Knowledge

7 reasons why digital ecosystems are the future of retail banking

How long have you been working in the financial industry? Have you noticed your bank morphing into much more than a bank? Just like the rest of the industry, your bank is now offering a lot more than just financial services of their own. Your bank is turning into a digital ecosystem, providing its customers with the fullest customer experience in the defining moments of your life.

Read on to learn:

  • Why digital ecosystems are a matter of life or death for retail banks
  • How digital ecosystems are helping incumbent banks retain their customer base
  • How digital ecosystems allow banks to differentiate themselves
  • How digital ecosystems improve the quality of banking systems
  • How digital ecosystems are sources of intelligence
  • How digital ecosystems are key to improving customer experience
  • How regulators are forcing banks to become digital ecosystems for the benefit of all

Banks are not transforming into ecosystems because they like it. Rather, it has become a necessity to act as a one-stop-shop for their customers. For starters, consumers are seeking convenience and want to procure as many services as possible through one purchase. Secondly, open banking and PSD2 (the second Payment Services Directive) are forcing financial institutions to open up their databases to external service providers if customers request this. And, thirdly, FinTech companies are stealing customers away from incumbent banks, by focusing on the customer journey and the actual needs of customers. As Chris Skinner explains in ‘Doing Digital’, FinTechs are one of the driving forces in the digitization of the banking system, and they certainly play a key role in the creation of digital ecosystems.

While most banks may not have immediately embraced the evolutions outlined above, they have plenty of reasons to set about building or joining digital ecosystems.

Digital ecosystems help incumbent banks retain their customer base

For a long time now, financial institutions have persisted in building their entire IT architecture themselves. By nature, financial institutions are control freaks. The very basis of banking is about managing risk, security, and regulatory compliance. By building applications on their own, banks feel more secure and more in control.

The ‛build‘ or ‛buy‘ question

Banks quite rightly view technology as a force of innovation and want to use technology as a means to differentiate themselves from other banks. That’s why they engineered and built large monolithic systems that captured the entire know-how and experience of the bank, its business rules, its processes, its products. These large applications took years to build and proved difficult to maintain, not to mention adapting to changing market conditions. That’s why it dawned on banks that buying may, in some cases, be a better option than building.

Agile FinTechs focus on frictionless experiences

What banks also saw was the agile way FinTechs created their apps, and how successful these apps proved. Although these FinTechs were first categorized as a nuisance, traditional financial institutions could not help noticing the quality of the apps and how these apps succeeded in removing friction from financial processes. Rather than competing with these upstarts, banks decided to partner with them to offer customers a better experience along with added functionality.

By working with the FinTechs in digital ecosystems, retail banks can enrich the customer experience and offer functionality that consumers might otherwise seek elsewhere. Often, turning to a FinTech for such functionality is a first step for customers in moving away from their primary bank. If they find it at their own bank, there is no reason to jump ship.

Digital ecosystems are a win-win for all those involved

In a digital ecosystem, there are three sets of stakeholders: banks, third-party service providers and the customers. All stand to gain from digital ecosystems. In that way, digital ecosystems are no different from the ecosystems we find in nature.

Customers get a better experience through digital ecosystems

Customers benefit from digital ecosystems by getting access to a wealth of services through the unique channel of a banking app. No need to shop around and piece everything together themselves.

Banks get customer loyalty through digital ecosystems

By offering a full suite of services to customers, banks can stop customers from walking away from them for a cool app that delivers a great customer experience. What’s more, banks can even attract new customers. That’s why some banks open up their smartphone app to non-customers. By using the app for a specific functionality, they get experience with the bank in question and may consider moving banks because of a more complete package of services.

External partners get extra data through digital ecosystems

Partners in ecosystems exchange data, and each partner can add value to that data. For instance: an airline that gets extra financial information on a customer can find out whom to offer upgrades to. An electronics company can segment its customers based on their willingness to buy more fancy equipment.

Digital ecosystems allow a bank to differentiate themselves

Have you ever watched the ‘Lego Master’ TV format? In the show, different teams get the mission to build a specific artifact using the traditional Lego bricks. Sometimes they get free rein and are allowed to build anything that comes to mind. When that happens, you see creativity skyrocketing. Each team starts with the same 2 million Lego bricks in different colors, yet the outcome is vastly different. The teams come up with an idea, look at the colored blocks, pick and choose what suits them best and then start building.

That is what happens when banks build ecosystems too: they look at the market of services that are on offer, own services, and apps from FinTechs, they pick and choose and then start building. At best, all ecosystems will be just as different as the stuff that Lego Master teams come up with. By attaching external services to their core banking functions, retail banks can differentiate themselves and build a unique offering that caters to the needs of their target customers.

Digital ecosystems improve the quality of banking systems

The breakthrough of FinTech players has given a welcome boost to the quality of financial software, especially when it comes to the user-friendliness of the systems. FinTechs are usually focused on just one small aspect of the financial spectrum and then turn it into the best possible application. If you can combine all these top-quality applications from FinTech whizz kids into one ecosystem, the result is a perfect set of apps, that is probably better than a monolithic app built by one set of developers at a bank. To quote Chris Skinner: “One brilliant thing is much better than 1,000 average ones.”

The beauty of an ecosystem is that banks can decide what apps they will work with and which they will avoid. They can detect which FinTech apps are best and then include them in their digital ecosystem. In doing this, banks unburden their customers of making this choice. To quote Skinner again: “Banks need to be the curators of open marketplaces that remove friction from banking processes, rather than developers of end-to-end services for customers.”

Digital ecosystems deliver more intelligence

Databases can spawn some wonderful tools: by adding data to other data, we gain fresh, new insights. By pooling the information from different parties in the digital ecosystem, the participants can offer intelligent services to their customers. Consider this example: a bank that aggregates the financial information from a customer’s different bank accounts, can let the customer know what his total budget is, and can even inform the customer on how much money (s)he can still freely spend until the next payday, after deduction of certain fixed costs. This is a huge bonus for customers, who get more information on their digital financial lifestyle and a personalized service.

 

By aggregating financial information and adding intelligent services to the data, digital ecosystems can make the customer more money-wise. Knowing how many people have gotten themselves in debt is also a useful yardstick for the bank.

Digital ecosystems deliver a richer customer experience

Modern consumers have no time to waste. If a complete package of services is on offer, they will go for it. Just look at the success of services that deliver all the ingredients to make a hearty meal at home. Services such as Hello Fresh take away the burden of queuing at shops: they deliver exactly what you need, in the right quantity and with a simple recipe. This is sometimes called ‘convenience food’.

 

Ever more banks are opting for ‘convenience banking’ by tailoring a number of financial and non-financial services around the defining moments in a person’s life: marriage, buying a house, moving house, having a baby, buying a new car after the old one got totaled …. All of these events have a financial component to them that necessitate interaction with a bank. Banks that bolt on extra services to a loan for a house are delivering a rich experience to their customers. When you get a mortgage for the house, the bank can also offer utility companies, removal firms, insurance companies, etc. This is a huge time saving for the customer.

Digital ecosystems are a must for regulators

Even if all the reasons above have not convinced you that digital ecosystems are the future of retail banking, there is still one other compelling reason to investigate digital ecosystems anyway: regulations. Throughout the world, governments are imposing rules on banks that force them to exchange customer information with other banks and service companies if the customer asks them to do that. In the European Union, this is known as the PSD2 framework, other countries and regions are adopting similar legislation.

Turning the dream of digital ecosystems into reality

Being convinced of the power of digital ecosystems is one thing, actually building it is quite another matter. Fortunately, technology has taken great strides in the past decade. It is now easier than ever to let applications communicate with one another, thanks to Application Program Interfaces (APIs) and the evolution of microservices.

Identity and Access Management (IAM) plays a key role in ensuring trust in digital ecosystems. IAM protects the security of APIs and microservices, not only at the edge, but also between different applications. This delivers airtight security. When it comes to the customer experience, IAM will authenticate users and give them access to those apps they have access privileges for and impose step-up authentication when extra security is required

Building a digital ecosystem is a more profound change for a retail bank than adding digital channels was. However, it is an evolution that no bank can ignore.