APIs and Automation are the operative words for tier 2 and 3 banks navigating the narrowest of grounds between legacy and scalability.
In graduating from the legacy of foundation towards the actual legacy they aspire to, small and medium sized banks have their work cut out.
For these mid-tier banks, the capital isn’t quite there to consider wholesale transformation and yet they’ve been around and amassed enough technical debt to be palpably constrained by it; they have certainly accrued their own legacy.
This carries with it the exquisitely acute challenge of digitally transforming without having as much to invest with as other, larger players.
Additional to this is the urgency to bring under control compliance such that it doesn’t consume such resource that front-end innovation is hampered.
This middle ground of mid-tier banks can soon become an operation simply to survive, rather than a springboard to viable, healthy and sustainable competition.
Keeping the lights on
Neobanks: nimble, agile and “born in the cloud” don’t have these challenges; instead they can be challenged by limited customer base and deposits and shut out of the traditional lending domain.
And top tier banks have legacy challenges to an even greater degree but huge asset-rich reserves to plumb.
The tight spot these middle tiers find themselves in, however, leaves very little wiggle room indeed.
Hence, some take a shrewd and adaptable approach to automation, which can really come into its own for this crowd. It is of course, an ongoing challenge to avoid creating the legacy of tomorrow while they endeavour to scale.
There have been several incidences of challenger banks that have flown too close to the sun in scaling up, and thereby gathered huge costs in their thirst for rapid growth.
Jason Maude, Chief Technology Advocate at the UK’s Starling Bank, at the very coal face of tech strategy within the success story that is Starling Bank, once described this as “doing the wrong thing but faster.”
Core to the mission has been to drive costs right down compared to other banks, prevent diseconomies of scale, and essentially to automate as many processes as possible, he says.
Speaking a couple of years ago about the bank’s approach to streamlining and managing compliance, Maude said Starling had created an “internal package to lighten the load of compliance-related tasks”, the same internal package built to support all its other operations, whether it be direct customer service, payment processing, account management and so on.
It’s automatic
Automation can be applied to many processes. All manner of data and payments processing- from fraud surveillance, to developing natural language models; customer data for the personalisation of products and services to reconciliations, and so on.
Partnering with technology providers or building in-house depends on the organisation and allocation of budget.
Tide business bank provides current accounts and other banking services to small and medium sized businesses based in the UK.
Through automation of its reconciliation process, which used to take three or four hours of manual Excel-based work each day, the bank says it has reduced the time taken to do this by 90% to a mere fifteen minutes.
This massively ameliorates reporting requirements and also enables a clearer view and, hence understanding of the data they process.
This, in turn leads to valuable and new business insights on their customers, which enables more compelling business goals and priorities to be set, et cetera, et cetera.
Nick Botha, Payments Lead at AutoRek, which provides automated solutions for Financial Services, Tide among them, believes automation to be a key driver in cost reduction due to the task efficiency and strategic resource allocation it facilitates.
“Ultimately, the financial industry is competitive and ever-evolving. To remain agile banks should continuously assess how they can further enhance their cost-effectiveness, scalability, and flexibility.”
“Likewise, data management contributes towards sustained growth as it allows tier 2 and tier 3 banking players to leverage analytics for customer insights and risk mitigation.
By establishing robust data governance, banks are able to ensure that quality, security, and compliance are the basis of a strong foundation. In turn, this will foster trust among customers and regulators.
“This capability to adapt and continuously monitor the changing landscapes ensures that tier 2 and tier 3 banks remain agile and competitive when faced with tech giants and neobanks,” Botha says.
Crucially, he asserts, cloud infrastructure is the real enabler here. “[Cloud] infrastructure can empower banks to adapt quickly to changes and respond to customer needs on a larger scale and without having to invest in physical infrastructure.”
The UK’s Virgin Money has been on a mission to fully automate mortgages as part of its Digital First strategy, starting with applications and finishing with a ‘straight-through’, fully digital service.
Building blocks
Automation needs to be part of a well-orchestrated digital platform and for mid-tier banks, this means scalability in order to keep moving forwards.
An API-based system creates endless opportunities to partner more easily, to connect data streams and applications more easily and also to bring new products to market faster.
Furthermore, a whole host of fintechs are founded on APIs- particularly those providing Banking-as-a-Service.
Their business models are based entirely on the provision of their banking services to banking and payments organisations through APIs.
According to a 2023 McKinsey report, banks should be asking themselves three key questions in order to yield full value from APIs:
Which APIs should be implemented and in what order?
How can external APIs be monetised?
How can the operating model maintain alignment between business and IT on API prioritisation and governance?
This final point on governance is so vitally important and yet rarely does it feature in a discourse about API capability and implementation.
There is indeed limited knowledge of best practice in the space, as the report explains, and so this is what to prioritise- choose partners wisely or educate internally with a view to building ownership of API programmes across the business, “elevate APIs on the organisation’s roadmap and provide IT leaders with the mandates they need to achieve a tech-driven future business model”.
Regarding implementation, this needs to be guided by the in-house talent and skillset, the business and operating model and the current technology stack.
And ultimately the goals and priorities of the business.
These answers will determine what to ask of a provider and how a provider’s offerings may complement and enhance the business.
And monetisation- how to make it work for the business.
It’s about prioritising APIs at the outset but then continually tracking performance from day 1.
“By creating transparency about API usage and monetisation effectiveness, they can re-evaluate their focus on a regular basis,” says the report. Feeding into this should be active scanning of the market, scouting and spotting new trends that will inform the ongoing calibration and updating of the API strategy and how well it is performing, according to McKinsey.
There are many models and routes to success, and just as many if not more platforms and partners offering solutions to pave that pathway for all kinds of banks and payments providers.
Mid-size organisations come with their own set of distinct challenges and tread a keenly felt tension between maintaining the status quo and progressing their growth.
It’s true this tension puts inordinate pressure on spending decisions but surely a future legacy built with blocks that create flexibility through interoperability is the kind that will bring a mid-tier into gear.
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