The banking industry is deeply ingrained in traditional processes and legacy systems, yet it is ripe for disruption and transformation.
Some of that transformation is happening at the industry's periphery as new players roll out business models driven by new technologies.
At the core of the industry, some banks embrace transformation as the way forward, while others continue to fight the march of progress.
As one cloud industry executive has said recently, “around 85% of IT budgets at banks are aimed at maintaining the status quo.”
The trends in banking industry technology are outlined in a recent Equinix whitepaper on the payments industry, which outlines how the deployment of hybrid public and private cloud architectures — often linked back to legacy systems — are moving the industry forward.
This new model is for collaboration between new players and old, with new services being rolled out in an ecosystem approach over the top of existing regulatory arrangements, leveraged by new technology.
The age of BaaS
The whitepaper outlines a new model banking-as-a-service (BaaS), driven by next-generation connectivity between the traditional bank, a technical banking platform, and a front-end interface.
Ultimately, the technology stack delivers a differentiated customer experience because consumers expect low latency on their banking apps. They demand these connections are reliable, secure, and always available.
BaaS also allows rapid rollout in new markets. As the whitepaper points out, gaining a full banking license can be an onerous and costly exercise in many jurisdictions. The new banking model allows the so-called neobanks to focus on the customer interface as a critical differentiator.
“The future of banking and payments is instant, open and everywhere,” the whitepaper says.
“These trends have evolved based on the developments of new business models and backed by technical infrastructure that increasingly features greater connectivity, responsiveness, reliability, and security.”
A new case for banking agility
The whitepaper presents several case studies which show the new models for banking and payments, some of them using real-time payments systems (RTP).
There were 56 RTP systems live globally as of 2020, many of them maturing as users adapt to the new business model.
It points out the example of Swish in Sweden, a real-time payments success story that uses the country’s BIR payments scheme. As of October 2020, there were 7.7 million private Swish users and over 260,000 merchants using the app.
Operating initially only as a mobile wallet app, Swish was created in 2012 by a consortium of six largest Swedish banks, the country’s central bank, and the bank clearing system.
Initially designed for P2P payments, Swish became increasingly popular for small payments received by ad hoc merchants, such as market stalls in flea markets, collections at church services, and sporting clubs.
In an example of consumer demand driving development, Swish has evolved to make and take payments online and officially support merchants at the point of sale.
For e-commerce merchants, Swish is available as a plug-in within shopping car services, and payments via Swish occur primarily via QR codes.
Westpac extends its BaaS
In Australia, the whitepaper points out the collaboration between leading bank Westpac and new player Afterpay, which has taken the local market by storm — and threatened the very existence of credit cards – with its ‘buy now pay later’ model.
Under the agreement between Westpac and Afterpay, which commenced in the first quarter of this year, Afterpay has become the first third-party fintech to be launched on Westpac’s cloud-native “IOX” digital banking platform.
IOX is a platform earmarked by the bank for collaboration with fintechs and is operated separately from the main Westpac banking platform.
The agreement gives Afterpay’s 3.3 million Australian customers access to transaction and savings accounts and undertake transactions without using an external bank.
Afterpay has access to all the spending data, which it can then use for more meaningful engagements with customers.
All this occurs without Afterpay needing a banking license, using Westpac’s existing license as part of a BaaS model.
These business models are highly dependent on localized infrastructure providers who can meet data sovereignty and latency requirements.
“The interconnectivity between banks, service providers, fintechs, and others involved in the ecosystem is a crucial element in their enablement,” the whitepaper says.
“Where that infrastructure will be located and how it will be connected are important questions for CIOs and IT admins.”
All of which points to a future where banking is an ecosystem of larger players providing regulatory compliance and critical infrastructure, with nimble new players rolling out consumer-facing services through better connectivity and latency.
Some old banks might not like this future, but it's here now.
Lachlan Colquhoun is the Australia and New Zealand correspondent for CDOTrends and DigitalWorkforceTrends, and the editor of NextGen Connectivity. His fascination is with how businesses are reinventing themselves through digital technology and collaborate with others to become completely new organizations. You can reach him at [email protected].
Image credit: iStockphoto/NatalyaBurova