The original version of this article appeared in Point Banque (in French).
At a time when fintech companies and open banking models are disrupting the industry, banks, slowed by the weight of their legacy tech stacks, are lagging. However, there is a solution to help them bounce back: API-zation.
To keep pace with changes in the way financial products are consumed, banks must be able to provide cutting-edge digital services at the same rate as demand evolves. Fast-growing neo-banks and online applications boost customer demand by offering powerful, consumer-centric services. The way they operate fosters innovation, and their flexible entry requirements have turned them into serious competitors for traditional banks. Combined with the success of fintech and the new EU competition directives, there’s little doubt that the industry’s historical models are being challenged.
Customers still value the relationship with banking advisors and physical branches, but how long will this last? In this fast-changing market, traditional banks face a challenge: their legacy systems, i.e., the set of core banking systems essential to their proper functioning, are increasingly outdated.
For instance, some major U.S. banks run their banking operations on platforms that emerged in the 1980s and 1990s. Developed in-house or customized to such an extent that they no longer resemble the original product, these cumbersome software systems require complex and time-consuming maintenance, undermining the resilience of these institutions. Challenges include migrating applications and data to the cloud, slow upgrades, and the cost of developing new products.
Banks’ dependence on these core banking systems is a considerable handicap, and dismantling them is costly and time-consuming. Historically, replacing these systems has meant years of effort and a significant financial commitment, with no immediate return on investment. There is also an operational risk, as the transformation of these tools is complex and can disrupt daily operations.
Updating core systems with APIs
How can banks adapt to change while taking into account the importance of legacy? The solution lies in the use of application programming interfaces (APIs). APIs enable a hybrid model rather than a complete replacement of older systems, and they allow for an open strategy. APIs also offer various functionalities: personal finance management, multi-banking, digital loans, protocol transformation, analytics, MBaaS, etc.
Banks generally operate in a closed system. They are the creators, producers, and distributors of their products. Opening up their information systems and sharing their customer data would allow third-party vendors to work on innovative solutions to integrate new applications into the banks’ core systems. Rather than relying on a team of in-house developers, a few partners, and private applications for innovation, this collaborative marketplace allows third-party developers to create open APIs, which the bank can use to be more flexible.
Many banks also currently struggle to move data across their multiple systems. They operate in silos, with each system corresponding to a specific banking service. API-zation unlocks this access to data and services for use by internal and external customers while meeting security and governance requirements.
With APIs, banks can digitize their customer experience without the heavy investment or slow implementation of changes. At the same time, they integrate a wider ecosystem of partners using a progressive and agile approach. As a result, they can quickly adapt and customize their service offerings to meet market demands, just like neo-banks. To this end, SopraBanking offers access to more than 3,400 financial institutions throughout Europe and a network of third-party providers.
In addition to increased efficiency and time savings, this is a unique opportunity for banks and fintechs to collaborate. Innovation is streamlined, and time and costs are reduced. The result is a more tailored consumer experience that keeps up with the evolving market and the digital offerings sought by today’s customers.