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It's time to go all-in on open banking

The term “Amazon effect” is a term increasingly used to represent a digital-first business model where interactions with partners and customers centers on web-based application programming interfaces.

APIs are the glue of the internet and allow digital businesses to interact seamlessly. Banks create a digital-first business model by offering services, such as treasury or loan origination, through APIs in an open-banking system.

To move toward open banking, a bank must embrace the Amazon effect and open its internal processes to third-party developers, which requires the bank to first adopt a micro-services strategy. This will impact every process, transform the operational support of each business unit and shift the human capital needs of the bank.

A micro-services strategy requires a bank to break down its internal processes into modular components by creating private APIs for each fundamental deliverable. These private APIs can then be combined to solve complex business problems through a series of API calls, instead of using manual processes on top of a single-purpose, monolithic technology solution.

Once these private APIs mature and become stable for internal processes, they can then be turned outward and opened up to external developers to innovate on top of the bank’s internal processes.

Transitioning to micro services requires a dramatic change in culture, which blurs the lines between IT, operations and the businesses. Such a change requires a decisive strategic direction from the very top, and will inevitably be a difficult transition for the company.

In the early 2000s, Amazon CEO Jeff Bezos issued a memo that propelled the e-commerce giant toward its successful open-business plan. The memo, sometimes called the “Bezos API mandate,” has since taken legendary status among the tech community.

Bezos required in the memo that: all teams deliver their internal functionality through APIs; teams can only communicate with each other through their APIs; all internal processes must be designed from the ground up to be externalized; and anyone who doesn’t abide by these rules would be fired.

This strategic decisiveness fundamentally changed Amazon’s culture and went a long way to eliminating internal silos. Though risky, it allowed Amazon to monetize many of its internal processes by opening it to the external world, enabling monumental growth of Amazon Web Services (the API-based cloud platform subsidiary). Similar shifts in operating models need to be made by financial institutions to become open banks.

However, traditional banks face challenges since they are hindered by legacy systems and old infrastructure. The shift will be difficult from a control and risk perspective as well.

Although customers are open to the efficiency and ease of technology, there is also heightened awareness of the risk due to events like the Equifax data breach.

Integrating with third parties will also decrease some of the control institutions have over data security. This reduced control means banks need to have strategies and monitoring in place to assess future partnerships.

Institutions need to consider the potential benefits relative to the costs of shifting to open banking in light of risks like potential cyberattacks and fraudsters interested in customer data.

That being said, there are some key steps to transitioning to open banking.

First, internal processes will have to be reinvented as private APIs. Then, a financial institution can begin transforming itself into an open bank.

Banks will need to automate processes from end to end using APIs and establish preventative controls that work in real time within a streaming data environment. This is an opportunity to modernize all processes and make the bank scalable.

Next, the bank’s decision engines and models will need to be transformed into real-time applications, transitioned to scalable production environments and accessed through APIs.

Finally, the bank will need to create an externally facing platform that allows third-party partners to develop on top of the bank’s internal capabilities.

The externally facing platform will provide a “sandbox” to allow developers to create applications within a safe-test environment and a clearly defined process for becoming productionalized.

The platform should provide a software development kit (SDK), which is a set of tools that enable the creation of applications on top of the bank’s APIs. SDKs usually contain sample code for each major coding language and access to complementary services, such as identity services. These complementary services can also provide access to other platforms. For example, the bank may provide accelerator packages that speed up development on the Android mobile device platform.

Open banking is designed to deliver efficiency gains for both the institution and consumer by taking advantage of crowdsourcing technology. The process of becoming open will also give the bank a technology and integration advantage over its peers.

There are, however, banks that choose to develop their own technology applications without opening their core capabilities to third parties, which runs the risk of them becoming obsolete. This approach can make it difficult for banks to remain efficient or create scale.

While open banking has its benefits, transitioning is a costly endeavor from a time, labor and monetary perspective. The move will be challenging and for many institutions, a cultural shift in thinking will be necessary.

Banks making the shift need to assess the potential risks, time investment and strategic implications.

Editor's Note: The opinions expressed in this article are those of the authors, intended for informational purposes only, and should not be attributed to Regions Financial Corp. or any of its subsidiaries or affiliates, including Regions Bank. Any representation to the contrary is expressly disclaimed.

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