Allan Brown, VP and GM, Digital Community Markets, Finastra, suggests that for financial institutions to gain a key digital advantage, they should opt to layer their cores with APIs rather than rip and replace their existing technologies.
Banks and credit unions understand that legacy cores are holding them back from reaching the digital superiority account holders demand. Financial institution executives also understand the other potential side of that equation. That’s the one where a lengthy evaluation leads to an even longer transition period, as costs spiral upward and the organization hangs on by their fingertips, waiting for the transformation to yield results.
Still, the advantages of legacy system upgrades are clear, including a more holistic view of customer and member relationships, as well as greater compatibility with the digital solutions consumers want to use. But what if many of the same results could be achieved quicker, giving more time to the dreaded core system evaluation and transition process?
To gain the digital advantage, many banks and credit unions are opting to layer the core over the rip-out-and-replace approach.
A simpler way to start the digital journey
Fifty-seven percent of consumers now prefer Internet banking to in-branch services, and 47% consider mobile banking apps their new branch in a pocket. An emerging 21% even prioritize the use of chatbots and automated voice assistants over in-person contact.
To meet the rising demand for digital access to banking services, some of the larger financial institutions are spinning off all-online subsidiaries. These all-digital ‘branches’ function solely in cyber space, allowing account holders to access accounts and perform transactions from anywhere they can use the Internet.
To create a branch in the cloud, financial institutions often use a Banking- As-a-Service (BaaS) partnership. A BaaS provider delivers access to application programming interface architecture, more commonly known as APIs. APIs plug into banking core systems and support a host of digital services, by streaming data back and forth between the bank’s core systems and the new digital interface.
The approach enables rapid speed to market, with lower costs. Research by Oliver Wyman reveals a startling difference in customer acquisition costs for all-digital banks when compared to traditional financial institutions. Many existing banks spend as much as $150 to acquire a new customer, a stark contrast to the approximate US$30 cost incurred by all-digital challengers.
However, spinning off a subsidiary is not the simplest or fastest solution for most banks, particularly those with deep community ties and strong customer or member relationships. In fact, consumers are seeking more than check deposits and bill payments from their financial institution. An increasing number are also looking for a partnership.
J.D. Power reports that 78% of banking customers would like to receive financial guidance from their bank or credit union, and 58% want to receive it through the organization’s website or mobile app.
To expand deep relationships like these into the digital realm, banks and credit unions can take a page from the BaaS notebook. Adopting a Bank-As-a-Service model to Digital Transformation leaves the legacy core as a system of record and provides digital functionality by layering on the solutions that are necessary to keep financial institutions competitive.
The flexible, scalable alternative to core system replacements
Despite tight margins, financial institutions are facing the need to rapidly evolve digital capabilities. Prior to the COVID-19 pandemic, 85% of business leaders across multiple industries believed they had only a two-year timeline to make progress on digital initiatives before they fell behind swiftly-moving competitors. The COVID-19 crisis has shortened that runway.
Stay-at-home mandates have forced years of digital adoption to occur within the span of a few months, according to J.D. Power. Approximately one-third of consumers who used digital banking services during the pandemic actually plan to increase their usage of online and mobile banking in the months and years to come.
However, a willy-nilly approach to digital adoption in which the financial institution implements a multitude of digital services all at once is likely to result in high costs and potential for failure. Instead, it’s wise for banks and credit unions to start first with the one or two initiatives that will account for the biggest portion of revenue and efficiency gains.
The advantage to an API-driven strategy is the infinite scalability, meaning that a bank or credit union can start with the services that make the most sense and scale upwards as time and circumstances demand.
For example, a financial institution firmly rooted in online services may not be fully meeting the needs of the increasing number of consumers who want to bank through a mobile device. While mobile banking was the least-used banking channel in 2008, it is expected to grow at a CAGR of 2.83% by 2024, the highest among all channels.
With APIs, providing new functionalities like this is a plug-and-play process, allowing for rapid time-to-market. Then, as needs change, the bank or credit union is free to add additional services and products to the core.
Slipping the loop on the iron-clad core contract
While BaaS models allow for greater agility and rapid expansion to the digital product line, what happens to the financial institution locked into the iron-clad core contract? Sixty percent of banks indicate that their core provider is slow to provide innovative solutions or upgrades, according to a survey conducted by Bank Director.
Thanks to the product limitations of many core providers, banks and credit unions are missing out on lucrative opportunities. For example, small businesses are currently paying US$500 billion to non-traditional providers for services such as accounting/bookkeeping, invoicing, bill payment and payment acceptance services.
Simultaneously, nearly a third of financial institutions are facilitating commercial clients from retail platforms that lack business-specific products and services, according to Aite. Forcing businesses to use products designed for consumer needs results in low satisfaction where 67% of SMBs say their bank doesn’t offer services they’d be willing to pay money to receive.
The API-led approach makes it simple for banks and credit unions to slip the loop on iron-clad contracts by standing up a separate, business-only solution with a new innovative provider. Fifty-seven percent of large and mid-sized banks are currently taking this approach to accommodate commercial clients, migrating business customers on to commercial platforms that have the capacity to fill SMB product and service needs.
The key here is that banks and credit unions have choices when it comes to digital adoption, and many options for slipping the noose on restrictive core contracts as well as the constraints of legacy core systems. In the modern era of banking, digital is the new core, offering faster time to market and far less risk than replacing legacy systems.
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