There was once a time when the mobile smartphone market was dominated by BlackBerry handsets. In recent years BlackBerry’s sales have plummeted and it seems unlikely they will ever regain the level of dominance and market share they once enjoyed.

The company has been eclipsed by the likes of Apple, Samsung and Google’s Android who disrupted the market by providing new products, services and customer experience with their own smartphone innovations. The lesson for retail banks is that BlackBerry provides an example of an incumbent business that is now in decline after it failed to adapt to innovations in technology and changing demands and expectations from consumers. The question being asked of retail bank incumbents is whether they are facing their very own BlackBerry moment?

Incumbents versus challengers

Incumbent banks currently find themselves in a dominant position as a consequence of their size and customer base, however, such a position has been known to lead to complacency. Wishing to be seen as innovative is not enough. New challenger banks such as Monzo, Starling, Atom and Fidor have very different ideas on what the future of banking may look like and are not constrained by much of the incumbents technical and policy baggage.

Challenger banks are seeking to do something ‘different’ in banking and have been quick to recognise changing consumer behaviour and how technology can provide new services and customer experiences. Unlike the incumbents, they are starting from a point where their business models and relationships with customers are very different. The point of departure is that ‘millennials’ are more open to digital banking experimentation. They do not share the same level of brand loyalty as older consumers, and expect very different things when consuming financial services. Incumbents can still rely on the diverse portfolio of products that serve their older customer base, but technological innovation and changing consumer behaviour is leading to new business models.

The move to Open Banking

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Alongside this threat from new market entrants, legislation is changing the bank business model. Regulators in the UK and in Europe want to increase competition in the market by pushing towards an ‘open banking’ model.

Open banking enables customers to share data that banks have historically held exclusively, with consumers and third parties. Only this week it looks like customer data (for the purpose of Open Banking) has a broad definition, with very significant implications. Third parties can access this data by connecting directly to customer bank accounts via a standard Application Programming Interface (API). This access will allow third parties to build products that leverage customer data, enabling new services to be delivered and specifically tailored to the needs of different customers, ensuring insight driven financial products and a more frictionless customer experience.

With regulation forcing banks to open up customer data to FinTech firms, startups and other financial service providers, consumers are becoming less reliant on providers of traditional financial services. The idea that one institution will manage all financial services for one customer will no longer be the most viable or the expected model. Open banking creates a new relationship between banks and customers. It requires banks to adopt a customer centric and data centric view on how they do business.

In this emerging model, data becomes a valuable commodity. To extract value, banks must have the appropriate core-technology and infrastructure in place. It requires a good API governance structure that must include: standards, management policies, data access and statistics, and development processes. For banks to become digitally ready they must understand the data currently available inside their organisations and how to access third party data; they must understand the data information flow and where the business sits in terms of existing APIs. The use of APIs as a key to accelerating the leverage of such data is a key building block, and norrow ‘compliance’ based views of open banking or PSD2 miss the point of the new permissive data economy, its promise and its threats.

The challenge for incumbents is achieving this while still relying on legacy systems and outdated mainframes. Newer systems and programming languages designed to cope with the shift in consumer behaviour do not interact well enough with older, slower back-office systems. This will ultimately hamper their ability to respond to the digital challenge.

The historic monopoly enjoyed by incumbents within retail banking is very much under threat. If they are to avoid their own BlackBerry moment then they must become ‘digitally ready’. There are some incumbents such as Spain’s BBVA who are leading the way towards implementing digital transformation strategies. Spain’s second largest bank has explicitly stated that its top strategic priority is digital transformation. It means having the technology and business processes in place that will allow them to meet the digital challenge head on in an agile and nimble way. In Germany, Fidor Bank is not only a digital bank but also an innovative digital banking platform. Its digital bank Accelerator, No Stack Bank and API Banking technologies provide low-cost Platform-as-a-Service for rapid delivery to other market entrants.

Many banks have spoken about becoming digitally ready but few have embarked on the necessary steps needed. Too many incumbents continue to believe that digital transformation means creating digital products and services whilst maintaining existing business models and back end legacy systems. If retail banks are to have the future customer-focused business they need to remain relevant, they simply cannot afford any further delays.

Christian Ball is Head of Retail – Atlantic Region, GFT