Connected Banking: The Industry’s Spoon Full of Sugar

Jerry Silva, Global Banking Research Director, IDC Financial Insights

In the 1964 film classic Mary Poppins, the title character convinces wards Jane and Michael that cleaning their rooms can be fun, even if the task seems overwhelming.

As Mary Poppins sings, magical things happen; beds make themselves, clothes fold themselves, and toys move into their proper places.  The song becomes a musical motif for Mary Poppins as she approaches every challenge with the same attitude.  It’s a great scene that encourages the viewer to meet every challenge with the idea that even daunting tasks can be made easy with the right attitude.

Jerry Silva

Much like the metaphorical spoonful of sugar can “help the medicine go down,” some banks are approaching the perceived threat of open banking with a strategy we’ve started calling “Connected Banking” that is much more palatable.The basic tenet of this strategy is that the institution wants to proactively create a business architecture that is nimble, flexible, and open to the creation of new models of value yet allows the bank to retain control and minimizes the risks normally associated with open banking.

For context, “open banking” is a somewhat ambiguous term that refers to the presumed logical – and forced -evolution of frictionless interoperability between banks and non-banks.  Open banking was boosted by a European Union regulation called the Payments Services Directive (PSD) and more specifically, a 2015 revision to that directive, PSD2.  In a nutshell, the revised directive requires banks in the European Union to allow third-party payments processors to access customer information at the bank.  Presumably, this directive was created to create a safer and more innovative payments market in the EU, one based on improving the convenience of mobility and e-commerce.

However, the notion of allowing external organizations – particularly small payments firms that don’t have the same established history as the major players – to get access to customer information held in the institution’s data center is, at best, a large security, privacy and risk management challenge.  In light of another prevailing regulation in the EU, the General Data Protection Regulation (GDPR), which places the responsibility of safeguarding financial data for all EU citizens on the financial institution, the PSD2 directive seems at odds with the need to protect data privacy at the same time.

The threat associated with open banking comes from the not unreasonable belief that such open access will eventually apply to areas outside of payments.   For instance, could a bank be forced to provide your history of paycheck deposits to a ride-sharing company?   Could your favorite coffee house demand to get detailed shopping information from the bank’s store of payments data to find out where you buy your beans?   These are not quite Orwellian outcomes, to be sure, but for an industry ostensibly built on trust to be forced to loosen its hold on protecting data, the future of open banking isn’t welcomed without some trepidation.

So let’s flip the situation on its head.  For the purposes of modernizing its own infrastructure, many banks are transforming their technology architectures to be much more open internally.   Moving from decades-old, monolithic applications that run the business to a much more disaggregated and fluid collection of business components using open application programming interfaces (APIs) and microservices is a great way to improve the speed of development and innovation for the bank, increasing its ability to respond to market changes.   New products and services could, theoretically, be assembled as needed, instead of creating from scratch through software development.The new architecture becomes a resource for internal product developers and the lines of business to better connect products within the institution.  In the longer term, the institution can improve efficiency even further by making decisions to move non-differentiating workloads to cloud providers at a lower cost or with better service characteristics.

In turn, the ability to create a connected environment internally is very easily used to connect to external partners as well by using different API libraries with their own levels of security and governance.  The key here is that the bank is in control of with whom they choose to partner.  There are instances of partnerships between banks and non-banking organizations, for example, that have been done under legacy architectures using point-to-point integration, but in the Connected environment, institutions can practice Connected Sourcing, that is, the ability to choose partners as market demands change without onerous one-to-one software development.  What’s more, the bank has proactively created this open environment, and placed safeguarding measure in place, before it is forced to do so by regulation.  This is the essence of Connected Banking.  (Figure 1 is a high-level view of the Connected Banking ecosystem)

Creating this internal architecture serves the short-term needs of the bank to be more agile in addressing the customer’s needs, while at the same time making the institution’s operation more efficient.  And by creating a managed environment from which to connect to external ecosystems, the bank can offer unprecedented value propositions that are better aligned to the way their customers live.  Imagine being able to search for a new home on your bank’s website, within a desired neighborhood, with all the relevant information about taxes, schools, cost of typical home services like lawn maintenance, etc.  Then combine that experience with a personal dashboard on the same page based on the information your bank has about your specific financial state; savings accounts, current credit worthiness, prevailing market interest rates, and, ultimately, highlighting which of those homes on the map fall within your financial means.  Or allowing you to click on your perfect home, even if it’s slightly out of reach today, and then advising you on the steps needed to reach that potential purchase.

It sounds like magic.  But the start of this kind of ability is already surfacing at some banks today.   And just like in the movie, banks will surely find a number of unanticipated and sometimes magical benefits by embracing Connected Banking and using it as the strategic refrain to get the inevitable task of open banking done, under control, while maintaining their charter of trust.

About Jerry Silva:

Jerry Silva is research director for IDC Financial Insights responsible for the global retail banking practice.   Mr. Silva’s research focuses on technology trends and customer expectations and behaviors in retail banking worldwide.   Mr. Silva draws upon over 25 years of experience in the financial services industry to cover a variety of topics, from the back office, to customer channels, to governance in the technology shops at financial institutions.  His work for both institutions and vendors gives Mr. Silva a broad perspective in technology strategies.

Follow Jerry on Twitter @JerrySilva_PGS and read his blog posts in the IDC Financial Insights Community.

Figure 1.  Connected Banking  (if desired)

IDC Financial Insights

Jerry Silva, Global Banking Research Director, IDC Financial Insights

In the 1964 film classic Mary Poppins, the title character convinces wards Jane and Michael that cleaning their rooms can be fun, even if the task seems overwhelming.

As Mary Poppins sings, magical things happen; beds make themselves, clothes fold themselves, and toys move into their proper places.  The song becomes a musical motif for Mary Poppins as she approaches every challenge with the same attitude.  It’s a great scene that encourages the viewer to meet every challenge with the idea that even daunting tasks can be made easy with the right attitude.

Jerry Silva

Much like the metaphorical spoonful of sugar can “help the medicine go down,” some banks are approaching the perceived threat of open banking with a strategy we’ve started calling “Connected Banking” that is much more palatable.The basic tenet of this strategy is that the institution wants to proactively create a business architecture that is nimble, flexible, and open to the creation of new models of value yet allows the bank to retain control and minimizes the risks normally associated with open banking.

For context, “open banking” is a somewhat ambiguous term that refers to the presumed logical – and forced -evolution of frictionless interoperability between banks and non-banks.  Open banking was boosted by a European Union regulation called the Payments Services Directive (PSD) and more specifically, a 2015 revision to that directive, PSD2.  In a nutshell, the revised directive requires banks in the European Union to allow third-party payments processors to access customer information at the bank.  Presumably, this directive was created to create a safer and more innovative payments market in the EU, one based on improving the convenience of mobility and e-commerce.

However, the notion of allowing external organizations – particularly small payments firms that don’t have the same established history as the major players – to get access to customer information held in the institution’s data center is, at best, a large security, privacy and risk management challenge.  In light of another prevailing regulation in the EU, the General Data Protection Regulation (GDPR), which places the responsibility of safeguarding financial data for all EU citizens on the financial institution, the PSD2 directive seems at odds with the need to protect data privacy at the same time.

The threat associated with open banking comes from the not unreasonable belief that such open access will eventually apply to areas outside of payments.   For instance, could a bank be forced to provide your history of paycheck deposits to a ride-sharing company?   Could your favorite coffee house demand to get detailed shopping information from the bank’s store of payments data to find out where you buy your beans?   These are not quite Orwellian outcomes, to be sure, but for an industry ostensibly built on trust to be forced to loosen its hold on protecting data, the future of open banking isn’t welcomed without some trepidation.

So let’s flip the situation on its head.  For the purposes of modernizing its own infrastructure, many banks are transforming their technology architectures to be much more open internally.   Moving from decades-old, monolithic applications that run the business to a much more disaggregated and fluid collection of business components using open application programming interfaces (APIs) and microservices is a great way to improve the speed of development and innovation for the bank, increasing its ability to respond to market changes.   New products and services could, theoretically, be assembled as needed, instead of creating from scratch through software development.The new architecture becomes a resource for internal product developers and the lines of business to better connect products within the institution.  In the longer term, the institution can improve efficiency even further by making decisions to move non-differentiating workloads to cloud providers at a lower cost or with better service characteristics.

In turn, the ability to create a connected environment internally is very easily used to connect to external partners as well by using different API libraries with their own levels of security and governance.  The key here is that the bank is in control of with whom they choose to partner.  There are instances of partnerships between banks and non-banking organizations, for example, that have been done under legacy architectures using point-to-point integration, but in the Connected environment, institutions can practice Connected Sourcing, that is, the ability to choose partners as market demands change without onerous one-to-one software development.  What’s more, the bank has proactively created this open environment, and placed safeguarding measure in place, before it is forced to do so by regulation.  This is the essence of Connected Banking.  (Figure 1 is a high-level view of the Connected Banking ecosystem)

Creating this internal architecture serves the short-term needs of the bank to be more agile in addressing the customer’s needs, while at the same time making the institution’s operation more efficient.  And by creating a managed environment from which to connect to external ecosystems, the bank can offer unprecedented value propositions that are better aligned to the way their customers live.  Imagine being able to search for a new home on your bank’s website, within a desired neighborhood, with all the relevant information about taxes, schools, cost of typical home services like lawn maintenance, etc.  Then combine that experience with a personal dashboard on the same page based on the information your bank has about your specific financial state; savings accounts, current credit worthiness, prevailing market interest rates, and, ultimately, highlighting which of those homes on the map fall within your financial means.  Or allowing you to click on your perfect home, even if it’s slightly out of reach today, and then advising you on the steps needed to reach that potential purchase.

It sounds like magic.  But the start of this kind of ability is already surfacing at some banks today.   And just like in the movie, banks will surely find a number of unanticipated and sometimes magical benefits by embracing Connected Banking and using it as the strategic refrain to get the inevitable task of open banking done, under control, while maintaining their charter of trust.

About Jerry Silva:

Jerry Silva is research director for IDC Financial Insights responsible for the global retail banking practice.   Mr. Silva’s research focuses on technology trends and customer expectations and behaviors in retail banking worldwide.   Mr. Silva draws upon over 25 years of experience in the financial services industry to cover a variety of topics, from the back office, to customer channels, to governance in the technology shops at financial institutions.  His work for both institutions and vendors gives Mr. Silva a broad perspective in technology strategies.

Follow Jerry on Twitter @JerrySilva_PGS and read his blog posts in the IDC Financial Insights Community.

Figure 1.  Connected Banking  (if desired)

IDC Financial Insights