Somewhere, a banker sits in his office, shoulders slumped, looking at the newest report about how many consumers have turned to digital-only finance — and how many more branches his bank will need to close.
Or maybe the report includes the newest numbers about how few millennial customers the bank has. Perhaps it’s about how much market share they’ve lost to Stripe or Mint or Fundbox or Plaid or some fintech he’s never even heard of before. It might be all of these things at once. Whatever it is, it causes the banker to stare vacantly, wondering how he got here and what he can do to right the ship.
Sound grim and dramatic? Consider the facts:
- Thousands of bank branches have closed in the last few years as consumers have embraced digital approaches to managing their finances.
- Millennials are more open than past generations to non-traditional banking and financial services providers, and millions of them don’t foresee they will need legacy banks in the future.
- Given the amount of investor money pouring into fintechs and digital challenger banks, and the billions in revenue these challengers have already grabbed from big banks, many of those millennials may be right.
- In deposits alone, the largest banks are expected to lose billions over the next decade as current customers defect to new options.
And these challenges, daunting in their own right, are only one dimension of banking disruption — there’s also, among other things, the spread of open banking regulations, such as PSD2 in Europe. Banks have long held monopolies over transaction capabilities and customers’ data, but these regulations often require banks to share this functionality and data with third parties whenever customers consent. One result of open banking is thus that challenger banks and fintechs can now compete directly with legacy banks as payment service providers, upping the competitive stakes even more.
To top it all off, consensus is forming among commentators and thought leaders that banks are reacting to all of this too slowly. In a Fall 2018 Forbes article, for example, Accenture senior managing director Alan McIntyre, a co-author of a recent report on challenger banks, noted that “only a minority of incumbent banks” are preparing themselves for a digital future.
“Most [banks] are trying to maintain their traditional banking role by adding a digital overlay, perhaps because more significant change is a very tough ask,” McIntyre said — a sentiment that matches what Google Cloud’s David Andrzejek observed among banking attendees at the recent Sibos conference in Sydney.
So if it sounds grim, that’s because, from a certain angle, it is grim. But only from a certain angle. From many other angles, disruptions are actually opening banks to new opportunities.
Applications programming interfaces, or APIs, are a key component in turning disruption to opportunity. APIs enable enterprises to make their core capabilities — such as a bank’s transaction functionality — easier for developers to leverage and reuse, which can in turn make it easier for those enterprises to launch new services, forge new partnerships, and develop software faster and more efficiently. To compete in today’s digital economy is in part to skillfully create, manage, and leverage APIs.
To illustrate, we on Google’s Apigee team have assembled several stories from banks we’ve worked with — banks whose efforts show that though their industry is changing, the landscape is also ripe for innovation.
When Requirements Change, Opportunities May Open
Though open banking regulations require that banks make business capabilities and data available via APIs, banks are free to narrowly meet such requirements. Technical requirements for API implementation are still often open to a degree of interpretation, and individual banks are still free to make their APIs easy to use (and potentially useful for more than compliance) or to view them simply as new requirements to check off.
Whereas legacy methodologies usually encase functionality in hard-to-update monolithic applications, API-first strategies package business capabilities in modular bundles that can be quickly harnessed, combined, and reused. As consumer preference shifts to new services, banks can leverage APIs for greater responsiveness and agility. Banks that focus only on regulations may miss opportunities to turn their API investments into enablers of new services and business models.
For example, leaders at Allied Irish Bank* (AIB) have found that plans for PSD2 compliance could complement their plans for digital transformation. “We had a digital strategy in place that was API-led,” said John Daly, digital development manager at AIB, in an interview. “Our goal was to make it simpler and easier to consume our own services in-house.”
“Of course, our initial strategy had an eye on the regulation, but we always viewed it as a strategic opportunity to move into the API world, rather than [as] a burden,” he added.
Ecosystems Bring the Banks to Customers
With many customers doing their banking on-the-go, banks can no longer count on branches to be hubs for customer activity. Indeed, banks can’t even count on their mobile apps to be central hubs — not with customers increasingly expecting cohesive, seamless experiences in which an extra tap or swipe, such as one to open a new app, may be a bridge too far.
The biggest opportunities in today’s digital economies rely on ecosystems of software and the developers who leverage them to create compelling experiences. Banks can no longer funnel customers toward specific channels — they have to be able to establish a presence in any channel.
Western Union* approached this challenge creatively by leveraging APIs to be not only accessible on the devices customers carry but also increasingly available in the experiences customers prioritize. The organization opened its core money transfer service via APIs, for example, then used those APIs to build a chatbot that allows customers to execute money transfers from within a social networking experience.
A prime example of harnessing software to meet customers where they already are, Western Union’s approach countered fading customer reliance on physical branches by, as Google Cloud’s David Andrzejek put it, “opening a ‘branch’ inside a social network!”
Leveraging IT Agility for Better Services
In emerging or less mature banking markets, APIs can play a vital role in modernizing services.
For many years, for example, Mongolia’s banking customers have needed to visit branch locations for even the simplest of tasks — changing a PIN number, requesting a credit card, and doing other things that customers in most other regions are accustomed to completing online or, at most, with a phone call. With customers throughout Mongolia waiting an average of nearly half an hour per bank visit, leaders at Khan Bank,* a major institution in the country, wanted to change things.
Khan Bank had been relying on legacy applications that took months to update — untenable in a world of constant digital iterations and improvements. To modernize, the bank exposed its core capabilities via APIs, which enabled its developers to embrace continuous delivery models for the first time. Today, thanks in part to the bank’s transition to APIs and the speedier development methodologies they support, about 90 percent of its customers’ transactions occur through internet banking, mobile banking or SIM-based banking. Wait times in branches have declined as more tasks can be accomplished online, and Khan Bank sees 100,000 new online banking transactions monthly.
APIs have also helped Khan Bank to improve a variety of specific services, from automating its previously protracted visa processes for embassy customers to streamlining supply chain payments for its mining customers. The latter is particularly significant because mining is one of Mongolia’s most important industries.
Focus on Developers and Customer Experiences
As we’ve seen, traditional banks may appear under siege from certain angles — but from other angles, the opportunities for growth and innovation have arguably never been so abundant. It’s up to banking leaders to decide which angle will define their strategic perspective. It’s clear the status quo is no longer working for many incumbents — but luckily, it’s also increasingly clear that the right path forward starts with a focus on great customer experiences, the developers who build those experiences, and the tools that empower those developers.
*Allied Irish Bank, Western Union, and Khan Bank are Apigee customers.
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