In 1994, Bill Gates famously said the process of banking is necessary but banks themselves are not. Never has a phrase felt more probable following our latest Temenos report with the Economist Intelligence Unit. Bank branches have been present in Europe for at least 1,000 years. Now, our survey reveals that 65% of global banking executives believe branch-based banking will be “dead” within five years.
This is just one example of the drastic changes we are seeing in the banking sector.
A generation of digital natives, new regulations like PSD2 and new competitors are opening up banking in a way that has never been seen before. Embracing this concept of ‘open’, by opening up banking systems and creating more transparency is the only way banks will able to fulfil their customers’ demands for digital services rapidly and at lower cost.
The end of isolation
The technologies that allow banks to be prepared for this new world have one thing in common; they are open.
They include things like Open REST APIs, microservices architecture, containers, Kubernetes, private and public cloud usage, and SaaS delivery models.
For decades, the IT infrastructure of banks was quite the opposite of this. It was dominated by closed, locked, inaccessible on-prem systems and monolithic software. This has changed completely. Digital banks, neobanks, challenger banks are built on open, cloud-native, core banking systems and components. They are running in the cloud and offering open APIs to either third party service providers or deploy banking services to non-banks. The banks’ infrastructure is no longer isolated. It has started to become a platform to drive an extended ecosystem around it.
The big choice for banks
I see one megatrend for this decade: Banking as a Service or embedded finance.
As consumers, we expect banking to be part of our daily lives. To shop, travel, invest in real estate, protect their health, and create a new business – all of this includes, at a certain point, banking services. But for the consumer, it doesn’t matter where these banking services come from. What we want is the best experience, and the banking element is seamlessly integrated with the overall customer journey. Compare it to electricity or the internet, you use them through a distributor, but you don’t care about the provider in the background. Banking as a Service is precisely that; it’s a utility that’s almost invisible.
From what I see in the market, 60-70% of banks have started the process of digital transformation, but only around 20% have fully gone through, and less than 10% have really defined the end state of their future business model.
So now banks have choices to make. Do they want to be on the manufacturing side of new banking services, or the aggregation side, or the distribution side?
Do they want to be a complete services provider to consumers and businesses, including third party financial services or even non-banking services into their portfolio?
Do they want to be a platform provider to fintechs or neobanks, or do they want to deliver modular banking services like accounts, deposits, loans, payments, and mortgages through a cloud-based open API platform to retailers, travel agencies, healthcare providers, or insurance companies?
Or maybe all of this? All these business models are funnelling into one common theme: BaaS.
The shift to open cloud banking platforms
This radical shift of business models means a radical shift in how banking software will be developed, managed, deployed, or monetized. Today many banks still buy software for on-premise usage on a perpetual license model. They buy a core banking system, and then they spend a lot of development in customization and localization of this software to make it work for them.
In the future, they’ll want to consume core banking components from the cloud, create new services or products on the fly or integrate curated fintech solutions in minutes.
Therefore, traditional software vendors need to re-architect their monolithic core systems. They need to re-deploy them as cloud-native microservices, running in containers, managed through Kubernetes, and offering open APIs. These new services will be charged on a subscription or pay-as-go basis.
Temenos recently launched The Temenos Banking Cloud in anticipation of these market trends.
While the future is uncertain, instant access to AI powered, rich banking services, an innovation sandbox and an ecosystem of fintech partners, gives banks the agility to embrace change with open arms.