Hardly a day goes by without news of a new fintech start-up looking to use technology to deliver better services or an incumbent bank embarking on a new IT project to keep up with the pace of technology.
However, efficient and client centric digitisation in the financial industry not only requires IT investment but a fundamental change in business models.
Historically, banks and financial institutions have tried to build technology to cover the entire value chain. Owning the products, technology, and client relationship used to make sense as banks operated behind a wall of regulation and inflexible technology.
But to keep up with new technology and rising client expectations, banks must embrace the ethos of the sharing economy, tear down this wall, and have a razor sharp focus on their specific core competency in the value chain. The core focus of most banks is servicing their clients and delivering relevant products. It is rarely to develop the products or technology necessary to deliver the client service. And that is why operating through partnerships is key.
A troubling legacy Many banks openly admit they are tied down by legacy infrastructure. 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.
Should you decide to build a bank from scratch today, you would not build anything... but you would curate everything.
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 to meet ever changing demands of clients.
Legacy trouble does not necessarily mean that a bank can’t deliver a decent digital experience to its customers today, but the situation is unsustainable in the long run and means that the bank is inefficient, inflexible, and lacking scalability. Eventually the bank will become so tangled in its own system complexities that it risks being overtaken by competitors and will ultimately lose out to those able to offer a better more comprehensive digital experience.
The initial reaction from management and the board could be to overhaul the entire infrastructure. While such a solution might treat the symptom for a while, it will not solve the underlying problem.
Should you decide to build a bank from scratch today, you would not build anything... but you would curate everything. Through a “Lego-approach” you can assemble all the necessary technology and infrastructure to deliver what is your core focus: client service. This is really the good news for banks tangled in legacy trouble: the solutions to all your sorrows are already available.
At Saxo we have recently partnered with the large Italian bank Banca Generali and online investment platform MoneyFarm to provide technological infrastructure to provide their customers with 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. Today technology is so flexible that through OpenAPIs, for example, it is much easier to deliver an offering specifically tailored to the partners' or clients' needs – both front-end and back-end solutions.
A shift from owning technology and infrastructure to leveraging it When we talk about technology sharing, we do not mean simply buying software from a software vendor. The financial industry is complex and highly regulated and software providers might not always be able to navigate the system 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.
Airbnb, the world’s largest accommodation provider owns no real estate; Facebook, the world’s most popular media owner, creates no content and Uber, the world’s largest taxi company, owns no vehicles. This only demonstrates that this shift from owning assets to leveraging them has transformed a very broad range of sectors and is now reaching the financial industry.
If you look at CRM systems, 15 years ago many businesses built their own. Today, no one would do that and almost everyone buys CRM- systems “as-a-service” from a few global specialists such as Microsoft or Salesforce. The same goes for phone operating systems, accounting systems, and a range of other key functions.
I used to analyse the telecom industry and I can see clear similarities in how resellers built a unique offering on top of the existing infrastructure supplied by what were essentially their competitors. Instead of insisting on owning the entire value chain they decided to spend their resources and energy on their specialty: solutions tailored to specific audiences, with great service and sharp prices. By embracing partnerships and technology sharing, banks can eventually achieve similar network effects.
That is exactly what we also see many fintechs doing. Instead of building the entire infrastructure needed to run a robo advisor for example, they use our technology and market access as a foundation. That way they get the necessities from us and can focus on the specialties that truly differentiate their offering.
Looking five or 10 years ahead, we see a vastly different financial industry. Pushed by technology, regulations, and client expectations, all financial institutions will need to understand their role in the value chain, embrace the ethos of the sharing economy, and be prepared to work with partners to deliver a unique client service.
