Banking moves to PaaS
So far bankers have considered platform as a service (PaaS) mainly as a way to free their own software developers from the constraints of relying on scarce in-house IT resources.
By using the server and computer capacity of private cloud-computing providers instead, banks’ engineers have been able to develop and run new banking applications much more efficiently, cutting costs and reducing time to market.
Banks have found that migrating developers onto private cloud platforms makes them much more productive and reduces tension with internal IT departments that are invariably preoccupied with keeping core banking operations running. This is especially relevant now, as daily transaction volumes are driven higher by the spread of mobile banking, particularly on smartphones.
Francisco González, executive chairman of BBVA and Euromoney’s banker of the year for 2016, believes PaaS provides a model for the future of banking. González is one of a small number of CEOs of large banks already to have grasped that the traditional model of bank business divisions using a central IT department to build an application or service must be changed. It is too inflexible and takes too long.
Instead, González and other enlightened banking chiefs now realize that business divisions must employ their own engineers to develop the applications they need for themselves. The role of internal IT heads should be that of policing certain basic standardization requirements, rather than gatekeeping the infrastructure required to build these applications.
But replacing fixed IT infrastructure costs with variable payments to private cloud providers may be just the first step for banks. They may also be on the road to becoming PaaS providers themselves.
BBVA now runs an open API platform, headed by Shamir Karkal, who came to the bank in 2014 after BBVA bought Simple – the company Karkal founded in 2009. Simple is the classic start-up challenger bank, delivered by smartphone apps and targeting millennial customers. Built out of frustration at the poor service provided by traditional US banks, Simple offers basic low-cost services, smart budgeting tools and leads with elegant design. Still operating as a standalone company, it is now delivered on the open platform of BBVA Compass, which provides scalable underlying processing, authentication and compliance.
The next step is to allow competitors – traditional banks, new fintech challengers, retail brands moving into financial services – to offer their banking services over the platform while BBVA takes on certain core underlying functions. These include customer authentication, money transfer, card services and other transaction processing. BBVA has already opened its payments API to Dwolla, a digital payments network connecting US banks and credit unions, allowing customers to set up accounts for free and to send and receive payments in the US in real time, rather than days.
It might seem strange for a bank to build a market-leading, integrated real-time operating platform and then open it up to competitors, but then it seemed odd in 2006 that the world’s leading online retailer should launch Amazon Web Services and offer other companies access to the proprietary technology platform on which it had built its success. Ten years on, Amazon Web Services is a $2.4 billion a year revenue company that is still growing at an impressive rate.
In banking, the journey to a digital future offers many troubling questions for incumbents, such as high investment spending, low operating margins, customer intolerance for service interruption and an excess of transparency. Bankers have to assume that customers have immediate access to complete information on all their rivals’ products, pricing and terms. The model for PaaS in global retail banking may not be Amazon Web Services but rather the open architecture approach private banks had to embrace over a decade ago.
By the mid 2000s the world’s leading private banks could not pretend that they were properly serving high net-worth clients by loading their money into in-house funds that might be both high cost and low performance. Banks had to compete instead on asset allocation advice and on the willingness to put clients into the best products available, even those offered by direct competitors or nontraditional rival providers.
The journey to a new future of digital banking has only just begun. It may be that for some of the incumbents building and running the best open platforms is the ultimate destination.