Stephen Bailey, CTO, Transact Payments
In the last ten years, the banking industry has undergone a vast technological transformation. Yet, incumbent banks are in a uniquely challenging position given the weighty burden of their legacy technological infrastructure. These organisations face an extremely complicated, expensive and time-draining process to update such technology, greatly hampering their ability to innovate products and services to tech-savvy customers. A decade ago, incumbents were not at risk of losing their customers to new fintech challengers, meaning they had no real impetus to innovate. Such organisations continued to use existing legacy systems that centred on “old” models, with the added constraint of extensive distribution networks.
However, within this period of time, fintechs have been able to make the most of their freedom and agility to build their technology from scratch. This has enabled them to react continuously (and quickly) to provide the very latest banking services, underpinned by innovative features that customers both need and have come to expect. With fintechs thriving, the position of incumbents has been disrupted and they must now break away from tradition to stay competitive in an ever-evolving market.
Despite such significant disruption to the banking sector, fintechs still encounter hurdles to overcome. For example, some of the most successful challenger banks, like Monzo and Starling Bank, are still impeded by having to rely on the infrastructure and regulatory frameworks of the bricks and mortar banks, such as the simple need to have access to the Single Euro Payments Area (SEPA) network. Unfortunately, until the entire industry becomes better-aligned technologically, fintechs will find themselves in partnerships that bring limitations.
With this in mind, especially at a time of such fast-moving innovation, what are the key considerations for challengers regarding partnerships and technology decisions?
From concrete to the cloud – the need to break cost barriers
It may seem a quaint idea now, but before the adoption of cloud technology, financial organisations had two approaches: either build a data centre or use a hosted solution. Data centres offer on-premise data storage in a physical location yet, are extremely costly. Meanwhile, while less of an initial financial outlay, hosted solutions have the pitfall of locking companies into long-term contracts that can smother the level of innovation at an organisation.
As the rapid pace of cloud adoption highlights, this solution offers a more effective, flexible and affordable approach. The cloud is a bundle of services in practice, encompassing storage, computing, networking, data analytics, AI, and machine learning. With such a range of services, the flexibility comes in the ability to pay-as-you-go depending on the needs of your financial organisation, which in turn, inherently lowers risk as adaptions can be made in a lightning-quick fashion.
Alignment with the cloud enables the development of agile systems that rapidly innovate and scale. Sadly incumbents can’t realise the cloud’s benefits as their ability to utilise it is restricted due to entrenched legacy models. By contrast, fintechs aren’t tethered to such legacy issues, meaning the cloud breaks down cost barriers to markets that otherwise likely would have been unattainable. Importantly, the cloud also offers ongoing agility to respond to both today’s and tomorrow’s business needs and technological developments. This is clearly a distinct advantage for fintechs.
Regulators try to catch up
Much like technology has disrupted the banking market, significant change is also on the horizon from a regulatory perspective. Regulators are trying to get to grips with the complexity of the cloud. Transitioning from the old legacy model has presented new challenges – without simple answers. For example, distributed networks can cause issues including the jurisdiction of where the data is held, where it is used, where services transact, as well as the difficulties of being GDPR compliant, which regulators themselves do not yet know how to regulate.
In this environment, the opportunities provided by the cloud are many (and attractive); however, the overarching context of a shifting regulatory landscape must be given due consideration. This is why care needs to be put into thoughtfully selecting a network of partners to ensure changes stemming from regulations can be planned effectively, without derailing innovation.
The perfect starting point for innovation
The best banking platform considers how symbiotic business strategy and technological infrastructure are – simply put, without such a combination, you cannot innovate in today’s competitive market.
Therefore, a bank identification number (BIN) sponsor’s technology and business teams need to be intertwined to ensure that technology can pivot swiftly to address the needs of the business and give technical solutions that fit ever-changing business ideas. Another factor is ensuring adequate in-house talent is in place, especially in a sector where such expertise is increasingly difficult to find. This fluid way of working with a potential partner is essential to attain fast-paced, bespoke solutions – which banks are simply not capable of delivering.
As technological transformation continues at a breakneck speed, the benefits of a cloud-based platform have really come to the fore. Yet for fintechs, the real recipe for success is combining this technology with an experienced BIN sponsor. Such a sponsor unlocks added value thanks to a strategic vision, built on a deep level of expertise, meaning fintechs can do what they are best at – being innovative.
