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The future of banking is composable

Banks need new tools to embrace open-banking models and respond to rising customer expectations.



Frankie Wai, Temenos

Over the past few decades, banking became about creating bigger institutions: from consumer and corporate lending, to investment banking, markets, and wealth management, the trend has been towards universal banking, with interlocking businesses that support one another.

Although universal banking makes sense from a client and business perspective, it doesn’t work well from a technology and efficiency point of view. Each department, and each product, has developed in its own silos – as legal contracts, as databases, and as cultures.

Frankie Wai (pictured), business solution director at Temenos – a leading technology provider to the world’s biggest financial groups – says technology has made these weaknesses apparent.

The power of expectations

Consumer expectations are now shaped by experiences on platforms such as Amazon and Alibaba. Banks are now expected by consumers, and even by corporate customers, to offer something as easy and seamless.

This reality has forced change in the industry. “Customer expectations mean firms now compete across industries, not just among one another,” he said. “Along with new competition, there is also new collaboration.”

For example, the trend of open banking (sometimes mandated by regulators, and in some cases, a powerful market driver) is leading to more competition, while digital efficiencies enable banks to extend services to new customers – the traditionally unbanked or underserved consumers and small businesses.

“The combination of customer expectations and emerging technology is splitting the value chain in banking between manufacturing and distribution,” Wai said.

Data is the lifeblood of this change. Banks are racing to aggregate their own siloed data, to get a holistic view of a customer. But why stop there? Many other companies have data on a bank’s customer as well.

Neil Tan, chairman of the Fintech Association of Hong Kong, said, “Data sets now come from your own bank, and from the platform. It’s about using artificial intelligence and machine learning together with partners to get a comprehensive picture of your customers.”

Adapting banking business models…

As universal banks, big institutions try to do everything themselves. They make their own products, such as loans, brokerage, or structured products. And they sell these to their own clients.

But in this new world, these proprietary business models don’t work. Fintechs are attacking niche services by providing great mobile or online experiences, but they are too small to survive against a big bank, so they are partnering with non-banks that have customers: bank customers.

Banks have learned to respond in kind. They are growing the pie by becoming more flexible, more open-source, and by adopting key infrastructure such as cloud technology. This lets them test, go to market, and apply big-data analytics fast, and at scale.

It also has set the stage for banks to change their business models.

They are still “universal banks” in the sense that they can deliver a complete package of services. But they may be delivering their services to a third party’s customers instead of relying solely on their own. This is also known as “banking as a service”, with the bank becoming a manufacturer that puts its goods on someone else’s platform.

Or they may be delivering a service created by a partner, in combination with their in-house offerings, to sell to their own customers. This could be a financial product, perhaps a niche product the bank doesn’t have. Or it could be a non-financial product – a lifestyle or e-commerce offering, for example. This is also called “banking as a platform”, in which the bank is now the platform on which others can add their products.

And many banks are doing everything! They are proprietary service providers, and sometimes they offer their services to other platforms, and yet in other instances, the bank itself becomes a platform.

…based on new partnerships

Temenos recently surveyed bank CEOs and senior executives worldwide and found 47 percent expect their bank to move beyond traditional business models.

“Globally, banks are headed down the path of third-party banking or offering non-banking products to customers,” Wai said.

Therefore if a bank wants to be “universal”, it can do this by partnering with other banks, or fintechs, or any company facing customers, such as a social messaging app, payments businesses, or digital lifestyles.

As more institutions embrace open banking, they will need the right IT architecture and core systems to make this a reality. “Temenos enables the industry to move from traditional banking, to open banking, to operating within an entire ecosystem,” Wai said.

Temenos’s core banking software is upgradeable to operate on cloud, delivering solutions on a subscription basis, so clients can pick and choose what features they want, when they need them. Cash management? Trade finance? Mortgages? Instant payments? The list goes on.

Composable banking

The company calls this its Composable Banking Services (CBS), meaning every possible product, function, and operational protocol is available a la carte. A bank (or insurer, non-bank lender, or other institution) can select the capabilities they want, put them into a Temenos sandbox to see how they work, and integrate these into their systems. They can also integrate with a range of fintech partners that are available on the Temenos platform.

Charles Shum, a Temenos consultant, says CBS is housed in the company’s cloud, so there is no infrastructure overhead for customers. “We are unbundling functionalities,” he said.

“Take cash management, for example. Our customers don’t need to replace their existing systems or build something new that’s end-to-end. They can just go to our CBS, like any other online shopping experience.”

Shum says composable banking is more than just a platform or a solution. “It’s a philosophy about staying relevant in a changing world,” he said.

More prosaically, Wai added, “You can launch a bank within days.”

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