API Management in Retail Banking

A strategic approach to infrastructure and service modernization.

Analyst Perspective

Evolutionary digital transformation via API management

The need for fundamental systems transformation grows daily throughout all of financial services. Increasing competition and rapidly rising customer service expectations continue to reveal significant limitations within many core banking systems. Increasingly, financial services providers are adopting a growing suite of best-in-class vendors to meet customer needs. These changes are driving the need for API management capabilities.

The need for change is complicated in many financial services organizations because of how they have evolved their systems over time. The transition from batch-based, centralized systems designed to support in-branch banking has played a significant role in the current transformation efforts of many organizations.

Systems have evolved over time. Major transformations were expensive and risky. As a result, the systems currently in place have, in many cases, seen decades of continuous evolution. However, the current pace of technology change, combined with increasing competition based heavily on user convenience, requires more substantial infrastructure changes to meet current challenges.

Unfortunately, revolutionary transformations characterized by "rip-and-replace" approaches have a very high failure rate and produce low satisfaction scores. Instead, organizations can create a well-planned transformation journey using a key capability: a centralized API management layer that enables continuous transformation.

David Tomljenovic, MBA, LL.M, CIM
Head of Financial Services Research, Industry Practice
Info-Tech Research Group

Introduction

Understanding past approaches to systems and transformation is essential to planning for the future

All but the most modern digital native retail banks have some elements of infrastructure, code bases, and business processes that may be many decades old. They reflect how traditional banking services were delivered. Customer engagement was heavily focused on in-branch activities almost exclusively performed by a teller.

Modern retail banking is a vibrant and dynamic environment that is characterized by omnichannel service delivery that operates 24/7/365. Customers expect to be able to perform all their financial services activities when, where, and how they want.

Retail banks are also extending their products and services beyond the traditional range of savings and lending products and are increasingly offering wealth management, insurance, mortgages, and new payment offerings.

Competitive disruption in financial services is revealing substantial issues throughout the core technology infrastructure of many financial services organizations.

Business growth produced IT silos

Segmented business lines resulted in siloed systems

Legacy retail banking infrastructure was deeply siloed. In many cases, the business lines evolved as the banks' customers' needs evolved along with the marketplace. Regulation had a heavy influence on banking and often required that major product categories be owned by separate financial institutions.

Banking's business line development had unintended consequences on its technology infrastructure.

Legacy systems have unique complexities

Mainframes encouraged the growth of monoliths

Retail banking computing infrastructure can be over 50 years old and still be in active production. Mainframe computers were the backbone of retail banking operations. Monolithic code bases are synonymous with mainframe computing.

To enhance code reuse, security, and integration of features, the code bases continued to get bigger and bigger. As products and services evolved, the code bases grew in size and complexity. As new business lines were introduced, their own new code bases were developed. They were characterized by the same highly integrated and optimized code base.

Infrastructure designed to support specific business lines led to retail banking having multiple legacy systems that did not interact well with each other. As customers were presented with more products and services by their financial institution, they had to use and maintain separate logins.

The development of additional customer engagement channels such as phone and online banking further added to the complexity that a customer encountered when trying to engage with their bank.

An inevitable outcome of legacy infrastructure that supported business line development was deeply siloed and highly complex systems.

Moving toward customer convenience

Customers demanded a more unified experience

Competitive forces and rising customer expectations led retail banks to take their first major step to elevate the customer experience by introducing a unified customer experience.

Point-to-point integrations provided an expedient way to address the need for a unified customer experience.

Customer convenience with major change

Unified customer experience, not unified systems

The first step toward an enhanced customer experience through a unified login did not significantly impact the underlying core systems. In most cases, the unified experience was achieved by creating a more complex customer application.

The underlying systems still remained heavily siloed. Some middleware infrastructure was put in place that connected to the underlying systems, but this did not impact the monolithic codebase and deeply siloed data, processes, and business logic.

The net result of the shift toward a more unified customer experience was window dressing for the customer. Problems still existed with customer engagement across different product lines. Only partial progress was made with deeper systems transformation. As a result, the customer experience gains were somewhat superficial. This was particularly evident as customers began to engage with an increasing number of engagement channels.

Some processes, data, and options were not available across all engagement channels. Regulatory issues also prevented some activities.

Users were provided with a more unified and easier experience, but the underlying technology was not fundamentally altered.

Quick solutions can have long-term costs

The unintended consequence of point-to-point integrations: rigidity

As banks increasingly competed for customers based on the user-friendliness of their products and services, many banks felt a growing need to respond quickly. Many of the system changes required to enhance the customer experience required previously siloed data and processes to work more closely with one another.

The elevated competitive environment led banks to greatly expand their use of point-to-point integrations. They provided an expedient and effective way to achieve the integrations needed to fulfill their customer experience improvement.

The unintended consequence of the heavy use of point-to-point integrations was a new form of system rigidity. The integrations themselves added a new level of complexity.

The competitively driven need for more user-friendly systems that would overcome legacy system rigidity resulted in systems that were still heavily rooted in legacy systems with a new layer of complexity. A completely new approach is required to bring about true systems transformation that will allow banks to position themselves to succeed in an increasingly competitive and dynamic marketplace for financial services.

Expedience often outweighed a more thoughtful approach to integrations. The consequences are still impacting current integration efforts.

The beginning of true transformation

Transformation without disruption

A truly unified customer experience requires a deeper level of systems transformation beyond introducing point-to-point integrations and middleware. However, deeper systems transformation within a legacy environment introduces significant risks to the stability of ongoing services during the process.

The first step toward deeper transformation requires a new systems architecture.