How Open Finance Fuels Innovation and the Democratization of Data
May 3, 2022 | 2 min read
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April 27, 2021 | 0 min read
The number of banking mergers and acquisitions (M&A) deals worldwide rose dramatically in last year, from 619 in 2019 to 1,316 in 2020. And even though the number of bank mergers in the United States has generally slowed since the 1980s, the total number of banks in the U.S. has dropped from more than 18,000 to less than 5,000 today — overwhelming because of mergers and acquisitions.
Anyone who’s been involved in one of these mergers knows that the process can throw individual projects into disarray and even paralysis. You have a clear line of sight into how to implement a certain technology at the bank, and then — boom! — you suddenly don’t know how the team you’re working with will sit with your decisions, much less how you’ll sit with theirs. What if your systems don’t align? What if someone has a totally different idea about how to proceed? What if your budgets are focused on completely different things?
Despite the difficulties inherent in any merger or acquisition, it’s critical to not fall to paralysis when it comes to your data strategy
Here are three reasons why.
You can be certain that your competitors won’t wait around for you to figure out your data strategy — especially new competitors from technology companies, which are used to moving quickly.
In the past, this wasn’t as pressing of an issue since for the most part people didn’t have extensive choices about where they banked. They generally had to choose whatever institution had branches nearby. But today, anyone can search for a banking product — mortgages, payments, deposit accounts — on their phone and immediately see dozens of results on the first page alone.
These technology companies can no longer be ignored. For instance, JPMorgan Chase CEO Jamie Dimon shows in his latest annual shareholder letter how, over the course of just a decade, Big Tech has ballooned from $0.5 trillion to $5.6 trillion, payments companies have ballooned from $0.1 trillion to $1.2 trillion, and private and public fintech companies have ballooned from being essentially non-existent to $0.8 trillion — all of which is encroaching on traditional banking.
In addition, consumer sentiment is changing quickly, particularly in the wake of the COVID-19 pandemic. To illustrate, the percentage of consumers who say they trust banks most to handle their financial needs plummeted over the course of one year while the same period showed large gains for tech companies.
Over the past year, people often had no choice but to use digital banking products, and their habits changed as a result. As we illustrate in our Ultimate Guide to the Top 2021 Bank Challenges, 87% of consumers say they visit their bank branch less often than they did before the COVID-19 pandemic, while 89% say they use mobile banking more often. The shift to digital banking has accelerated faster than anyone anticipated.
So if you decide you’re just going to hold off on moving your data strategy along, or just coast on where you are today, you might be surprised by how quickly technology companies move ahead to meet customer demands.
When ATMs were first released in the late 1960s, they felt innovative. By the late 1980s, they were table stakes. Likewise, mobile banking felt innovative in the early 2010s, but now it’s table stakes.
Now, with the rise of artificial intelligence and machine learning, technological advances are set to happen more quickly, as each new technology makes it easier to create tomorrow’s technology.
This means that people are getting more and more used to experiences that are seamless, intuitive, and simple. They’re also realizing they can find these experiences outside of a bank. For example, this image shows how banks are already starting to be unbundled with the rise of fintech competitors
As the technological aspect of banking gets simpler and more convenient, traditional modes of banking will feel more and more archaic. It used to be a no brainer that people would go into the branch to do their banking. It was the only option! But today, as seen in our original survey data above, people are changing their attitude and becoming less willing than ever to entertain the notion that banking has to be done inside of a branch. Given how quickly technology is changing, this situation is bound to speed up, not slow down.
It’s understandable that people in banking might be wary about the idea of getting too involved in a tech project only to have the project stymied by a merger or an acquisition. They’ve likely seen it happen before.
Wasted effort is not an inevitability, though. A better approach allows flexibility in tech partnerships and contracts — using APIs and adaptable core models that enable banks to pivot far more quickly and seamlessly than they’ve been able to pivot in the past.
To get more specific, one way to bypass the friction of new systems during M&A is through the effective connectivity of middleware. By leveraging existing core integrations, a provider such as MX can bridge the gap between the two cores and create a common language by which the new organization can thrive. Path, MX’s Data Connectivity API, offers a way forward on this front by providing you with a simpler, faster, and more secure way to connect to different services, apps, cores, and systems. With a solution like this in place, you don’t have to feel paralyzed by the notion that a single wrong step will lock you into a tech stack you don’t actually want. Instead, you’ll be able to mix and match the solutions that work best for your new team.
Because of this, you’ll put your learning to work even if it so happens that you end up with a different tech stack then you initially thought you would.
In the past, some of the paralysis around tech projects in the midst of a merger and acquisition was justified. External competition was scarce, banks moved slowly, and there was no way around burdensome contracts that locked companies into tremendous inflexibility. However, the scene has changed. External competition from national banks, fintechs, and tech companies is quickly picking up steam, the industry is moving much faster, and technology now allows for a level of flexibility previously unthought of.
Given this shift, stalling is expensive. It results in your institution falling further behind right as the industry picks up speed. As long as you start thinking about how you can integrate your two teams early, find the right partners, and integrate a flexible, API-enabled tech stack, it’s a far better option to keep running and don’t look back.
To learn more see the MX Open Finance Portal.
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