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Since the inception of the Payment Services Directive (PSD2) in Europe, open banking has presented both a compliance challenge and an opportunity to unlock new revenue channels. Banks are being rapidly ushered into a digital-first era — one in which customers expect seamless digital experiences at an alarming pace. Customers now rely on digital banking experiences to make critical financial decisions, and banks are turning to open banking to provide useful services to meet these needs.

Lisa Hurwitz sat down with Paolo Malinverno, VP, strategy and innovation at MuleSoft to learn more. With over 40 years of technology and business experience – most recently as a Gartner analyst, Paolo has a pulse on the forces shaping banking and financial services industry. Paolo shares his take on how banks should approach their open-banking strategy to develop innovative new business models.

The pandemic seems to have intensified competitive pressures on the financial services industry. Have customer expectations in the banking industry changed since the onset of the pandemic?

Paolo Malinverno:

Customer expectations have shifted since the pandemic as the way that customers interact with banks has changed. Brick-and-mortar, in-person interactions have given way to digital experiences as banks and customers alike are affected by lockdowns. With this, customers are expecting seamless, connected experiences through the digital channels with which they interact with a bank, whether through a banking interface on a computer or a mobile phone. In order to maintain the special relationship with customers in an environment where social distancing is prolonged, banks must adapt quickly. Customers in industries that are heavily impacted by the pandemic have come to expect more support from their banks, and this has led to a rise in expectations. 

Banks have quite a few sets of demands to meet from customers in the short and long term. Can you share more about the most pressing challenges facing bank and financial services CIOs today?

Paolo Malinverno:

Even with the pandemic, there have been a few challenges that remain constant in the industry. Across all areas of financial services, especially retail banking, there is a desire to innovate. For example, in investment banking and especially corporate banking, CIOs are facing high demands to automate solutions and sell them as well. These are the pressures that helped drive the trend called open banking. Open banking is a trend that is sweeping the industry substantially in other areas of the world – not just in Europe but also in South America and Brazil, Southeast Asia (Thailand and Indonesia), Australia, and New Zealand. In Southeast Asia, Australia, and New Zealand, people are additionally used to doing mobile banking for a series of cultural reasons.

Open banking comes with imperatives. There are more than 60 countries worldwide with open-banking regulations in place, and at least as many who are going to put open-banking regulations in place for the next 12 months. These regulations push the banks to become a platform, securely opening up the  information that is on the bank to third parties. For example, the European directive called PSD2 has encouraged many retail banks in the European Union to publish APIs in an attempt to become more digital.

Digital strategy is also sweeping across all industries, with platform companies like Google or Apple becoming very successful. Conventional business models, like many in banking, seek to mimic these successful platform models. CIOs really need to make that a reality.

Is this heightened competition affecting the retail bank CIOs more so or is it an industry-wide competition issue?

Paolo Malinverno:

It is most definitely industry-wide – throughout investment banking and even insurance. Third-party non-banks like Alibaba are heightened competition by generally offering platforms, and they are already used to interacting with customers on digital channels. Depending on their origin country, third-parties may face more or less red tape to get a banking license. This competition is the reason why a lot of API programs are generally targeting either existing open-banking regulations and beyond, such as open-banking scenarios for multiplication of micro loans, which typically is satisfied with a fully automated process. 

What are the top actionable steps that banks and CIOs need to take to thrive in the current competitive environment? 

Paolo Malinverno:

Open banking won’t fizzle out so CIOs need to face the trend. Connecting digitally with your customers is not something that is going to disappear. It’s going to get much more important. Using APIs to build an API ecosystem of partners with banking solutions is an adventure that will take years, but it’s critical to remain competitive because a single bank cannot afford to offer all the possible experiences a customer could want. want. Organizations will need to change to embrace open banking.

Customers will continue to place value in established banks, but they will want to interact with them in a totally different way that is enabled by open banking and API ecosystems. Open banking has implications and banks can slowly become more of a service provider, which is a different model to adjust to. 

Additionally, open banking is something that will take investment before banks see ROI. Technical debt will significantly hamper open banking if not dealt with using strategies like APIs. Yet, embracing digital strategies may give organizations the chance to tackle technical debt as they go. APIs are the touchpoint between a bank as a platform and the broader ecosystem. APIs are becoming like a product, such as a mortgage to offer to customers, or to be used by an artificial intelligence-based system that invests a customer’s money that remains in their account at the end of the month. Services like these are enabled by APIs, so having an API mindset is critical.

For example, in the Nordic countries, several banks serve their corporate customers with corporate banking-based APIs with a high standard of security. These APIs can enable corporate clients to have real-time access to their account balances and bank transaction services, such as paying e-invoices. APIs are the necessary vehicle that will allow banks to build the ecosystem to enable more innovative services. Companies can reuse the APIs already existing in their infrastructure to model key interactions and define new ones, allowing them to innovate faster. 

We talked a little about the industry innovating and moving into that platform model to deal with competition. As banks strive to become more open and expand their innovation to partners, what are the most critical API strategy, best practices that they should be keeping in mind?

Paolo Malinverno:

It’s easy to say that banks should have an API strategy, but who drives the API strategy? It’s an easy mistake to build APIs bottom up from the little APIs we have already or for the transactions that you want to put an API in front of. The reality is that a good API strategy is a strategy that enables digital imperatives. Banks should prioritize all those interactions that they want customers to go through, whether because of digital needs arising from the pandemic, or open banking, or beyond. These interactions dictate what APIs a bank will need, and typically they won’t need hundreds.

A good set of 50 or 60 APIs can enable a lot of new interactions. In general, an API strategy that is driven by the enablement of specific, key interactions with customers is a best practice. Banks can then set key performance indicators or metrics on top of that to help them continue to improve moving forward. 

What’s ahead in 2021? 

Many open-banking regulations are becoming a reality in 2021 in countries like Russia, China, and much of Southeast Asia. Countries like Mexico, Brazil, and Japan will also see open-banking regulations in 2021. 

Amidst these regulations, economic recovery from the impact of the pandemic will be in the minds of many CIOs. Banks will have to support economic recovery initiatives that present challenges and risks, and government funding will affect this. For CIOs, going digital won’t just be an option, it will be an absolute necessity. 

In today’s rapidly, evolving landscape, meeting customer expectations for digital experiences will be more crucial than ever.