For years, mid-tier banks have been told they’re potentially heading for extinction. The barbell effect dictates that the middle will be significantly challenged by an increasingly tough business environment, with only the very large and the very niche institutions being able to succeed. And indeed the outlook does look challenging, if one adds up the increased cost of regulatory compliance, the pressure on fees exerted by a low-interest rate environment and prolonged macro-economic uncertainties, the balance sheet constraints imposed by Basel III and increasing competition from innovative, nimble FinTech firms.

But technology-led innovations are making possible new client-centric business models that will enable mid-tier banks to punch above their weight, while retaining the agility and focus to respond quickly to changes in demand. This marks a new era of open banking  where higher customer expectations can be fulfilled  by mid tier banks providing a widening and customisable array of capabilities and services accessed via APIs (application program interfaces).  This will give mid-tier banks the opportunity not only to survive but to thrive.

Grasping this opportunity requires a radical change in banking models and mindsets. But at Saxo Bank, we believe that the combination of profound socio-economic shifts and economic pressures should encourage banks to take a leap of faith. In short, recent digital technology innovation has changed customer expectations forever. People have grown used to the responsiveness, convenience and customisation they have experienced via apps downloaded from their smartphones to run key aspects of their daily lives. As is already evident in many consumer-focused industries, we’re making a transition from a service-based economy - in which firms including banks grow relationships and revenues by adding more services over time - to one in which the user experience (UX) is paramount.

To ensure the necessary degree of attention to - and investment in - the user experience, banks need to re-order their priorities.

In the first instance, they must reassess their value proposition and their core competences, often based on a unique combination of factors, including customer base, core geography, product expertise, customer service levels etc. This identity or brand is critical to customer perceptions in a world of increasing digital disintermediation and must be understood, harnessed and leveraged as banks migrate their services to omni-channel platforms in order to reach customers via the device of their choosing.

But to nurture strong, loyal customer relationships that can drive digital revenue growth in the long term, banks need to concentrate a higher proportion of their resources on highly-personalised, highly-responsive delivery to the client – increasing satisfaction levels and interaction volumes – whilst taking an aggregator view of the commoditised processes that are necessary but which are not valued, or even seen, by the client.

Historically, banks have not been known for their agility and responsiveness to customer demand. This is partly because they are highly regulated financial institutions, charged with fiduciary responsibilities to clients and bound by rules on consumer protection and anti-money laundering, among others. Moreover, their services are run on complex, expensive patchworks of legacy systems that do not easily facilitate change. But a further drag factor is that banks have typically preferred to exert full control and ownership over all aspects of production and distribution when bringing to market a new service, regardless of the cost and time implications.

Imagine a national or regional bank wishes to provide access to the global securities markets to a domestic retail customer base. It could enter into an agreement with another bank, effectively white-labelling a service, tailored to the bank’s own customer needs. More typically, it would opt to piece together the underpinnings of the service itself, such as the connectivity to major stock exchanges and their clearing and settlement infrastructures, the risk management, transaction processing and client service operations, plus the attendant legal, tax, compliance and HR processes.  

As well as being slow, this route to market is above all costly and risky. Deliver the service too quickly, and it may by flawed - either from a functional or, worse, regulatory perspective. Deliver it too late and the gap in the market has already been closed. Either way, large outlay has resulted in little added value for the customer.

Admittedly, firms that have adopted white-labelling solutions have taken one step away from this approach, but a further change of mindset is required for banks to embrace business models based on greater use of APIs, thus opening up access to solutions and capabilities that can be integrated into user-experience platforms more effectively than previous models for collaboration.  

It is a step that many firms large and small have already taken. The past decade or so has seen a revolution in the availability of capabilities and tools that underpin the evolving value propositions. Understandably, smaller, less well-funded and more tech-savvy firms - notably but not exclusively in the FinTech sector - have also been quick to seize opportunities to tap into services as and when required from cloud-based service providers. But many larger firms have taken the plunge too, resulting in a sector that is fast maturing, with new offerings emerging as appetite increases.

In particular, cloud-enabled ‘business-as-a-service’ (BaaS) providers offer a low-cost, flexible and quick-to-market route to seamless integration of product verticals or business lines - alongside the banks’ existing core services. Different approaches will suit different needs. While API developers might offer expertise in a particular product or geographic niche, BaaS providers also offer the experience of bringing a range of API-based services to market with banking partners across multiple jurisdictions.

Ultimately, the API-based model allows the bank to take a less capital-intensive approach to pursuing new business opportunities and therefore new sources of revenue. To return to our international equities analogy, rather than investing up front in all the market connectivity and infrastructure, the bank may first test the water by delivering to clients via an API-based service in partnership with a third-party, like Saxo. Depending on the customer response, the bank may continue down the same partnership path, or significantly ramp up investment if it sees opportunities to broaden or deepen its core value proposition.

While embracing open APIs speaks directly to the CEO’s core priority of delivering cost-effective digital revenue growth, the shift to an experience-based banking model may also help to achieve other priorities, such as attracting and nurturing future leaders. Since the financial crisis, banks have struggled to attract high-quality graduates, many of whom have preferred the ethos and opportunities offered by the giants of ‘e-commerce' and consumer technology. Banks that demonstrate their understanding of how digital technology innovation is reshaping peoples’ lives will have the best chance of recruiting the talent that can grow the business well into the future.  

With its principles pioneered and proven in other consumer-facing industries, open banking is going mainstream. There are many ways to benefit from this new model - but there are few alternatives to doing so - especially for mid-tier banks.

You can’t predict the future, but you can prepare for it. An open, agile architecture is a pre-requisite if you want to pivot nimbly in response to changing market conditions and customer preferences. Technology has given us the tools to collaborate in new ways with third parties – as well as new ways to increase customer satisfaction and loyalty levels. To really maximize the latter, banks should first exploit the former.


Chris Truce is director, Platform Development, Saxo Bank.