2018 will be a milestone year for the EU banking landscape. Banks and Fintech companies are undertaking massive innovative investments to ride the new disruption change. In this blog I would like to share my vision about preparations that will enable bank to ride the PSD2 wave.
PSD2 Open Banking means that third party PSPs will now operate between banks and their customers. Much of the retail and regular corporate transactions and information requests will be routed through the PSPs. However, complex banking operations requiring specialized analysis and custom attention will continue to be dealt directly between the customer (mostly corporate) and banks.
The IT systems will emerge as major enablers for customer relations in banks. Stability of IT systems, enhanced security, high elastic scalability, flexibility, rapid upgrades will now become the integral part of banking core strategy.
Bank CTOs will have two threads of strategies to work on simultaneously. (1) Operational agility (2) Innovation factory.
Operational agility post PSD2 open banking world
- Relationship consolidation: In the post PSD2 landscape, banks have a single customer relationship covering the entire portfolio of the customer. Banks should have a consolidated view of the customer’s relationship and thus offer the best possible options specific to the customer’s profile and track record in response to 3rd party service request. Banks that do not have a consolidated view of a customer readily available, will lose out to competition with better understanding of the overall customer profile.
- Intra-system connectivity: It is quite possible until recently that manual processes existed when systems across departments needed to share data / information for cross-department processing. Banking API implementation will expose such internal manual connections significantly and force banks to tightly couple inter-department systems.
- Rapid risk and fraud verifications: 3rd Party service requests have the potential to scale substantially over short duration. Hence banks will need to upgrade compliance, fraud and risk management systems to respond to fraud related verification requirements in real time. AI and machine learning with unstructured data management will soon become the norm for fraud and risk management and rule based systems will soon be relegated as museum exhibits.
Banks become the Innovation Factory:
Banks will innovate rapidly and introduce market relevant products. The following technology traits are a must to roll out innovation rapidly.
Elastic scalability for the Cloud Era
A large majority of the mainstream banks had legacy core GL and transaction processing systems in place, some of them implemented a few decades ago. These legacy systems have served banks well with robust architecture, accuracy of record keeping and transaction processing. Many have responded well to rapid feature integrations too. However, they run the risk of reaching the threshold as volumes increase. In the new market environment, rapid and steep fluctuations in volumes are probable and banks need to prepare by addressing the scalability of each system in place. The weakest system will define the scalability ceiling of the bank itself. In the PSD2 open banking era, Banks must consider moving to cloud based operations to support elastic scalability.
Rapid but incremental upgrades:
DevOps becomes very relevant for banks in the new market environment. Banks will compete with each other to introduce innovative products rapidly and available in their automated platforms. A big ace up the banking sleeve are their huge databases that hold deep insights which can be mined through high end analytics and inference engines. To roll out such upgrades rapidly, and transparently to PSPs and end customers, DevOps will be the ideal process option.
With PSD2 open banking, end customers will have both the option and ability to switch banks. This means that banks do not have the option of delaying their sophistication initiatives. Hence, they must be able to upgrade systems, switch rapidly between cloud service providers to have best in class environment and support for themselves. Such rapid platform switching calls for implementing infrastructure as code and configuration as code initiatives.
Regression management is the key
Incremental and continuous upgrade requires crunching of time between upgrades. It is easy to lose focus on stability during rapid upgrades. Regression is an important factor influencing stability negatively. Automation and robustness of regression progresses within rapid implementation cycles becomes quintessential.
January 2018 is a big month for banks. Banking in EU will undergo a mammoth transformation from an operation focused banking to technology focused banking. The transformation will happen from transaction centric banking to customer centric banking.
This will happen only with the right technology strategy. Banks who do it early and do it right have a lot to gain.
Balaji is the co-founder and Chief Executive Officer of Evolvus Solutions Pvt Ltd. He plays a critical role in anchoring strategic priorities for the company to gain leadership position in the payments domain.