The Tech Strategy to Navigate Real-Time Disruption in Banking

The Tech Strategy to Navigate Real-Time Disruption in Banking

The disruption in the banking industry is only beginning, and the entrance of tech giants like Apple and Amazon into the payments space should serve as a wake-up call for financial institutions. To stay competitive, institutions must adopt strategies that ensure they can adapt to ongoing and future changes. Here’s the tech strategy that will prepare financial institutions for the future.

Rapid Innovation in Banking

Innovation in banking is accelerating at an unprecedented pace, particularly in the digital payments sector. Companies like Venmo, Square, and Stripe are transforming the payments ecosystem, compelling traditional banks to offer new services to keep up with tech giants like Amazon, PayPal, and Apple.

This disruption is driven by changing customer expectations and demographics, facilitated by technological advancements that make the once impossible possible. For example, high-speed internet and smartphones have revolutionized how we pay bills, transfer money, and manage investments.

The Forefront of Payments Disruption

What's happening in the payments sector is just the beginning. Technological advancements will eventually allow companies, especially in tech, to delve deeper into core banking services like checking and savings accounts, mortgages, and investment management.

For example, Apple Pay has revolutionized in-person payments, replacing the need to swipe a credit card. In response, the banking industry is developing Paze, a payment wallet with similar functionality. Additionally, services like Venmo and Zelle offer seamless money transfers, and Visa+ aims to bridge the gap between different payment systems. Even the Federal Reserve is stepping in with FedNow, enabling real-time payments and instantaneous online bill payments.

Adapting to Disruption

For large, established banks, adapting to this new landscape involves several strategic actions:

1.Develop an API Layer

Financial institutions often implement APIs as standalone projects, leading to redundant systems and high costs. Instead, banks should create a unified API layer that standardizes functionality and operations. This approach, akin to the “Stone Soup” story, where everyone contributes to a shared resource, results in a richer, more integrated system.

2.Implement a Real-Time Layer

To support real-time functionality, banks need to create an intermediate layer between their external APIs and internal core systems. This layer provides real-time capabilities without the need for immediate and costly overhauls of 40-year-old core systems. It enables banks to respond to market demands within 12 to 24 months, keeping them competitive.

3.Future-Proof Core Systems

While a real-time encapsulation layer is a short-term solution, banks must eventually update their core systems to support real-time and API functionalities fully. The initial steps of creating API and real-time layers provide the necessary time to undertake this comprehensive overhaul, ensuring long-term competitiveness.

By adopting these strategies, financial institutions can navigate the ongoing disruption in the banking industry, staying agile and responsive in a rapidly changing environment.

‍