flexibility over what goods and services they consume, including partner products, as well as from other third parties. This indicates that the purchasing decision might come from a third-party source rather than the bank. Third-party service providers, huge IT corporations, and fintech are all vying to become customer-owners in this new environment. 

Despite these very real hurdles, banks still have the strongest starting position since they have volumes of customer data, and also share their customers' trust, which is the most valuable asset in acquiring and retaining customer loyalty.

The Changed Contexts that are Driving Banks

There are three realities that banks must deal with today: first, significantly altered customer expectations; second, an equally altered competitor landscape that has spawned non-traditional, new-age, and tech-led businesses; and third, the increased power of collaborative ecosystems that use various types of technology to provide better customer experiences.

These developments occurred in less than two decades, and although customers previously had to visit a specific bank branch, technology and digitalization enabled banks to begin centralizing processes, making them branch-agnostic and allowing clients to be served between branches. This was the first step toward what we now take for granted: the requirement for excellent customer experiences across the board, and not just at a particular location.

Banks, on the other hand, will have to figure out how to leverage the trust capital that their customers have invested in them and strike a balance between physical and digital presence. Simon Kucher & Partners revealed insights in a recent study on post-pandemic banking behavior that demonstrated that today's customer wants both. 54% said they would "only" open a new account with a bank with physical branches, 26% said they would move some or all of their business to another bank if their bank branch closed temporarily, and 65% said they would take some or all of their business to a competing bank if their bank branch closed permanently. Customers, on the other hand, are less inclined to stick with banks that offer superior digital experiences, according to the survey.

Matching Customer Expectations – Going Beyond Functional Needs to Meet Emotional Needs

Customers' perceptions of how they transacted with their favorite brands compared to their primary banks were revealed in a Deloitte financial survey published in 2018. Two years ago, 67% of customers said their favorite companies consistently improved their experiences and gave higher value; just 49% thought the same about their banks.

Customers' expectations have grown to the customer where banking can be done while doing other things, such as boarding a flight or queuing at a coffee shop. The expectations are for speedy service, the best offers when compared with others on the internet, while at the same time offering unobtrusive, ubiquitous, and immersive banking.

Customers are increasingly seeking more value from their service providers, and banking is no different. They also want greater control over their banking, extending beyond statements and accounts to demand immediate access to the products and services to which they have subscribed. That is the promise that open banking aspires to provide.

Enhancing Positive User Experiences by Developing an Experience-First Mindset

Customer expectations are only going to rise as technology and service provider options expand, banks must adopt a 'Experience-First Perspective,' shifting away from the old goods and services mindset.

Banks must transition from banking-as-a-product, where the focus is on selling conventional goods like loans, credit cards, and money market accounts, to banking-as-a-service, where they become plug-and-play services through the use of APIs and move to open banking, in the short term. Banks, on the other hand, must progress to become omnipresent, cashless, and integrated into consumers' daily lives in the long run. When banks use a technological landscape characterized by a customer-centric IT strategy supported by APIs, analytics, cloud, and microservices, they can make this paradigm change toward banking-as-a-lifestyle.

The current state of competitiveness is something that few banks could have predicted. Small and differently positioned challenger banks are already household names in several areas of the world. Fintech start-ups are eating away at various financial services as a result of the gradual unbundling of banking services. The proliferation of payment apps, the sudden interest in the traditionally underserved SME market, and the personal finance management space – all of these factors contribute to increased competition for banks, which are facing a double onslaught from new challenger banks on one side and fintech on the other.

The way forward is for banks to make a conscious decision about whether they want to become utilities or innovate to become "everyday banks." In other words,  to be low-cost, high-efficiency utility providers, or evolve to becoming customer-owners, providing not just their own products but completing the customer’s experience cycle with a host of partner products as well.

The Glue that Can Make It All Possible – Technology

Most banking IT environments are naturally complicated, and legacy core technology systems, which are often antiquated but cannot be changed due to the huge amounts of customer and product data they retain, continue to provide a difficulty. As a result, banks have been unable to adapt to the changing environment around them, resulting in an unsatisfactory and unwholesome customer experience. It's not through a lack of effort or understanding; according to the Deloitte Center for Financial Services Global Outlook Survey 2020, 48% of banks have already implemented the digital transformation of their business services, with another 44% in the process.

A digital core that can organize customer experiences is required for a successful transition. Such options are being seriously examined. What banks require today is the hollowing out of the current core and the establishment of a digital core referred to as the System of Engagement in comparison to the System of Records in the back office. This digital core is located beneath the channel layer, which is used by banks to communicate with their clients. This simple and successful technological architecture, which sits above the back office and below the channel, offers the essential intelligence to engage with customers and allows for prescriptive actions, bridging the top and bottom levels. This API-based layer is designed with customer-centricity in mind, enabling banks to provide world-class customer experiences.

This allows banks to streamline their product offerings, establish ecosystems that can deliver value to clients across a wide range of demands, and hence provide seamless and outstanding customer experiences.

Delivering True Value 

Transformation must be properly thought out and not done haphazardly with short-term profits in mind to fulfill customer expectations in a changing environment with increased competition. A focus on exceptional customer experience and good ecosystem management is required for digital transformation to function in banking and financial services organizations. A digital core is required for creating great customer experiences, and equitable value allocation among ecosystem partners is required for efficient ecosystem management.

Regardless of whether the banking is for individuals or corporates, banks must ensure that the necessary technologies are in place to make digital transformation work to offer not just products and services, but outstanding end-to-end customer experiences.