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How partnerships define the future of banking

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Søren Kyhl

COO of Saxo Bank

When banks no longer have to develop their own systems, significant resources can be unleashed to deliver better services and products.  

Digitalisation and the adoption of modern technology more broadly are, with good reason, top priorities for financial institutions. With banks being challenged on many fronts – from regulation and technological developments to shifting customer expectations – everyone must find new ways to remain competitive and relevant. 
Research shows that a typical bank in Europe uses up to 80% of its IT budget purely on maintaining old systems – i.e. getting the same old engine to start again every day. With such a large part of the bank’s resources being used on maintenance, it leaves little room to develop new solutions which are aimed at meeting ever changing demands of customers.
Casper von Koskull, CEO of Nordea, recently pointed out that many established banks are challenged by legacy IT infrastructure, with systems bundled up together like spaghetti. 

Sometimes these IT spaghetti systems have a mainframe from the 1970s and a large number of external systems are held together with what amounts to chewing gum and duct tape.
This does not necessarily mean that a bank can’t deliver a decent digital experience to its customers but the situation is unsustainable in the long run and means that the bank is inefficient, inflexible, and lacking scalability. Every time a change has to be made, the duct tape must be removed and more chewing gum applied to keep it all together. 
With bundled system on top of bundled system, the bank ends up painting itself further and further into a corner. Eventually the bank will have become so tangled in its own system complexities that it risks being overtaken by competitors and ultimately lose out to those able to offer a better digital experience.
Obviously continued incremental improvements are not sustainable and sometimes an alternative strategy is required, especially for the larger banks. One is to undertake a comprehensive overhaul and try to build a new and more efficient machine to replace the old IT spaghetti system. However, such projects can take a long time to implement and it can be difficult to make the changes while maintaining the current system running.
We know from both the public and private sector that the risk of large-scale IT projects is that they can be significantly more expensive than initially expected, or face significant delays, and these risks increase with the size of the project. Such projects only generate cash flow when they are eventually finished. 

When entering into partnerships to deliver new solutions to clients, the time to market is much shorter and partnerships are often based on revenue sharing why the risk to the business is completely different. Simply put, you only pay for the infrastructure proportional to how much you use it which is a perfect “hedge” of this business risk.

We believe that partnerships and outsourcing are the solutions for both large and small banks to help deliver relevant solutions to their customers in an efficient and flexible way. A bank needs to focus its efforts on its core competencies, while entering into partnerships supporting the technology underpinning the rest of the value chain.
It requires diligence to carefully consider which parts of technology system to keep, abandon or develop, and consequently which processes need to be outsourced. However, we do not believe that it makes sense for every partner firm to develop and maintain its own systems to cover the whole value chain. This was the case with the development in CRM systems where companies 10-15 years ago developed their own technology.  Today firms buy CRM-systems “as-a-service”. 

Similarly, the infrastructure in the financial sector is becoming an off-the-shelf product, where any adjustments can be applied directly and create value from day one. It is far more efficient and far more flexible. 

However, the financial industry is complex and highly regulated and software providers might not always be able to navigate these waters in a fast and efficient way. That is why entering into partnerships with other financial institutions that can deliver their core competency as “Banking-as-a-service” is a very relevant solution. A financial institution servicing its own direct clients and delivering “Banking-as-a-service” is a partner “taking its own medicine” and therefore has the right incentives to constantly keep up with the development, regulatory changes etc.  
Open for partnerships
At Saxo Bank we have developed the infrastructure to give our own direct clients unparalleled access to global capital markets and we deliver “banking-as-a-service” in the field of investment and trading. Today we have more than 120 white label partnerships globally allowing our partners to service their end clients with our technology.
We entered into our first white label partnership already in 2001, and since then we have developed our partnerships strategy in an open and collaborative way. 
For instance, we recently announced a partnership with the large Italian bank, Banca Generali where Saxo Bank will be providing technological infrastructure to service the bank’s customers’ access to global capital markets through our technology and connectivity with more than 100 global liquidity providers. It is very costly and time consuming for any bank or Fintech to develop and maintain its own “global capital markets engine” and that is why we see the trend of partnerships spreading much more broadly these years.
The development is positive for both the sector as a whole, and the customers. Partnerships could become one of the most disruptive factors in the financial sector in the coming years and become the foundation for a significant step forward in the sector’s use of technology. When banks no longer have to develop their own systems, significant resources can be unleashed to deliver better services and products for clients.  



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