By putting customers first, fintechs are using technology to provide more responsive and cost-effective financial solutions for clients.
Financial technology’s meteoric rise—fintech startups raised $12.2 billion globally in 2014, triple the amount raised in 2013—is set to continue as the sector develops products and services to meet banking shortfalls and customer demand for improved convenience and better value. According to financial services IT research firm Celent, only a small portion of the $196.7 billion banks are expected to spend on IT in 2015 will be on innovation, as 75% will get swallowed up maintaining their unwieldy legacy systems and keeping pace with new regulations.
Richard Goldklang, chief technology officer, European Union, at GFT , which specializes in designing and implementing IT solutions for the financial services industry, says investment banks face enormous problems with technology as they have all grown via acquisition. “Each separate area of the bank has its own technology silos, and no one seems to be able to pull it all together; and they have not tens, not hundreds, but literally thousands of systems.”
But it is not just banks’ IT infrastructure that is causing them problems when it comes to keeping pace with fintech startups. Regulation is also having an impact. “Everything is being driven by yet another regulatory compliance deadline, and everyone is spending their whole time rushing after these deadlines, which is very inefficient,” says Goldklang. Rather than adding to the spaghetti of existing architecture with manual work-arounds, banks should invest in getting their architecture and market data correct, adds Goldklang, which would help make future compliance issues easier to resolve.
CORPORATES BENEFIT FROM INNOVATION
For Philippe Gelis, the co-founder and CEO of Kantox, a peer-to-peer foreign exchange platform for businesses, fintech firms are more agile and able to respond to customer needs with greater urgency as a result of their size and leverage of technology. “Fintech looks at traditional finance and aims to improve it through technology, whereas banks are so big, with so many layers of old technology and long-established processes, that it is time-consuming and bureaucratic,” says Gelis.
Customer power in such circumstances is not so strong, adds Gelis, as there is little to no competition that offers a more customer-centric service. “Fintech as a finance subsector is growing exactly because of the failings of the traditional sector, so fintech services are more customer-centric by their very nature,” he explains.
Making international payments, for example, is an essential task for any company wishing to operate globally. However, the infrastructure designed to support the thousands of transactions taking place each day within traditional banks often relies on legacy systems and manual operations, says Todd Latham, vice president of marketing at currency payments provider Currency Cloud, which provides a Cloud-based international payments platform to businesses via an application programming interface or API. “As such, businesses often find themselves paying additional fees for such services, which are delayed by drawn-out processes.” Latham says Cloud platforms can automate traditionally laborious payment processes and offer businesses a seamless international payments experience, significantly reducing the cost and time associated with the transaction. By operating their payments online, businesses also have complete control over how they manage their international payments.
Although fintechs are currently meeting the needs of specific banking verticals such as payments and foreign exchange, Gelis believes there will be fintech banks within the next five years. “Fintech banks will provide a platform for convenient access to a marketplace of financial services and a knowledge base that will be indispensable to customer interests.”
Gelis says APIs will enable fintech banks to act as a central point from which the bank can address financial service requests from customers and turn to the services of a relevant third party, be it a fintech company, a financial institution or even old-school banks. For developers, APIs enable them to connect to a bank, through a controlled access channel, to make use of customer data. Developers can then build new services, with banks maintaining complete control over how those services are delivered behind the scenes.
“For banks, the API benefit is clear,” says Latham. an API provides the opportunity to save huge amounts of time and money by integrating the functionality from another offering as part of the bank’s own, which simplifies the process of adding innovative technology services by piecing together building blocks of flexible services, much like financial lego. “Taking this open approach to IT development can help banks reduce their development costs, provide innovative new services and unlock fresh revenue,” he says.
A nimble and customer-centric approach to financial services is behind most fintech innovations. Jean Donnelly, executive director of FinTech Sandbox, a Boston-based nonprofit that helps fintech start-ups, says entrepreneurs look where entry barriers are the lowest, adding greater transparency on the consumer side for payments, currency exchange and platform or alternative lending.
“A potential problem arises if the innovative front-end makes a promise for service that the legacy back-end can’t deliver.
~ Jean Donnelly, FinTech Sandbox
FinTech Sandbox aims to support fintech entrepreneurs by providing them with access to free financial data and infrastructure. “Data is the lifeblood of the financial services industry, and APIs make that data accessible and easier to use,” explains Donnelly. “But one of the greatest impediments to starting a fintech business is the high cost or inaccessibility of financial data, including market data, retail banking data, insurance and payments data. Without access to deep, quality data, it’s difficult to identify problems to solve and/or test services to the robust standards of financial institutions.”
REDUCING TECHNICAL DEBT
Donnelly says there is tremendous benefit for all parties involved when banks expose their APIs to developers. “This helps banks, and it helps fintech start-ups develop products and services that can enrich the banking experience for all.” What technology strategies banks undertake to implement in order to compete in a very changed marketplace depends on their unique brand and service offerings. “Given a bank’s culture, priorities and resources, this mix of brand and service offerings—in-house investment, partnerships, direct investment and accelerator programs—is tailored for that bank,” says Donnelly. GFT’s Goldklang warns that the relentless pace of new regulations for the banking sector is now “the new normal” and is unlikely to be reduced anytime soon, and the teams who have to deal with the required enterprise-wide changes are also not all equal. “Paying for quality, within reason, makes massive amounts of sense—there’s one bank where 80% of their IT department are based in India, but they only achieve about 30% of the entire group IT productivity.”
He says banks need to understand the level of technical debt they have and how to reduce it. Put simply, badly programmed systems with multiple manual fixes require more maintenance, especially when additional changes are required, making them a long-term cost. With better programmed, enterprise-wide systems, this “debt” is reduced more quickly. “If you measured it and stuck it on your balance sheet, then you’d have money to invest and you’d understand how you can reduce your debt,” states Goldklang.
The back-end operations of banks are very similar. It is their front-end user interface that is differentiated. “A potential problem arises if the innovative front-end makes a promise for service that the legacy back-end can’t deliver,” says Donnelly. Traditional financial institutions have realized they need to adapt to compete with nonbank providers. Some will collaborate rather than compete, but ignoring fintech is not an option.