In the past, banks operated in relatively closed, insular systems and were largely cut off from one another. This was mostly by design. Given that banks handled their clients’ money and sensitive personal information, such as earnings and credit card histories, they had to reassure their clientele that this information was not being misused or stolen. Therefore, banks built their own records systems, eventually digitizing these systems into the legacy IT infrastructure that was in place around the 1980s.
However, these systems, siloed off from one another as they were, were soon replaced by more advanced technologies and, eventually, widespread digital banking innovation. Back then, banks were quite closed off from one another and guarded their clients’ depository information jealously.
By contrast, today’s banks actually depend on one another, openly sharing information about their clients to create a more complete picture of their capacity to borrow and repay loans. This environment is what’s known in the financial industry as open banking. If your bank isn’t participating in it yet, it’s probably high time that you do.
If you are part of the management team of a small or midsized bank and are thinking of ways to open up your banking systems, you’ve come to the right place. Here are some things you need to consider when pursuing your slice of the USD 416 billion open banking pie.
Update Your Tech Stack
Core legacy banking technology was designed at a time when much of the software and hardware we use today were simply pipe dreams or fantasies. The idea of a bank’s mainframe being hosted at a third-party location, rather than in a property owned by the bank itself, would have set off major alarm bells among bank executives of the past. Today, cloud-hosted systems and services are highly sought after thanks to their extensibility and security.
Naturally, to become a part of the digital revolution in banking, you must first upgrade your bank’s core systems to support current-generation technology. This can be an expensive and time-consuming endeavor, but you don’t have to revamp all your systems in one fell swoop. Consider a packetized rollout of your bank’s internal digital revolution, with key systems prioritized and attended to first, followed by subsystems. You can add on to your stack as needed later on. Also, be sure to select a third-party vendor who will give you the flexibility to add to or extend your digitalization as needed.
Search Out and Select Potential Partners
The digital age of banking and finance is all about partnerships and agile engagement with institutions that were, once upon a time, your competitors. While competition is still going to be part and parcel of the industry, you’ll also be working with your fellow banks, pooling your data foundations together to assemble a more complete picture of a client’s credit position. Therefore, you must select partners whose data foundations are compatible with your own, particularly those with systems that can integrate seamlessly into yours.
Choose to partner with banks that you can agree with to build a common framework for managing, updating, and accessing your data. To simplify this process, you may simply want to partner with banks that use the same third-party software provider as you do. While this does not ensure exact, one-to-one correspondence between your system and theirs, it does make reconciliation between the two systems easier.
Reinforce Your Security
Open banking may be the age of free-flowing information between banks, but this does not mean it’s not without its safeguards. In fact, security is more important than ever in the age of open banking, and it’s also more regulated. As such, failing to implement adequate security measures will usually result in hefty noncompliance fines and citations.
Your bank’s security and IT personnel will have to check that your systems have strong protocols for user authentication and authorization. This will ensure that users get access to what they need and are kept from more sensitive information. Encryption of inbound and outbound API traffic will have to be implemented as well. Even after attending to all of these, your security personnel still won’t be done. They’ll have to stay abreast of new tactics and technologies that hackers might use against your bank’s system in their search for new ways to exploit it.
While the banking industry has always preferred the safe, certain course of action when it comes to investment, this principle is no longer applicable. Agility and dynamism are what will be required in the new banking industry as clients demand more immediate personalized services and products. Banks that are unable to deliver this will likely be consumed or left to peter out. To ensure that this does not happen to your bank, consider the tips outlined above.
