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Sunday 02, July 2017 by Nabilah Annuar

Out with the silo, in with the ecosystem

Gerhard Oosthuizen, Chief Information Officer at Entersekt highlights importance of a synergetic approach in enhancing a financial institution’s digital capabilities.

As consumers, we have become so used to being able to engage with our service providers via digital devices that many of us do not give a second thought to the complexity behind these interactions. Online and mobile have become part of our daily lives, and we expect our favourite brands to be available on these channels. This demand has in fact become so strong that 89 per cent of executives believe digital will disrupt their business in the next 12 months.

As new services hit the market at an exhausting pace, companies known for their traditional business models are turning their attention to how they can compete with the smaller, more agile offerings that pose a serious threat to their revenue streams. Financial services companies are particularly vulnerable to being left behind by so-called digital disruptors.

Tapping into digital ecosystems is a way for banks to prevent their own disintermediation. An ecosystem is simply a partnership between a bank and one or more service providers, aimed at creating additional value for customers. In such partnerships, the bank often provides the banking licence, technical infrastructure, and some or all client data, while the provider partners bring all manner of previously unavailable user tools to the table. This may include data aggregation, messaging, payments, personal finance management and much more.

According to Gartner, top-performing organisations will be doubling their ecosystems in the next two years because “a digital ecosystem amplifies the reach of a company. It enables scalable connections between known partners and customers, but also provides a medium for unknown parties to connect with one another”.

Easier said than done

Fintech providers are clearly making significant inroads with customers, most banks admit they are not adequately prepared to manage outside threats, such as fintech startups. According to the 2016 World Retail Banking Report, released earlier this year by Capgemini and Efma, nearly two-thirds of customers (63 per cent) are now using fintech products or services, and are much more likely to refer friends and family to their fintech provider (55 per cent) than to their bank (38 per cent). While the vast majority (96 per cent) of banking executives agree that the industry is evolving toward a digital ecosystem in which fintech providers play a much bigger role, only 13 per cent say they have the infrastructure in place to support such an ecosystem.

Banks are wary of opening their systems to outsiders, and with good reason. Aside from the atmosphere of fear created by the constant feed of security breaches in the news, the regulations surrounding data protection are also becoming ever stricter. Europe’s revised Payment Services Directive (PSD2) legislation, which was passed by the Council of the European Parliament last year, promises to upend the traditional financial system with its requirement for banks to expose their customer data to third-party service providers through open APIs.

Banks that fail to enter into collaborative ecosystems with partners, fintech or otherwise, will miss out not only on access to a broader set of customers, but also on a myriad of potential revenue opportunities. According to Accenture, “banks that […] deliver new sources of value through customer value ecosystems can provide consumers with an estimated $1,600 in value per US household (compared to less than $100, on average, provided by the bank today)”.

Accenture lists three things that banks must do in order to capitalise on ecosystems: be fast, be seamless, and be secure. And the latter is exactly where banks should be focusing.

Keep it secret, keep it safe

New technologies for reaching customers are blurring our existing ideas about customer engagement. The bank’s “perimeter” will soon be closer to the customer than ever before, which is why it needs to be secured better than ever before. For example, digital certificates should be a non-negotiable requirement for secure ecosystems. When using these in its authentication processes, a financial institution can be certain it is communicating with a legitimate device; that the communication originated from a trusted source; and that no third party can access or alter the communication.

Banking-grade authentication and verification measures need to be employed throughout the ecosystem, since protecting customer details is paramount. Only a multi-factor, out-of-band channel will counter phishing attacks, keystroke logging, number porting, and other attempts to defraud online and mobile users.

Furthermore, if they are going to embrace the benefits of ecosystems, banks will need to make sure that their partner companies comply with the same strict security standards as they do. Any enterprise that wants to set up as a provider of identity (or otherwise benefit from a platform such as a bank) should put a security protocol in place that is consistent with the relevant standards for their region. After all, banks will be more likely to team up with service providers that are already compliant.

Applying the highest levels of security throughout the ecosystem will give banks and other financial institutions the peace of mind they need to leverage collaborative opportunities.

Case study: Siirto (Finland)

Siirto—a collaborative ecosystem incorporating IT software provider Tieto and ATM operator Automatia, which is owned by Finnish banks OP Bank Group, Nordea Bank and Danske Bank—is scheduled to go live in March 2017. This platform will be a pioneer in two aspects: the first real-time mobile payments service in Finland that works without a credit or debit card, and the first such service in Europe to follow the new PSD2 rules. Sami Uski, Tieto’s Head of Business Development: Banking and Digital Channels, explains that each component of the ecosystem had something specific to contribute: Tieto’s experience and knowledge, Automatia’s infrastructure, and the banks as end-user service providers. “Now, we are looking to lead collaboration further,” says Uski, “not only with banks and payment service providers, but also retailers and other service providers like public transportation.”