Why big banks are threatened – and how they can fight back

Incumbent banks are starting to look to “platform banking” to stay relevant. But what is it exactly, and why is it important?

Established banks always run multiple legacy systems that were patched together over the years. In fact, many well-known banks still run decades-old mainframes with near-extinct code that is difficult to maintain. How do they get around it? They keep adding more technology layers and then use the newest, sexiest-looking parts of their banking systems as examples of how innovative they are. It’s like putting lipstick on a pig.

These banks have another challenge: separate divisions that work in silos. Their fragmented infrastructure can make it hard to run integrated, efficient and modern banking services that meet customers’ needs in real time. They rarely have a single view of the customer, and each division may, for example, ask the client for Fica verification every time they want to sign up for a new product or service.

Enter platform banking, the antidote to the disjointedness and unwieldiness of legacy banking. With platform banking, banks run on unified digital platforms that make it easier for them to manage their operations cohesively and efficiently and gear their entire operation for continuous and quick innovation, renewal and expansion. Their secret sauce is interoperability — when systems talk to one another and function harmoniously. Without it, the data can’t flow to make innovation and more thoughtful customer service possible.

Why is platform banking becoming so important?

We live in an increasingly connected, digitised and competitive world. In the era of Covid, we’ve seen a rapid acceleration of digital and mobile financial service adoption by the public and the businesses that serve them. Banks are no longer competing only with other big banks in the same geography. They are now also up against global banks, new purely digital challenger banks (also known as “neobanks”), innovative fintech start-ups, Big Tech (think Apple Pay or Google Pay), and other non-bank businesses such as retailers who are starting to offer great banking, payments and financial services.

With this new reality dawning, the older players need to realise they will suffer the same fate as the dinosaurs if they cling to outdated, fragmented business models. Banks that run on more modern, lightweight, nimble technology platforms will have the competitive advantage, not only in terms of what they can do and offer existing clients, but also in terms of how they can woo new customers who are spoilt for choice. Platform banking creates enormous opportunities for banks to lower their costs and improve their margins, allowing them to pass on these pricing benefits while upping their customer satisfaction game. It also enables them to plug in great solutions from external partners who can help them innovate more rapidly and offer clever new services on top of their existing infrastructure to keep their customers engaged and happy.

What about ‘open banking’?

“Open banking” puts the ownership of the customer’s data back in their own hands. In an open banking environment, banks provide third-party organisations such as fintechs access to their customers’ data on their platforms, with the customer’s permission, to create an open exchange of data. This openness is highly beneficial for all parties involved — the customer, the fintech and the financial institution — because it allows for exponential innovation and creativity. It does, however, come at a price for the incumbent in that they must make peace with giving up what was traditionally always their key competitive advantage – the full control they had over their customer data. Open banking is not yet regulated in South Africa, but in other markets where it is, for instance in Europe where they have PSD2 (their version of Popia), regulators compel banks to open up their data at the customer’s behest. Local banks need to start preparing for this.

Pros and cons of platform banking

The main benefits of platform banking are efficiency and agility. Younger customers, including millennials and Gen-Zs, want simple, almost effortless, custom solutions that are all accessible in one place, preferably on their mobile phones. They are the prime customers for banking solutions that run on integrated digital platforms. For example, if they are buying a car through their bank, they might want to opt for insurance and customise their payment terms right there on their banking app — all from the comfort of their couch.

Another benefit for banks following the platform path is the data they can, in turn, access from the fintechs that plug into them. The insights they can gain can really help them understand their customers and where they are on their customer journey.

Banks that are still holding on to expensive, old-school business models will see the fintechs and neobanks eating their lunch

Pure digital platform banks have lower overheads, so they can offer other perks such as lower fees, higher interest rates on deposits and lower interest rates on loans, all while offering great customer service.

Platform banking is here to stay. Banks that are not ready for it, and that are still holding on to expensive, old-school business models such as the branch model will see the fintechs and neobanks eating their lunch. The regulators won’t protect them anymore, like they did 10 years ago. The big South African banks have always operated like an oligopoly, on the assumption that if they were compliant with the country’s banking regulations, customers would trust them and only them. But a big customer trust shift is now under way, partly set in motion by the global banking crisis of 2008-2009 and subsequent WikiLeaks scandals involving banks. Today consumers trust brands such as Google, Apple, Nike, Vodacom and Alibaba more than they trust the banks, and they are willing to use the financial services they offer.

What platform banking means for financial customer service

The neobanks that have built themselves as digital-first platform banks are geared for providing exceptional service from the outset. One of the factors that makes that possible is the in-depth and real-time customer data they are able to use to come up with great ways to give customers what they need, when they need it. Legacy banks with siloed, static, low-quality customer data simply can’t compete in terms of meeting customers’ real and evolving day to day needs. They were built for the era when people still went into the branch and spoke to the teller to get advice and assistance.

Some international platform banks are already trialling voice assistance with Alexa or Google Assistant so that customers can literally say what they need help with

Digital banks are just much better at providing smooth, “frictionless” customer experiences, especially to today’s customers who do everything on mobile. Let’s look at “frictionless” financial services for a second — it’s a big buzzword in new school banking right now. “Frictionless” in the traditional sense of the word means continuous, effortless, easy and fluid. “Frictionlessness” in terms of financial customer service is similar — it is the practice of removing friction from the customer experience. With frictionless banking, financial services solutions are so smoothly and seamlessly integrated into the customer interfaces that today’s mobile-dependent, convenience-loving customers like using, it requires almost no effort on the customers’ part. An example of this might be to use a QR code to pay for something without having to go through all the steps of making an EFT, or to simply use biometrics to log in. Some international platform banks are already trialling voice assistance with Alexa or Google Assistant so that customers can literally say what they need help with.

How banks can embrace platform banking and do it well

Building one central, modern platform as a basis for all a bank’s components and customer touchpoints is difficult and expensive to achieve by banks, on their own. But it can be quite doable if they partner with outsourced experts and fintechs who have fresh systems, new thinking and the economies of scale to make it work without breaking the bank quite literally.

Banks that partner with fintechs and developers who offer additional services can use it to keep their customers in their ecosystem, rather than allowing customers to leave and search for services elsewhere.

• The author, Anthony De Gray Birch, is chief operating officer of Direct Transact and an authority on outsourced banking services and operations