The Preparedness of APAC's Legacy Systems for Open Banking

As the banking industry continues to evolve, Open Banking has become a key focus for many financial institutions in the Asia-Pacific region. However, legacy systems remain a major challenge for these institutions in their efforts to adopt Open Banking.

FREMONT, CA: In the past few years, open banking has been continuously developing and different regions have adopted various approaches, such as regulatory-led, to address it. Financial services companies will have to decide whether to allow access to data through open APIs and manage the data being exchanged. As new players and innovative products emerge, traditional banking models will be challenged.

During the process of implementing open banking, experimentation with various products and models may be necessary, as some may not be successful or popular. It is crucial to have a flexible architecture and facilitate real-time data sharing to promote greater financial inclusivity. The transformation from a rigid and traditional system to a more flexible and adaptable API environment will not be easy. However, despite the potential obstacles, it is important to acknowledge that each obstacle provides an opportunity for improvement.

The success of a transformation, whether it is market-driven or led by regulatory changes, largely depends on the level of adoption and maturity of the specific geography that is expected to implement it.

Opportunities: Open Banking and Beyond

Open banking provides an interconnected ecosystem for the financial services industry to overcome challenges and enhance its customer service. This includes offering:

Alternative Distribution Channels and Increased Customer Base: One of the main challenges that banks face today is the high cost of acquiring and servicing customers, which puts pressure on their margins. Open banking's architecture, which is based on a banking-as-a-service (BaaS) model, allows banks to lease their infrastructure through the internet.

Through the use of APIs, banks enable FinTechs, challenger banks, and other third parties to connect and build upon their system directly. This integration creates alternative distribution channels for the banks, allowing them to diversify into new business verticals and products, access larger customer bases through collaborations, reduce distribution costs, and tap into new revenue sources.

Agility and Personalisation: Open banking permits banks to embrace a plug-and-play approach, by seamlessly integrating innovative FinTech products and services into their core offerings, using white-label solutions. Freed from the constraints of a traditional, integrated banking system, banks can now overcome operational scale constraints and promptly respond to evolving expectations with relevant offerings.

Enhanced financial inclusion, achieved by using alternative distribution channels that cut costs, also broadens the spectrum of clients to which banks can cater. This is particularly important in Southeast Asia where 70 per cent of the adult population either lacks access to banking services or has limited access, making financial inclusion a critical issue.

Open finance allows banks to leverage the extensive financial data available beyond the traditional banking system. By partnering with third-party providers, banks can now access credit risk information for customers who were previously overlooked or reduce the expense of acquiring new customers, resulting in wider access to services.

The Legacy Challenge and the Need for Modernisation

Core banking legacy systems with closed architectures were appropriate for the pre-digital age, when banks handled everything internally, and mainframes were seldom accessed. In the legacy system model, security was paramount, and information access from outside the system was strictly separated.

As technology evolves and new innovative financial products flood the market, it has become crucial to share data securely in real-time. However, not all older legacy systems are capable of meeting these demands, making them incompatible with the requirements of the digital age and impeding banks from realising the full potential of open banking. To overcome this challenge, banks must find a balance between preserving their legacy system applications and building a modern, next-generation system. As a solution, banks should consider hybrid approaches.

The Future of Open Banking

The following stage of open banking is probably going to be open finance, with data becoming a valuable asset that will flow through various data services beyond the scope of banking. To effectively compete with this new challenge, traditional banks should adopt digital transformation, accelerate their development processes, and cultivate skills to collaborate with ecosystem patterns to provide a smooth personalised digital customer experience.

Instead of considering open banking and open finance as a danger, established financial institutions should be investigating how these concepts can facilitate new ways of conducting business, generating income, and providing tailored personal services. Companies that take this approach will be able to differentiate themselves from their competitors.

Full Replacement of the Core: The strategy is associated with significant risks and expenses. Replacing the essential systems is a complex and lengthy process, but the advantage is that the entire central system should be equipped to face future requirements once the upgrade is completed

Greenfield Tech Stack in Parallel to the Existing Core: The strategy is attractive because it presents lower risks, potentially lower expenses, and innovative opportunities. It enables banks to provide value promptly. However, the disadvantage is that it leads to the operation of two separate systems simultaneously, necessitating integration in the future.

Outdated legacy systems pose a challenge for banks to provide personalised and customer-centric services as required by Open Banking due to their difficulty to integrate with modern technologies. Moreover, these systems are more vulnerable to security breaches, which makes them a significant risk for banks that seek to adopt open banking.

Despite the obstacles, numerous banks in the Asia-Pacific region are implementing measures to tackle their outdated systems. This involves committing resources to cutting-edge technologies and collaborating with fintech startups to facilitate the upgrading of their systems. Additionally, certain banks are looking into the possibility of utilising APIs and other instruments to enable the integration of their legacy systems with contemporary platforms.

The shift towards open banking in the APAC region is clear, although there is more to do. To compete effectively, banks must deal with their outdated systems. By making appropriate investments and collaborating with partners, banks can overcome the obstacles posed by their legacy systems and take advantage of the advantages that come with open banking.

As the demand for open banking continues to grow in the Asia-Pacific region, traditional banks are facing the challenge of transforming their legacy systems to meet the demands of the digital era. While legacy systems have served banks well in the past, they are no longer suitable for the open banking landscape. Banks must balance the need for preserving their legacy system applications while developing next-generation systems that can accommodate the demands of open banking.

The success of open banking in the Asia-Pacific region depends on the level of adoption and maturity of the geography being asked to embrace it. While there may be challenges and obstacles along the way, it is important to recognize that each obstacle also presents an opportunity for improvement.

Overall, it is essential for traditional banks to embrace digital transformation, speed up their development cycles, and develop the ability to cooperate with ecosystem patterns to provide a seamless personalised digital customer journey. With open banking, banks have the opportunity to tap into vast amounts of financial data and expand access to previously underserved customers. Additionally, banks can partner with third-party providers to lower the cost of customer acquisition and access new revenue pools, ultimately benefiting the entire financial services industry.