Paul Higgins, EMEA Banking Lead, Mendix
Tech has long played a role in the finance space. The legacy applications running on mainframes at banks hold upwards of 50 years of business process and regulatory compliance evolution – that represents enormous complexity but also significant value in a highly regulated industry. However, that advantage of experience and stability is being outweighed by the faster innovation cycles and lower costs that cloud-native fintechs and neo banks enjoy.
Admittedly, fintechs have been hit hard in the current macroeconomic climate, with some valuations declining dramatically. But the long-term outlook is that fintechs in Europe continue to gain relevance. According to a McKinsey paper, at least one fintech ranks among the top five banking institutions in each of the seven largest European economies, as measured by GDP.
Given the accelerated demand for innovative business solutions geared to the digital-first economy, traditional banks cannot afford to lag behind the emerging crop of challenger banks and new fintech players. In addition, the standardization of services that we are seeing in the sector means that banks must find new ways to differentiate themselves from competitors.
What can the traditional finance players do to survive and thrive in this new world? The key lies in embracing the agility of their fintech competitors.
Fintech vs traditional banks
Fintechs often home in on a single-use case, adopting the latest technology to create a focused, best-of-breed product for customers. This innovation and laser-focus has led to the emergence of fintechs with multi-billion valuations, like Stripe, Klarna, and Revolut. Although offering different products, they share a common goal of providing a great experience to their customers and users – Stripe for merchants, Klarna for online retailers and their customers, and Revolut for retail banking – with no sign of a paper process anywhere. And they iterate and bring improvements to market at a rapid pace.
That poses a major challenge for traditional banks. The legacy applications they operate come from a bygone era where yearly release cycles were the norm – compared to the monthly, fortnightly, or even weekly release cycles common now. The business lines at traditional banks identify the trends and opportunities, but simply cannot react fast enough to capture the potential.
There is a real risk that without the agility to quickly bring new products to market, banks will continue losing customers, especially younger generations, to fintechs. An approach is clearly needed, that provides flexibility across the business and application landscape, enabling them to integrate innovative technologies and match the pace of change we are witnessing.
Low-code application development increases agility
Adopting low-code across the enterprise has emerged as a crucial solution to meet the challenges posed by the digital-first economy. Low-code breaks down traditional silos of business and IT functions through its first and most important principle: model-driven development. Using a visual model to build an application gives both technical and business professionals a common language to discuss their goals and needs. As a result, cross-functional or fusion teams develop solutions that are relevant and powerful. Low code also helps automate much of the application development, thus reducing errors and accelerating time-to-market and ROI.
Low-code application development unburdens IT
In full-code application landscapes, up to 7 of every 10 employees in IT are focused on tasks to “keep the lights on.” Whether that’s incident and problem management, making small upgrades to applications, or rolling out patches and other bug-fixes. Which leaves precious few developers to tackle the growing backlog of requests from the business lines.
By comparison, low-code drastically reduces the number of people required to maintain and operate applications. A major factor here is the model-driven development already mentioned. The combination of freeing up developers to actually work on building applications, and having those developers collaborate closely with business experts has a significant compounding effect – resulting in higher business value in a shorter amount of time.
For instance, in the case of Rabobank, whose direct savings bank served more than 500,000 people, customers were not happy with the interface, leading them to leave the platform.
The IT landscape was complex, with different systems per country, and meeting shifting regulatory and compliance requirements was not easy. So, any upgrade would be a challenge. Using the Mendix low-code development platform, Rabobank reduced their IT costs for the direct bank by 50% while delivering a far superior customer experience. They streamlined their customer onboarding process and created web and native mobile versions of their savings portal, leading to fantastic scores in customer satisfaction and increased business.
Low-code application development provides a bright digital future
For years the banking and finance sector has been dominated by well-known brands. But according to a recent EY report, 37% of consumers now say that a fintech is their most-trusted financial services brand, compared with 33% who name a bank. Looking at younger generations, 51% of Gen Z and 49% of millennials named a fintech as their most-trusted financial brand – a sign of incumbent brands’ struggle for relevance with younger audiences. Players in the banking space who leverage new technologies, making their products, strategies, and services relevant to customers’ needs will lead the competition.
As the sector continues to evolve, allocating resources to increase innovation, agility, and efficiency should be a priority for banks. Low-code presents financial institutions the opportunity to combine the strengths of an incumbent – the experience and expertise, and a user base most fintechs can only dream of – together with the agility of a start-up.