THE MANY IMPACTS OF THE OPEN BANKING REVOLUTION
A revolution in customer experience is underway in financial services. A raft of new technologies, combined with the regulatory push to increase competition, has the potential to fundamentally change the financial industry’s traditional business models.
A combination of Big Data and analytics, cloud computing, the mobile channel and social media is allowing new entrants and innovative players to bring new value propositions to the market, based on personalized, contextualized and real-time interactions.
Paving the way for these newcomers are regulations such as the second Payment Services Directive (PSD2) in Europe. This will allow fintechs, mobile network operators, retailers and internet giants to leverage customer data to market and aggregate services from a variety of financial services providers as well as create new solutions to act and execute on clients’ behalf.
From the customer point of view, this open banking revolution will provide consumers with a more holistic view and better control over their finances, at a time when customer loyalty is becoming ever more eroded. And from the industry’s point of view, the revolution has the potential to end the banks’ dominant position in supplying financial services.
However, PSD2 only marks the beginning of the open banking era, which will give a huge boost to new forms of competition and hand customers much more control over how, and from whom, they consume their financial services. IDC believes that, even in the absence of new regulations in other regions, data sharing will become the norm for banks everywhere, as it becomes clear that participating in digital ecosystems of various types of service providers is the surest way to build a competitive proposition.
For banks to succeed in this environment they will require the ability to deliver innovative products and superior customer experience. They will need to co-opt or compete with emerging players such as third-party aggregators, comparison platforms, marketplaces for financial products, and new channel and transaction processing providers.
Banks will also need to work out exactly how they can best fit into the burgeoning digital ecosystems, and how they can avoid becoming mere back-office processing and product providers rather than owners of the customer relationship. Even their direct competitors will be able to use APIs to connect to previously closed relationships between bank and customer, taking over many of the relationship touchpoints and building a platform with which to sell their banking products.
Going forward, therefore, the aim of banks’ digital transformation efforts should be to position them for this emerging reality. Banks must renovate their existing IT landscapes with a view to tapping into the new ecosystems and the new opportunities that crop up. Areas to focus on include:
- Moving to real-time. Customers expect channels and balances to be updated instantly, while real-time architecture allows marketing to be delivered at the time it is needed.
- Driving customer service to the highest possible level, adapting to new trends and usage patterns and giving consumers continuous reasons to stick with their banking partners even as competition increases.
- Becoming API-ready. IDC believes that the banks that prosper will be those which engage most wholeheartedly in the new digital ecosystems, and these ecosystems will communicate through APIs.
- Delivering reliability and consistency of channel experience through comprehensive and thorough quality assurance efforts.
If they get the transformation wrong, and if they are not able to deliver consistent and seamless experience both to end customers and to ecosystem partners, they run a significant reputation risk, and well as the risk of being cut out of the ecosystems.
OPPORTUNITIES FOR INNOVATORS
Existing banks retain a couple of enviable advantages as banking moves into the open era. The first is their existing position with customers and the years of trusted relationships the banks have enjoyed with the customers. The second is the data they have collected over the years, which can be analyzed to support personalization of customer service as well as calibration of product offerings.
But these advantages are essentially time-limited. The barriers for customers to switch provider are continually being lowered by regulators, and younger customers are more inclined to see the value they get back rather than being loyal to their providers. And the technological solutions for switching are becoming more customer-friendly also. Meanwhile, modern consumers are becoming more used to shopping around for deals, more in the habit of consulting social media and other forms of digital content, and more demanding of their banks, as they become used to better customer experiences in other industries.
Nevertheless, it can be said that the existing banks, with their still dominant market positions, are well placed to take advantage of the new opportunities afforded by the move to open banking. IDC has identified the following categories of player in the new open banking world:
- Isolationist. Provide exclusive products and distribution to their own customers.
- Producer. Provider of syndicated products and services with distribution through third parties. For banks, this creates challenges with customer ownership and branding.
- Distributor. Distribution of third-party products through owned channels. Third parties such as comparison platforms or marketplaces will assume the distribution of all kinds of products. Banks also open their distribution to third-party products and distribute them through their own channels.
- Platform. Platforms will serve as a facilitator or service provider to the ecosystem. For banks, this could open opportunities around shared know-your-customer (KYC), security and processing services.
- Aggregator. Cross-industry aggregation of customer data to provide financial management, advisory services to customers and, depending on privacy regulations, monetization of data assets through services to third parties such as product recommendation and marketing.
- Integrator. Interoperability and integration services for open APIs.
- Innovator. Development of new services based on opportunities arising from an open ecosystem.
Most banks can currently best be described as isolationists. But the traditional bank-centric model is under attack. There is the danger that they become mere producers of financial products, with distribution taken over by third parties and banks losing out on direct customer interactions. This could nevertheless be an attractive model for some players, with IDC predicting that a minority of banks will move in this direction, alongside some new sources of funding. IDC expects that many new entrants will look to become distributors, with these already taking shape in the form of comparison websites and brokers. The main opportunities for banks lie in becoming platforms and aggregators. The most successful banks will compete to become the hubs of the new digital ecosystems which develop, aiming to bring a wide variety of services above and beyond traditional banking services, via partnerships with new digital players and existing firms from other industries, through their own channels, to their customer base.
Financial service providers will look for assistance from their technology partners to become integrators, however. There is no guarantee of standardization of APIs, as currently intended by PSD2, for example.
A NEW ERA HERALDS NEW INTEGRATION CHALLENGES
There are many challenges banks need to face if they are to stay competitive as the wave of new competition hits in the next few years.
Integration looms large in the technology issues of large banks today. The typical bank’s IT architecture has grown organically over the last few decades to encompass myriad regulations, languages, trends, new channels and so on. This situation is exacerbated by historical acquisitions and mergers. Bringing in a new technology solution can, therefore, require huge effort to integrate to a multitude of different systems, sometimes running into the hundreds. This acts as a substantial drag on innovation, adding lead times for bringing products to market, decreasing overall system resilience and potentially introducing over-reliance on key individuals.
The shift towards APIs is helping banks overcome this, opening new avenues for legacy renovation and customer service innovation, but it throws up new problems in terms of internal architecture, integration, and resilience. It is imperative that banks have an API management strategy in place to ensure seamless integration between various internal and external ecosystems.
Meanwhile, the traditional ways of quality assurance will not suffice, due to the added complexities of new technologies, new devices, and the expectation to deliver new products and services in an agile way.
Achieving Best-in-Class API Management
It has been the case for a few years already that the swiftest way of innovating, of bringing new services to customers, is through the third-party partnership route; the days when it was preferable or indeed viable for financial service providers to look solely inside their own walls for innovation have gone. Nothing demonstrates this better than mobile contactless payments. While the initial impulse of many banks, such as Barclays, was to build a proprietary solution, the clear majority of banks in the developed world have come to accept that they cannot compete for head-on with the incumbents in the mobile space, Apple, and Google, and have as a result integrated Apple Pay and Android Pay into their propositions. This process has required a shift in thinking from banks. It has, for example, required them to compromise their branding, with banks advertising that third-party services are available to their customers.
This situation is likely to be multiplied over the coming years, with far more third-party services becoming integrated with customers’ financial dealings. There will be an opportunity for a competitive advantage here. Of those banks that aspire to become distributors, there will be winners and losers based on how customer-friendly that distribution process is. And this, in turn, will depend on how well the banks curate the third-party offerings, picking those most in demand and from trusted players, and how swiftly and simply the third-party services can be integrated. There is a security aspect as well. When onboarding an API, there will be various mechanisms required to determine what data gets shared and according to which certificates and tokens, and banks will need to use their discretion in picking third parties to work with (beyond the third-party providers stipulated by PSD2). Similarly, API consumption needs to be scalable. Banks must ensure that their infrastructure is architected to cope with demand, and is also simulated and tested so that when an API is consumed it is resilient and will work as intended. After all, multiple entities can use the same API but the ease of use, the resilience, and the support will determine through which third parties an API is consumed the most.
Going back to PSD2, while banks are required to open certain categories of data in a shareable way to certified third parties, the regulation has left the definition of the APIs themselves to the market. This means there is no standard protocol and makes it likely that there will be no standardized APIs for third parties to hook into banks. Where data-sharing APIs are not mandated by regulation, outside of the EU, there is even less chance of a standardized API developing. For this reason, banks and other players moving into the financial services industry face the challenge of how to manage a growing plethora of APIs.
It is not settled what open banking ecosystems will look like eventually, but IDC believes there will develop a host of different ecosystems depending on geography, customer segments and industry, as well as functional purposes such as to engage customers or to connect to partners and suppliers. These ecosystems are also likely to overlap in some instances or isolate and fragment in others, but they will eventually generate the biggest impact through interoperability if not convergence.
For customer-facing ecosystems, IDC expects a dramatic change away from today’s traditional bank-led, product-centric model towards a genuine customer-centric model. An open retail customer-centric model would see customers access financial products through various new channels and platforms, most of which will no longer be owned by banks. The commoditization of financial products, lack of customer loyalty and easy account switching will increase competition in the market as new platforms make them more accessible and easier to compare. Banks stand the risk of being reduced to a producer role.
IDC believes that the winners from the open banking revolution will be those banks that commit most to connecting to diverse ecosystems of service providers. This means that, as well as an open mindset, banks must be prepared from a technology point of view. A proactive approach to API-enabled partnerships will allow them to deliver more contextual banking experiences which encompass more than vanilla banking products. And an adaptable and open culture will help the bank spot opportunities in the ecosystem early enough to take advantage. Picking the right technology partner is critical as well.
Digital Quality Assurance and the Importance of Testing
Best-in-class customer experience in the financial industry requires a consistent and seamless experience across a variety of channels. Customers must be able to start an interaction through the channel of their choice and switch in real time to an alternative channel, without having to re-enter information or reauthenticate themselves. An often-overlooked aspect of delivering such an experience is the huge new requirement for digital testing to ensure that the necessary levels of consistency and resilience are delivered. This type of digital quality assurance is transformed from the kind of customer journey testing which was required a few short years ago. And it is growing in importance due to the speed with which bad news travels via social media. Not only can banks’ brands suffer very quickly if their customer service channels break, but regulators demand increasing levels of system resilience under threat of penalties.
Customers demand a seamless, consistent experience across channels which are extremely fragmented. For example, the mobile channel, which has grown from nothing in the last decade or so, has fragmented between two major operating systems (IOS and Android), mobile browsers versus apps, different network operators and a huge variety of handheld devices, ranging from smartwatches to tablets.
There is also fragmentation of channels on the financial provider’s side, with a customer journey touching numerous systems — some of which will be legacy in-house solutions and some of which will be housed elsewhere in an outsourced or cloud-based configuration. So the complexity of quality assurance and testing has rocketed in recent years, meaning financial service providers have had to reconsider how these functions are delivered.
A recent industry estimate by Capgemini put the scale of spending on testing at 31% of IT budgets, expected to rise to 40% in the next 24 months. The same research found that testing remains heavily manual, with only 29% currently automated.
But banks today are demanding speed and flexibility from their testing partners, cost-efficiency, closer interaction with business leaders and a readiness to test ever more diverse applications and environments. And delivery cycles are getting shorter. While online banking systems might have been refreshed every year or two in the past, mobile app developers are pushing out updates in cycles measured in weeks. To give an idea of the scale of the problem, banks are likely to make hundreds of functional changes per week, all of which require testing. Moreover, as the financial service industry evolves with new technologies such as blockchain and quantum computing, the demands for digital testing will move in step.
Most banks have not made the jump to an agile mindset and DevOps when it comes to quality assurance. These mentalities are beginning to percolate so that a bank is more likely to use the agile methodology for mobile banking than for a core banking project. There is a still long way to go to where agile is adopted for every application.
However, there are rich benefits from using agile in the testing space. Traditional testing requires a lot of back and forth between manual testers and automation teams, which act as a bottleneck on testing velocity. A feature of this arrangement was that the automation teams might not understand the functionality from a user point of view. Because of this drawback, as the requirements for testing grow exponentially, it becomes impossible for the testing function to keep up, and an agile mindset becomes crucial.
INTRODUCING QUINNOX, A MIDSIZE PROVIDER TRANSFORMING THE BANKING LANDSCAPE
Quinnox is a Chicago-based agile-technology-driven IT services and integration company with offices in the UK, Germany, and Dubai, and three development centers in India. It works across three vertical financial services, retail and manufacturing and, as a company with 1,400 staff, focuses on niche business solutions within those verticals. Quinnox is one of the largest implementation partners for capital markets provider Calypso. It provides extensive testing services to software suppliers including SAP, Oracle Financial Services, and Fenergo.
Quinnox’s services are spread across five areas:
- Agility and accelerated delivery
- Digital innovation
- Centers of excellence
Quinnox supports three digital platform styles for customers in their digital transformation strategy:
- Inside-out platform. This involves establishing (or reusing) an internal digital platform that is used by employees and platforms inside the bank. As the bank goes about getting an end-to-end understanding and appreciation of its own platform, extending it out to a semi open or an open ecosystem can be achieved through a well-defined roadmap.
- Shared incentive platforms. This involves the bank establishing a close group digital platform, which is used by known customers and trusted partners.
- Democratised platform. A public digital platform that is used by known and unknown business ecosystem partners, customers both inside and outside the bank.
Quinnox has specific solution sets to help banks with API management, which sits in its integration practice, and digital quality assurance and testing.
Quinnox API Management Offering
To support partners’ API integration, Quinnox offers a five-stage API strategy:
- Define API enablement strategy
- Evaluate API architecture readiness
- Plan API migration
- Select API platform
- Realise API enablement
Quinnox also offers its own API solution which is product agnostic and designed to work with the major API management platforms including Axway, Mulesoft, Apigee and Tibco. The offering includes an API testing framework, a decision tree for API model and product selection, a selfservice developer portal, a performance engineering framework for legacy components exposed as APIs and an API dashboard; it also incorporates DevOps for APIs.
For accelerated delivery, Quinnox offers an API jumpstart kit. This includes a reference architecture, implementation and application, a demo environment, a decision tree and developer guidelines and cookbooks. The aim is to help Quinnox’s financial services partners deliver a seamless user customer experience enriched by APIs, underpin innovation, protect from the security threats associated with APIs, and go to market faster through the acceleration tools and methodologies.
In one example, a heavy construction equipment auctioneer engaged Quinnox to leverage several APIs to connect the owners of different parts of the auctioneering workflow via a new omni-channel portal which is connected to the ERP system of the auctioneering firm. The new ecosystem enables post-sales equipment tracking and support, and real-time tracking of inventory and digitally connected financing as, crucially, the leasing partner banks form part of this new ecosystem. The scope for errors deriving from manual intervention, and fraud deriving from the disjointed nature of the credit allocation process, is reduced, while the efficiency gain is substantial: the entire auctioning process has been cut from three to five weeks to three to five days.
QTAF covers a full spectrum of testing from automation and continuous testing, user experience and omni-channel testing, performance, load and security testing, integration testing and test environment management.
The Quinnox Digital QA solution has broken the problem whereby testing is unable to keep up with demand for automation by deskilling the testing, moving away from the idea of a specialist automation team and giving ability and responsibility over to staff who understand the business and functional processes, with the QTAF solution taking care of the automation. This increases efficiency and accuracy of testing and eliminates the back and forth between manual and automation testing teams.
Quinnox QTAF also brings intelligence to the testing space, using analytics to optimise testing loads. Over repeated iterations, QTAF analyses which test runs need to be repeated because there is a higher chance of failure and which ones can safely be skipped based on their success rate in numerous previous test cycles. This analysis can be used to predict where tests are most required in future. The continual process of optimisation can bring substantial gains in terms of hardware required.
Quinnox is engaged with a large global bank as a core QA partner with a team of 75 testing specialists responsible for various digital QA initiatives across various business lines. The bank was looking to test its self-service channels ranging from mobile applications, next-generation teller machines with video chats and handheld devices for customer service. With Quinnox’s support it was able to have all the testing automation carried out by its functional teams, with more than 90% of tests automated by QTAF over just 11 days. By improving automation and efficiency, QTAF enabled the bank to increase the number of tests run daily from 300 to more than 900, increasing coverage for each cycle by 163%.
- As a medium-sized IT vendor in a landscape with IT majors 10 times its size, Quinnox must build on its position as a niche supplier of solutions in specific areas of excellence, working alongside the larger players rather than head to head.
- Quinnox must build its profile as a digital transformation partner for financial services players worldwide by continually engaging procurement departments and making sure it commands share of mind in the open banking era.
ESSENTIAL GUIDANCE FOR TECHNOLOGY BUYERS
- As testing and quality assurance functions are becoming increasingly central to digital transformation, QA partnerships should be viewed as strategic ones by all financial services institutions, and matching their needs with the capabilities of QA vendors in the market demands due care and attention. Picking the right partner is critical to achieving best-in-class customer experience.
- To make the most of opportunities deriving from partnerships with testing specialists, a cultural shift within financial institutions is required to move away from a siloed approach to testing and towards a mentality of continuous delivery from embedded QA functions.
- Aim to match the size of the technology partner with the requirements. Different IT providers have different strengths, so scrutinising the niche abilities of potential partners should be paramount.
International Data Corporation (IDC) is the premier global provider of market intelligence, advisory services, and events for the information technology, telecommunications and consumer technology markets. IDC helps IT professionals, business executives, and the investment community make fact-based decisions on technology purchases and business strategy. More than 1,100 IDC analysts provide global, regional, and local expertise on technology and industry opportunities and trends in over 110 countries worldwide. For 50 years, IDC has provided strategic insights to help our clients achieve their key business objectives. IDC is a subsidiary of IDG, the world’s leading technology media, research, and events company.