Readiness for Legacy Systems for Open Banking in APAC

Open banking has been an ever-evolving space in recent years with various geographies taking one of two key approaches to the issue: either a regulator-led approach or a market-driven approach. Regardless of which approach a region pursues, financial services organizations will need to make critical decisions in terms of allowing access to data through open APIs and taking control of rich data being exchanged. All the while, there will be new players entering the scene and new products being constructed which will differ from the traditional models currently in use.

This will likely result in a bit of experimentation as well, as not every product and model will work or find enough audience. As such, a lot of focus is being placed on architecture and real-time access to data sharing, as well as aspects of larger financial inclusion. Moving from a legacy, monolithic world to a newer, open API environment will not be easy. However, while there will undoubtedly be a world of challenges to overcome, it’s worth noting that every challenge provides an opportunity!

Across Asia-Pacific (APAC), we observe the following situation: 

Whether market-driven or regulator-led, the chance of successful transformation depends on the degree of adoption and maturity of the geography being asked to embrace it.

Opportunities: Open Banking and Beyond

With interconnected ecosystems from tech to finance, open banking enables the financial services industry to address challenges and better serve their customers by offering:

1. Alternative Distribution Channels and Increased Customer Base:
   A key challenge facing banks today is the high costs of acquiring and serving customers, squeezing the margins. Open banking’s architecture, built on a Banking-as-a-Service (BaaS) model, enables banks to lease their infrastructure over the internet, on-demand.
   
   By allowing FinTechs, challenger banks and other third parties to connect with and build upon a bank’s systems directly (via APIs), banks gain alternative distribution channels. These channels allow banks to diversify into new business verticals and products, access larger customer bases through partners, reduce the costs of distribution and exploit new revenue pools.
   
2. Agility and Personalization:
   Open banking allows banks to adopt a “plug and play” model, by integrating white label, innovative fintech products and services directly into their own core offerings. Free from the constraints of a traditional, integrated banking model, banks can do away with operational scale limitations and respond quickly to changing expectations with relevant offerings.
3. Greater Financial Inclusion:
   Cutting costs via alternative distribution channels also lowers the threshold of who banks can serve. As per reports, in Southeast Asia (SEA), where 70% of the adult population is either underbanked or unbanked, this is crucial for inclusion.
   
   With open finance, banks can also tap into the vast amount of financial data which exists outside the banking system. This enables banks to partner with third-party providers to assess credit risk of previously underserved customers or to lower the cost of customer acquisition, thus expanding access.

The Legacy Challenge and the Need for Modernization

Core banking legacy systems and their closed architectures were well-suited to the pre-digital era when banks did everything in-house and mainframes rarely had to be touched. In the legacy system model, high levels of security and hard separation of information access from the outside world were crucial themes.

However, with the evolution of technology and the flood of innovative financial products in the market, there now exists a strong need to share this data securely and in real-time. Not all legacy systems are up to the task, though, making them incompatible with the demands of the digital era and obstructing banks from achieving the full potential of open banking.

Thus, banks have three potential options for system modernization:

1. Full replacement of the core:
   This approach brings high risks and high costs. Replacement of core systems is a long duration program, but the payoff is that the entire core system should be future-ready when the overhaul concludes.
2. Building on top of the existing core:
   This is the most frequently pursued option and less risky than full replacement. However, slow transition timelines may deter banks from achieving the desired levels of efficiency and time-to-market.
3. Greenfield tech-stack in parallel to existing core:
   This approach is appealing thanks to lower risks, possibly lower costs and innovative options. This approach allows banks to deliver value quickly. The downside is this may result in two parallel systems operating concurrently, requiring integration or migration down the line.

Banks must balance the need for preserving a legacy system application while building up a still-untested, next-generation system. Banks should therefore consider hybrid approaches.

In the Philippines, Union Bank launched a digital bank called ‘UnionDigital’, in which they took the greenfield approach. This allowed Union Bank to deliver scale and efficiency. Meanwhile, RCBC opted to build a modernized system on top of and alongside their legacy systems, which allowed them to launch a new mobile app in just three months during the height of the pandemic in 2020.

The Future of Open Banking

The next phase of open banking is likely to be open finance, with data increasingly becoming a commodity that will move across data services beyond just the realm of banking.

To successfully compete against new digital challengers, traditional banks need to embrace digital transformation, speed up their development cycles and develop abilities to cooperate with ecosystem partners and provide a seamless, personalized digital customer journey. 

Rather than seeing open banking and open finance as a threat, incumbents should be exploring how open banking enables new business models, revenue streams and a customized personal experience. Those that do so will be able to put clear blue water between themselves and the rest of the pack.

EPAM’s latest in collaboration with Kapronasia - ‘Readiness for Legacy Systems for Open Banking in APAC’ – shares invaluable insights, read the full report here.

We also exchanged ideas on a panel discussion with participants from various established APAC banks and fintechs. You can catch the panel discussion on demand here.