From “banking-out-of-bank” to “banking-out-of-sight,” the financial banking sector has experienced significant change in the last couple of decades. But none so transformative as the one it’s currently undergoing.
Enter the age of “banking ecosystems.” Yes, amidst rising competition from open finance fintechs and Big Tech, banks are increasingly turning to collaborative ecosystem models. In fact, over 90% of banks already sold on the idea.
But why are banks opting in for this fundamental change? Yes, with global fintech funding on a record high – $131.5 billion in 2021 – competitive forces are inarguably real. But they represent just one side of the die.
Let’s untangle this paradigm shift in greater depth and explore the plethora of reasons for banks to opt for ecosystem-based digital banking platforms.
Banking Ecosystems Unravelled: What is it All About?
At its core, ecosystem banking is a relationship model where finance houses partner with third-party service providers and fintech companies, such as open finance platforms or marketplaces, to improve their existing offerings.
The aim is to provide new services and products that make your customers’ lives easier without having to develop the codebase from the ground up.
An example of an ecosystem in action can be found in Barclays’ partnership with TransferMate–a renowned global payments provider and modern banking platform. This partnership allowed the financial institution’s customers in higher education to conveniently collect fees from overseas students, making life easier for:
- Institutions – who can now track and settle fee payments easily
- End users – who have a convenient way to pay their university fees
- Barclays – who have a ready-made solution on their hands and don’t have to build one from scratch
This is just a glimpse of what banking ecosystems can achieve. To understand the complete picture, here are some more advantages that ecosystems bring to banks, partners, and, most importantly, customers.
Outsource Product Capabilities – A Definitive Answer to the ‘Build’ or ‘Buy’ Question
Historically, banks have been averse to outsourcing their IT requirements, instead relying on their home-grown banking technology. This used to work in times of staggered technological developments. But in an accelerated digital world, the legacy monolithic systems fail to keep up.
Fintechs, on the other hand, with their innovative and scalable solutions, have managed to reduce friction from many financial processes.
By partnering with these new-age fintechs, banks can offer improved personal, retail, and SME banking solutions to users, preventing them from seeking them elsewhere. Better yet, financial institutions won’t have to expend resources in developing and supporting best-in-breed solutions, as third parties have the expertise, scale, and technology to do it better.
That’s the beauty of the ecosystem model. You save time, money, and resources while your customers are happy with the convenience you provide.
Improved Quality of Core Banking Solutions
The rise of fintechs has definitely improved the quality of financial software. Digital banking and mobile banking platforms have been a huge hit amongst consumers, particularly due to the accessibility and experience of today’s financial apps.
This is because fintechs usually base their products on one part of the financial spectrum, focusing on streamlining customer experience in that one area. As a result, they can create the best possible digital application for a given issue, unlike banks, which have the same developers working on all functions.
The result, in the bank’s case, is a monolithic solution that can’t match the seamlessness of apps built by fintechs, leading to an underwhelming customer experience.
In this day and age, that’s too high of a cost to bear.
So, rather than building apps bound to fail, banks can choose what to include in their ecosystem from the plethora of commercial and retail banking solutions available. In effect, banks become creators of open marketplaces rather than developers of end-to-end customer services.
Provide a Richer Customer Experience Via a Unified Digital Banking Platform
The modern consumers have no time to waste. That’s one of the reasons why so many ‘convenience food’ startups, such as Cookd, are thriving. Essentially, they provide all the ingredients for a simple meal recipe in the right quantities—no need to order or shop for individual constituents separately.
The point is, if a complete package is on offer, the customer will go for it.
When you apply the same principle to banks, it becomes ‘convenience banking.’ And an ecosystem enables banks to provide these ‘complete packages,’ allowing them to add certain non-financial services on top of their core banking solutions.
For instance, when a customer opts for an auto loan, banks can also refer them to partner dealerships and insurance companies. It is a considerable time-saver for the customer.
Simplified Regulatory Compliance
If all other reasons fail to convince you that ecosystems are the future of commercial and retail banking solutions, there’s still the regulation part to consider. Governments worldwide have been pressuring banks to adopt a more open model for quite some time now, making their data accessible to other banks and service providers if the customer asks them to do so.
That’s what is happening in the EU with the PSD2 framework, with other regions and countries preparing to follow suit with similar legislation. An ecosystem model can now help banks comply with the data-sharing mandates while improving customer satisfaction and maximising revenue.
A Win-Win for All Parties Involved
All in all, a digital ecosystem works favourably for all parties involved–banks amass customer loyalty, customers get a better experience, and third-party providers get access to better data.
However, being sold on the idea of ecosystems is one thing. Building one from scratch is where all the complexities lie, especially now when there’s an abundance of financial microservices in the market.
We at Intellect Design Arena can make choosing easy for you with our comprehensive, multi-product modern banking platform, featuring corporate and consumer banking solutions powered by leading-edge technologies like AI and Big Data. Fuelled by our unique Design Thinking approach, our solutions can help you seamlessly transition to an ecosystem model.
Learn more about our capabilities. Request a demo today!
Author: iGCB Team