Banks face a new challenge in the open banking age: How do they best use application program interfaces (APIs) to collaborate with FinTech firms and deliver new services to clients?
The API economy offers traditional banks several opportunities for innovation. To capitalize on these opportunities, Tom Eck, chief technology officer at IBM, said financial institutions (FIs) must think outside the banker’s box.
Last month, at the annual Sibos conference in Sydney, Australia, IBM announced the launch of its Open Banking Platform, powered by the company’s Watson program, and aimed at helping banks to embrace the changes brought on by the API economy and other open banking initiatives. The platform connects banks’ core legacy systems to the cloud, where they can collaborate with third parties and invest in new services.
As Eck told PYMNTS in a recent interview, the platform lets banks reinvent themselves by embracing APIs and pursuing innovation. It also allows for banks to more easily comply with financial regulations like PSD2.
One of the Open Banking Platform’s primary goals, he said, is to help banks restructure and transform themselves into market platforms. That way, they can provide additional services to developers and clients.
“The market platform is the ultimate destination that we are driving our clients toward,” Eck explained. “Banks are going to be increasingly seen as a collection of services, rather than physical locations.”
Connecting Cores To The Cloud
To meet consumers’ expectations, Eck believes that banks must connect to the cloud. The Open Banking Platform helps banks achieve this by integrating with legacy systems. The platform includes a layer, the foundation, that allows core legacy systems to operate as cloud-native platforms. He said the platform acts as a fabric into which a bank or company’s business logic can plug itself.
Eck said banking domain units — or, as IBM calls them, packs — organize the platform and help link a bank’s legacy system to the cloud. The initial PSD2 Payments Pack offered users a core-to-cloud service that delivered PSD2-compliant instant payment solutions. This solution gives legacy banks a more cost-effective approach to financial innovation.
“This is not a core replacement strategy; this [is] a core system revitalization approach,” he said. “You don’t really have a complete solution unless you are able to connect your core solution to the cloud.”
Converting Banks Into Marketplaces
Connecting to the cloud is just the first step in the open banking era, according to Eck. Banks must go beyond their traditional identities to become marketplaces that offer a range of products and services. By linking legacy platforms to the cloud and inviting third-party collaboration, banks have created marketplaces to explore the potentials of different products.
Banks that offer these marketplace features will need developers to fill those spaces with applications. Eck noted that the smartphone industry could provide a useful model for that. Android-based smartphones and iPhones are successful because of the many apps that are available for them. On the other hand, Microsoft’s Windows Phone was discontinued last year, largely because developers were uninterested in creating apps for the platform.
“Having an ecosystem that is enabled by an actual marketplace is what pulls third parties to bring content onto the platform, which increases the value of the platform,” he said. “It thus pulls in more customers, which pulls in [even] more developers.”
As more developers create apps for their platforms, banks can offer more value-added content. This will force banks to focus on monetizing these platforms to compete in the open banking ecosystem.
An API-Based Plan For The Future
The Open Banking Platform was initially intended to help banks comply with PSD2 regulations, as similar initiatives are gaining steam in the Asia-Pacific region, Israel, Australia and Hong Kong. In 2019, IBM plans to expand the platform’s offerings with features like artificial intelligence (AI), which would enable real-time lending functions. As new use cases emerge, the platform will also add connections to more banking systems.
However, banks should remember to stay focused on their customers in this changing market. According to Eck, consumers are more likely to value their banks’ products and services, not the APIs and platforms behind their development.
“There’s really no practical end user to [connecting] a mainframe with an API — that’s not a direct value to the customer,” he said. “[Banks] have to rethink the consumer journey and then figure out what technologies they can leverage — and all roads will lead to APIs.”
Banks must be ready for change as they experience their open banking transformations. Despite big changes in the market, APIs can keep banks focused on their clients’ needs as they pursue financial innovations.