Monitise Banking Technology Pathway Paper 03

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BANKING TECHNOLOGY 2.0:USING PARTNERSHIPS AND OUTSOURCING TO MAINTAIN A COMPETITIVE ADVANTAGE

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3Banking technology 2.0: Using partnerships and outsourcing to maintain a competitive advantage2

CONTENTS:pg 05: Introduction pg 06: The challenge pg 08: The options pg 12: Opening the doors is nothing new pg 15: Conclusion: Customer first

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5Banking technology 2.0: Using partnerships and outsourcing to maintain a competitive advantage

It’s no exaggeration to say that banks have to keep ahead of the technology curve in order to deliver the connected experience expected of Banking 2.0. But with budgets and resource continuously stretched, how can banks maintain consumer faith in their systems, while delivering the services they want, quickly, efficiently and securely?

In this Pathway Paper we investigate the challenges for banks in aligning IT strategy with the velocity of the Mobile Money market:

• Why issues with banking IT can impact on more than the consumer relationship

• How an open approach can help satisfy consumer demand – while lowering the cost of progress

• Where collaboration and partnership work to best effect as part of an integrated IT strategy

Speed to market and the delivery of engaging, connected experiences are now the baseline in banking. As consumers demand easily accessible services and an increasingly rapid pace of innovation, outdated and slow-to-respond IT systems place the relationship at risk.

Introduction

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The challenge

For the banks to respond appropriately requires a mind shift from ‘what can we sell?’ to ‘what does the consumer need?’ and developing an approach to meet this change. The prize of course, is there for the taking. Those with the foresight to embrace change and deliver the services consumers want, open up a world of revenue opportunity, but foresight is the key, and requires banking IT strategy to be more visionary than ever before.

Unfortunately for the banks however, consumers are fickle. They actively embrace the new, but so too do they distrust change. New entrants are viewed with less scepticism than established brands who introduce new products and services. In the banking world, this means they stick with the brands they trust, but have a low tolerance for technical issues – which makes it particularly difficult for banks to drive innovation alongside their standard services.

With the advent of Mobile Money, consumer banking is now a moving target – and increasingly difficult for banks to build on.

Traditionally served by internal banking IT teams, choosing to retain development in-house is now a huge risk in a fast moving

market. The requirement is no longer simply one of accessibility. In a converging world, interoperability has become a hygiene factor; connectivity to retailers, other FIs and tech providers is vital to deliver the complete mobile experience.

Twenty-first century banking dictates that the consumer is in charge – and they are the key influencer in forcing change across the industry. From supplying standardised services, banks are now required to react quickly to consumer demand; for new products, as well as greater personalisation and joined up offers.

We know that doing nothing is no longer an option. The question for banks has now moved on from the ‘why?’ to the ‘how?’

Is it realistic then for banking IT to remain in-house and competitive?

Foresight is the key, and requires banking IT strategy to be more visionary than ever before.


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8 9Banking technology 2.0: Using partnerships and outsourcing to maintain a competitive advantage

The options:

Proprietary banking IT – the state of play

Many existing banking IT systems are complex and have been built over time by a small number of people.

As a result of a ‘patchwork’ approach to updates, development strategies are often disparate, or adapted from one another, risking overloading and lack of scalability. First generation mobile banking, for example, was too often launched as a mobile version of a bank’s Internet banking platform. Although a quick route to market at the time, it didn’t account for the unique characteristics of mobile, or for future requirement.

Though banks are moving towards Service Oriented Architecture (SOA), allowing the partitioning of service areas to enable expansion and incremental updates, many are still legacy systems with a complicated and closed infrastructure.

It’s not to say that there aren’t benefits to proprietary development. Retaining ownership in-house allows products and services to be developed as an absolute fit for customer requirement and provides total control for business continuity and disaster recovery planning.

It’s also true that for many banks, either/or isn’t an option. Many will have to continue operating their existing core systems,

meaning ongoing investment in in-house technology and resources must continue.

But when it comes to developing new mobile products and services, the costs to build and maintain in-house are less attractive. The need to keep up with the complexities of international regulation and the continuity risk of retaining IP in-house aside, the delay in time to market and the capex investment required to develop in-house far outstrip the value of retaining control. Indeed, faced with the ‘hidden cost’ of testing every mobile service and update across thousands of platforms and devices, it’s a wonder any bank would even contemplate building the future in-house.

What do we mean by ‘open’?

In the retail banking arena, a technology strategy that embraces external support to scale services and accelerate deployment could fall into two camps; open API development, or drawing down on licensed or subscription based cloud services.

Open API

Put simply, an API (or Application Programming Interface) allows software to interact. Consider social media, where Facebook works with Twitter, works with Pinterest, works with Instagram and so on – this is all made possible through APIs.

In the banking world, banks can open up an API to developers and partners, to connect and build products and services with each other. The result is a quicker

route to market, and often, new and enterprising revenue opportunities.

Capital One, as an example, established Capital One Labs to deliver rapid prototyping of new products and services through open APIs. Its deals, rewards and user identities are now available to partner organisations to develop personalised offers for its customers.

Their philosophy? ‘We know the most interesting ideas may come from outside our walls, so we’re empowering our partners to create new and awesomely creative experiences for our customers.’

Opening up user identities may be a step too far for many financial institutions, but the sentiment is unquestionably customer-centric, which in the world of Mobile Money, has to be the number one

priority. Imagine a seamless transaction experience, in which a retailer, bank and mobile operator’s APIs are linked to allow one click mobile shopping – it’s certainly a compelling argument.

The additional advantage of APIs is that they can be opened up across banks to enable collaborative service development for the greater good; in Turkey for example, an open API strategy across the entire retail banking industry is helping to bring new banking and retail services to Turkish consumers as a whole.

And APIs are certainly gathering pace, with around 900 APIs currently available in the financial and payments markets alone1 – a figure which has doubled over the last 18 months.

1. Retain core infrastructure and deliver new digital services in-house

2. Embrace an open approach to deliver new agile services

As a result of a ‘patchwork’ approach to updates, development strategies are often disparate, or adapted from one another, risking overloading and lack of scalability.

Faced with the ‘hidden cost’ of testing every mobile service and update across thousands of platforms and devices, it’s a wonder any bank would even contemplate building the future in-house.

The sentiment is unquestionably customer-centric, which in the world of Mobile Money, has to be the number one priority.

1 Source: Programmable Web, April 2014

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Licensed or subscription cloud services

A second option for banks looking to maintain a competitive advantage is to work with cloud providers and draw down on licensed, or subscription based services.

With the requirement for robust data protection and high security, in the banking context, this typically means services based in a ‘private’ cloud – a secure environment in which only a single specified client can operate.

Software as a Service (SaaS) of course, is nothing new. For many years organisations have paid a licence fee to integrate cloud based offerings with their own technologies.

The difference now, is that mobile banking and payments are moving towards a subscription model, where banks can

draw down services and products on a per-user basis.

This next generation in cloud-based banking technology removes the capex spend of a licence fee – yes, there are set up and integration costs, but thereafter, payment for services becomes incremental, based on usage.

The key benefit of a subscription model is the opportunity it provides banks to dip a toe in the water of new technologies and service offers. Research and development time, not to mention customer analysis to assess appetite, are massively reduced, while the likelihood is that the services on offer have already been hammer tested and proven to work elsewhere. The result is more agile service delivery; quicker time to market and greater ability to flex with customer demand.

Cloud is also inclusive, removing the monopoly on service innovation from the bigger players. Subscription based ‘plug and play’ apps give smaller FIs the opportunity to offer a broader range of services and compete on a level with their larger counterparts.

There are some drawbacks to subscription and cloud based services. Updates can often be at the mercy of the market and risk disruption to services. So too can banks risk losing control over product features being added or disappearing, but there is an opportunity to manage these changes – when banks buy into cloud based services, they’re essentially purchasing an SLA, and can ensure that this is robust enough to mitigate for this risk.

The open ‘ideal’

Open API and cloud services offer complementary options for banks to build on their core banking platforms. The likelihood is that over time, they will continue to operate core functionality in-house, supplementing with API development and subscription services where they see the most benefit.

The result is more agile service delivery; quicker time to market and greater ability to flex with customer demand.


CONSUMER

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Opening the doors is nothing new

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Individual financial institutions meanwhile, have also pioneered open door policies to improve the customer experience. LINK in the UK set a benchmark for effective collaborative working when it opened up the ATM network across the banking ecosystem back in 1986; while VISA’s networked, outsourced SaaS approach has enabled customers and partners to participate, interact and transact with each other across borders for many years.

It’s this joined up approach, made possible through partnership and the interoperability of banking platforms, that is critical to the new consumer ideal. Over time, all the innovation in the world will be null and void if a customer’s bank is unable to deliver the connected experience they require. Indeed, it’s one of the reasons the

Payments Council has recently launched its peer to peer payment system, Paym – for consumers who are currently unable to make payments to multiple recipients across different banks via their own bank’s app.

It’s also the reason that CaixaBank, Santander and Telefónica have joined forces to launch Yaap – a new alliance to bring ‘exciting and innovative digital services to improve the everyday lives of people’. With open shopping and peer to peer payment services on their way, accessible to all consumers, regardless of their bank or mobile operator, Yaap may well provide the benchmark for others to follow – a marriage between banks, telcos and retailers to deliver a wholly effective Mobile Money experience.

To suggest an open approach to IT is a new concept for the banking industry would be misleading. Banks and financial institutions have long trusted in technology partners to provide fundamental services, including running their operating systems and databases. In the US for example, many banks have always outsourced their core systems.

Over time, all the innovation in the world will be null and void if a customer’s bank is unable to deliver the connected experience they require.

Choosing partners wisely

If collaboration then is proven, and banks realise that in order to stay ahead of the technology curve they need to embrace partnership working, how do they select the most appropriate partners?

Much like the dating game, it’s about compatibility and sharing similar ambitions.

Some pointers for consideration:

1. Do they understand the banking and payments industry? The regulatory climate? The importance of PCI compliance and the absolute urgency around outages?

2. What are their capabilities to connect with your infrastructure? Can they operate with your legacy systems, or a Service Oriented Architecture (SOA)?

3. Can they introduce you to a broader network of partners to extend your reach and your revenue opportunity?

4. Can they provide the agility to scale their services as you grow? Can they provide a comprehensive roadmap of future services to meet your ambitions?

5. Are they tied to specific technology solutions, or can they provide an agnostic approach?

6. Is there an option to work in true partnership with a shared risk and reward model?

The very best mobile alliances work when both parties share a vision and each bring essential skillsets and added value to the relationship, whether from experience, expertise or connections to other service providers.

http://www.monitise.com/insights/2014/04/28/will-bank-customers-paym-pingem-look-cashpoint/

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Conclusion Why have so few banks followed a path of continuous improvement in their technology and back office processes?

For many, it’s been a case of ‘if it ain’t broke, don’t fix it’. With regulatory change and industry developments hard to predict, ring-fencing funding for large scale updates has traditionally been difficult, and there have been few compelling market events to force a change.

But right now there’s a serious business case. Aside from banking competitors, the bigger Internet players, and even telcos, are moving into the traditional banking arena. Some banks have managed to implement new services in-house up to now, but the Mobile Money opportunity is still in its infancy, and if banks are to remain ahead of the curve they need to collaborate to pull in the blend of services they will need to offer. If they don’t, and the consumer’s needs are better served elsewhere, there’s a very real risk to the entire customer relationship.

There’s certainly a window of opportunity for the banks. In the future, data ownership will be a key driver in developing new services. The consumer will be in control over who accesses their data, and right now, they trust the banks.

Crucially, in order to deliver the vision, decisions around technology can no

longer sit solely with IT. With its impact on brand, reputation and revenue, the banking IT department needs to become more business-focused than ever before. The priority for the in-house team should be on banking and the development of a coherent banking strategy. Technology, processes, customer service and products should evolve from this central tenet.

A new mindset

It requires a shift in thinking for the banks, whose technology budgets have long been sapped by necessary upgrades, or reactionary development in response to market or regulatory change. ‘Cost to serve’ needs to be replaced with ‘revenue opportunity’. With Internet banking many institutions missed a trick by focusing on service need only. Mobile is the first platform that can reach consumers where they are and provide a completely personal experience. IT strategy then, must maximise this massive opportunity.

But in a dichotomy for the banks, customers want the new, but don’t want to see the banks spending too much. In-house development, we know, is costly, and takes time. It could be argued then,

that collaboration is the only way for banks to deliver the innovation the consumer demands in the fast paced environment of Banking 2.0.

The key is to understand the value chain for new products and services all the way through. Banks could provide many services by developing or purchasing individual slivers from partners and building the rest themselves, but the investment and energy required to integrate these slivers could be better served by subscribing to full end-to-end services.

The very best subscription services provide added value way beyond core functionality. They connect banks with a global network of retailers and mobile operators to provide the interoperable payment and shopping services that place the mobile at the heart of the consumer lifestyle.

By drawing down on these services as they need them, banking clients are able to direct their energies towards improving banking itself – and the shift towards ‘what does the consumer need?’ that the next generation so demands.

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If banks are to remain ahead of the curve they need to collaborate to pull in the blend of services they will need to offer.

The priority for the in-house team should be on banking and the development of a coherent banking strategy. Technology, processes, customer service and products should evolve from this central tenet.

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Monitise designs, develops and implements Mobile Money products for some of the world’s leading banks andfinancial institutions.

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