By Anthony Badger, FS&I API Lead at Axway

With customers increasingly prepared to shop around for their banking needs and rising demand for digital services, the banking sector is under relentless pressure to innovate to survive and prosper. As an example of the volatility banks are facing, more than 700,000 people switched their current account from one bank to another in 2020 in an effort to find better deals and services.

Customer experience is becoming a major differentiator in how people choose their services. Companies like Amazon and Netflix have laid the groundwork for digital brands – and the banks are not exempt. No wonder the likes of Monzo, Starling and Revolut have won millions of customers by taking on the mantle of challengers revolutionising the banking experience. Their app-based experiences have won many converts because they put the customer front and centre of the banking experience.

In this febrile atmosphere, there has been no shortage of contenders with 40 challenger banks active in the UK at the end of 2020, according to analyst firm Beauhurst. None of these new entrants have been encumbered with the reputational baggage weighing down so many of their incumbent rivals. Without the burden of legacy technology infrastructure or vendor lock-in to hold them back, they have been able to innovate and bring ideas to market much more quickly. They have achieved this level of innovation while giving customers a much better experience than they have been accustomed to from traditional banks.

Their success emphasises the importance of technology  in developing stronger and deeper relationships with consumers and providing services that are more appealing and customer-centric. As the challengers begin to enter additional markets (mortgage, insurance, foreign exchange and even cryptocurrency), traditional banks are being forced to reevaluate how they use technology to try and reconnect with their customers.

It’s imperative that they do so. Banks pay a high cost for customer churn so it makes far more sense to retain customers by providing an experience that keeps them loyal and happy. The difficulty for big banks is they are often too unwieldy to introduce innovative financial products quickly and many are hamstrung by a reluctance to change their backend systems of record.

This reluctance is a drag on their efforts at innovation. It prevents them from adopting an open finance approach that allows them to use and share customer data across multiple finance sectors in a holistic way and deliver a more integrated set of services. The open finance ecosystem connects individuals with other platforms and companies to offer them a more integrated means to manage their finances and consume financial services.

As an example, the open finance model enables someone to understand and manage their health and spending status using a smartwatch and rewards the individual for allowing third party providers to use data from the watch. With open finance application programming interfaces (APIs), a person’s health app could offer improved terms for health or life insurance using their health statistics.

To deliver these changes, banks need to integrate all of their legacy and modern technology applications and build marketplaces and ecosystems that meet their customer needs. This requires them to automate their processes to make it easier for internal and external banking application developers, allowing them to focus on frontend tasks instead of spending unnecessary time and resources on legacy integration at the backend.

To understand the way the financial ecosystem is changing, it pays to acknowledge the financial process may not involve customers interacting directly with a financial services organisation. For example, a leading automotive manufacturer has integrated insurance to enable customers to buy cover when they purchase a car. They can get cover with the push of a button without having to provide additional information. Once they are on the road, drivers will be able to use services through their car to find, reserve and pay for parking spaces. They will be able to use their car to order and pay when going to drive-throughs, all based on preferences they have registered previously.

Open finance will make it possible for banks to invite a wide variety of companies to become part of their ecosystem using APIs. In turn, banks will be given the opportunity to become part of other ecosystems. This will lead to more integration between organisations and more offers being made available to consumers.

The banks have enjoyed success with their traditional model for many years, but they are being forced to bring new ideas to market at a speed and agility they have not achieved before. With traditional banks under pressure to adapt to heightened customer expectations fuelled by the success of the challenger banks, the stage is set for tech-led innovation to become widespread across the entire finance sector.