FinTech

Open banking: The new face of digital transformation

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Previously, financial institutions viewed the concept of open banking as an imminent threat to their business and industry. Now, the industry sees the same concept and technology behind it as a catalyst for their business to achieve digital transformation. One of the more anticipated sessions during Think 2018 in Las Vegas was IBM CTO of Industry Platforms, Tom Eck, speaking on Wednesday afternoon on what exactly is “open banking,” and how it has become the “new face of digital transformation.”

What is open banking? Why should I care?

You may have heard the term before, but the definition of open banking stems from the concept of “Open Innovation,” and was coined by noted professor and author, Henry Chesbrough, who defines it as:

“Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. [This paradigm] assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology.” – Open Innovation: Researching a New Paradigm

Open innovation in banking can refer to the use of open APIs that enable third party developers to build applications and services around a financial institution. Applying open innovation arises from current challenges facing the industry.

New customer pressures drive change in consumer expectations faster than it ever has been. According to Ernst & Young, 41% of consumers would not hesitate to change their financial service provider for a better digital experience. Technology convergence and democratization tears down entry barriers used by traditional banks. The complexity and expense of complying with changing regulations for PSD2, AML, and KYC. Possibly the most important challenge is the pressure to remain profitable while experiencing low ROE, slow growth and strong cost control.

Taking action for digital transformation

With these challenges staring at them ominously, banks are looking for fast, flexible and cost-effective ways to enable digital transformation, meeting evolving customer demands and participating in the API economy. The future of banking is not just about IT modernization or creating a slick mobile banking app, it’s about rethinking banking towards new models that are open, intelligent and platform-based. Banks and financial institutions are sitting on a goldmine of data from sources such as account data, mobile and location data, and compliance data that can provide powerful insights that power different banking functions and create new revenue opportunities. Open banking can open up legacy systems and exposing them internally as microservices using modern architectural tools. This in turn exposes these banking microservices as public APIs in the cloud ecosystem to create new channels, fintech collaborations and ultimately new customer experiences and revenue streams.

Where are we today?

As Mr. Eck explained, a common blocker to achieving digital transformation are multiple legacy systems confined behind firewalls with heterogeneous environments that are a result of previous business acquisitions, internal silos, or simple incompatibility issues. Often these involve complex, heavy and mostly proprietary integration protocols and systems. This presents serious challenges for third party vendors to make sense of it all and get everything working together homogenously.

To remedy these problems, IBM is building a suite of software products that will accelerate a financial institution’s transformation to a platform economy. This platform approach provides benefits such as direct integration to internal hosts, and support for multiple interfaces, enabling faster time-to-market with lower risk, establishing new digital channels and revenue streams, while driving engagement and collaboration with fintech partners, to fully engage in the API economy.

Learn more how IBM Banking and Financial Markets solutions can help your financial institution achieve digital transformation.

Visit the IBM Cloud for Financial Services Dashboard to explore APIs, starter kits that are available to try and get started today.

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