Accelerating digital transformation: value in a platform-based approach

An opinion piece by Eli Rosner, Chief Product and Technology Officer, Finastra

Over the last 12 months, we’ve seen one of the biggest shifts in decades in financial technology – with banks accelerating the transition of their operations to the cloud. The benefits are clear: a cloud-based approach provides easy access to innovation, helps banks deliver more relevant customer experiences and reduces total cost of ownership, without the burden of managing security and infrastructure.

Importantly, the shift to the cloud also opens up new opportunities in terms of facilitating the rise of platforms and the use of open APIs, helping to increase collaboration between banks and other third parties. This is imperative for banks today as they adjust to an increasingly competitive landscape and open up their services to allow customers to benefit from open banking and the type of digital-first experiences fintechs can provide.

How to approach transformation?

If banks haven’t already decided on a strategy for how to keep pace with technology innovation, this should be a priority. Competition, not just from other banks but from fintechs, big techs and other third parties, is increasing. Those that hesitate risk being left behind.

Some of the largest banks worldwide, including Emirates NBD with its API Sandbox, have already embarked on building their own platforms to facilitate innovation – taking a ‘Bank as a Platform’ approach. In this way, a bank exposes its infrastructure through APIs to fintechs and developers, inviting them to develop products and services for customers.

But the challenge for any bank in building a proprietary platform is made more complex by the need to ensure integration and interoperability with existing legacy systems, while also simultaneously creating a more flexible DevOps based architecture. Such an approach requires significant investment of time and resources.

For financial institutions in the Middle East, the time to think about open banking is now, as regulators begin to plan for the future. Bahrain has been an early mover with The Central Bank of Bahrain’s launch of the Open Banking Framework. Announced in October 2020, it includes operational guidelines, security standards, API specifications and data protection rules. Saudi Arabian Monetary Authority (SAMA) said it aims to have a similar framework for open banking ready during the first half of 2022.

According to Finastra’s survey last year, almost 90% of UAE bank executives say their organization is adopting or looking to adopt open APIs. Numerous challenges to progress were cited by respondents, including regulation, with the cost of fintech development mentioned as a particular concern for 46% of bank executives in the UAE.

It will inevitably cost money to realise the many benefits of open banking, but there are other routes that avoid banks building their own open banking platforms – particularly when they can easily connect to an existing third-party platform for open innovation like Finastra’s

A third-party platform frees the bank from the overhead of needing to manage and run the platform itself – allowing it to focus on what really matters: delivering a great banking experience to customers.

The best third-party platforms bring banks and fintechs together in a model that benefits all – allowing banks to access and deploy innovative apps from fintechs that have been tested and, in many cases, pre-integrated with the core banking systems they are already using. As a result, bank customers can quickly start to benefit from new apps and functionality that banks incorporate as part of their offerings.

A platform-based approach that facilitates collaboration through APIs, also allows banks to tap into the growing Bank-as-a-Service (BaaS) marketplace. This involves banks exposing specific back-end services via APIs to non-banks, enabling these third parties to offer such services to customers. A BaaS approach can allow banks to reach new audiences and achieve scale.

Adopting a platform-based approach opens a range of opportunities for banks today. With banks and fintechs competing alongside big techs for who will own the customer relationship. This battle is set to intensify.

To explore this topic in more detail Finastra has commissioned research with Aite Group on the Pathways to Competitive Advantage in the Era of Digital Transformation. We will also be sharing the key findings during our panel session at Finastra Universe on March 2 – register now to take part in the session (content will also be available on demand for a month thereafter).