How to achieve an effective transformation with fintechs
Customers are what businesses exist for – and if businesses aren’t able to keep up with ever-changing customer demands, they will be left behind.
This is particularly relevant in financial services, where legacy processes and technologies are often a barrier to innovation and progress.
Open banking and the shift to “as a service” models have spawned many new financial technologies that offer the brilliant innovation capabilities that customers are looking for. Banks are increasingly turning their attention to B2B fintechs to take advantage of their new business models, faster transformation and advanced technology. It is therefore not surprising that the global fintech market is expected to reach $332.5 billion by 2028.
However, much of the data that powers fintech capabilities requires integration with legacy systems hosted by banks and other financial services institutions. This can lead to several unique integration challenges.
Establish cultural fit
One of the main challenges is the difference in culture and working methods. Big banks are heavily regulated and have vast operations and systems – a far cry from the cloud-based agile approach of fintechs – which inevitably affects how these organizations work together.
Speaking at a recent KPMG panel, Allan Woodcock, Engineering Director at Lloyds Banking Group, explained the role education plays in solving this problem.
“Banks have a responsibility to educate fintechs about the regulatory environment and its pervasiveness within a bank, as well as how it can vary by product or division. Sharing knowledge helps banks and fintechs to align with a common goal and work at pace,” he said.
At the same event, Conrad Ford, chief product officer at Allica Bank, mentioned that the problem is that large financial institutions generally want to involve everyone in everything. He explained that there is a perception that if many people are included in a decision it is less risky, but that is simply not the case.
He commented, “It leads to a culture where people don’t take responsibility. Instead, big banks need small cross-functional teams to get things done. This not only makes accountability clearer, but speeds up implementation.
Technology as an Inhibitor
On the technology side, data models are a major contributor to incompatibility, as it is difficult for fintechs to integrate them into banking systems. This ranges from defining appropriate IT service operations to ensuring that the bank has the correct IT skills to implement and operate the technology.
Where fintechs frequently advertise “plug-and-play” solutions, in reality, the implementation process can be painful.
To ease the onboarding journey so that a working solution could be achieved sooner, Ford advocated for the end of the request for proposal (RFP).
“Tenders are the worst way to choose a technological solution. The starting point for selecting a fintech vendor is to ask, “Does it do what we want it to do? “. If so, chances are it will go through the confirmation due diligence that tenders initially require. »
He added: “Banks should focus on proof of concept and then determine if there are any gaps that need to be filled.”
Legacy systems are often a drag on large banks. Their complexity and IT teams’ lack of understanding of older systems can be a stumbling block when integrating fintech technology.
However, the legacy technology can also be seen as an advantage. Legacy technology offers a plethora of opportunities for working with fintechs, according to Woodcock.
“There are ways around legacy technology. We have several working environments so that we can collaborate with fintechs without causing security problems. Increasingly, we’re working more in our legacy systems with partners because that’s our opportunity space,” he said.
Reconciling risk and value creation
Balancing risk and regulatory requirements without disrupting the use of fintech is another issue facing banks. However, modern working methods, such as Agile, can solve this problem.
Ford explained, “The best way for banks to work with fintechs is to have small, self-sustaining teams, who take quick, quick steps so they can step back when things go wrong.
“We have seen many high-profile system failures where banks have attempted transformation projects, but a modern engagement mechanism can prevent these disasters from happening and create a strong partnership.”
Achieve effective transformation
According to our latest report, a record number of fintech deals were closed in 2021 with a total investment of $210 billion, and in 2021 there has been renewed interest in fintechs capable of assisting in the business of digital transformation, especially from tier one banks.
As more large banks seek to partner with fintechs to deliver effective transformation, these organizations need to ask themselves three questions to minimize the aforementioned challenges:
- What is the problem to be solved?
- Is there a fintech that fits this space?
- How can we align ways of working to proactively address integration challenges?
It is true that fintechs have much more to offer banks than technology platforms, but only if these considerations are made from the start so that the solution can be used in the right way. Without taking this approach, transformation is destined to proceed at a snail’s pace.