The bank-as-a-platform promise is real: and the impact is bigger than you can imagine
The manifested fintech-led reinvention of banking holds true several broader changes
Consulting firms are one of the first to see the need for the big banks to change. They have been with banks for aeons. They were part of numerous attempts to change the banks processes and systems, both successful and botched. They know of the dire state of banks disparate systems creaking not only to deliver the information in seconds, but to even talk to each other. The well known example is for one, Lloyds, a respected institution with a prominent online presence yet it suffered a number of times trying to offer new services compared to what one would experience from “Googles” or “Apples” in terms of simplicity or new functionality. Their whole systems were ground to a halt or unavailable for days, for which the noble attempt to offer something novel and appropriate for the time was penalised by the regulators. A Catch 22 in full glory.
The same applies to repeated woes at RBS: their IT systems are snowballs of functionalities connected to each other in spagetti fashion. The outages are caused by the complexity of their legacy systems rather than their efforts to bring innovative products to the market. — mentioned to me by former PWC Senior Consultant Radek Jezbera, with whom I share the passion to upend the market gyrations
You can start tracking the slow-pace change of course through what professional services are doing:
- staging hackathons and meetups with startups, on one hand betting that a number of them would grow to satisfy the effort of putting diverse teams of consultants together to track and report on the morphing state of services offered by offshoots.
- they organise labs dedicated to emerging trends and engage startups, either just tracking what they do or involving them as a the next step of acting on recommendations they have given to big customers.
KPMG, Roland Berger, zeb, all have planned either an internal incubation units where they approach the amateurs help together solve particular projects consultants are tasked with by the corporates. Apart from building smart data-finding tools to assist corporates build better profiles of their customers, or better serving, they witness the need for change of the industry of solid standards and conservative outlooks (where the cost of risk often outweighed to opportunity rewards.
The reality is even bigger. The small changes made by those populating the newfound blue ocean of fintech is already tilting the icebergs sitting on the plane — and accelerating the change that banks want to institute to rebuild the core foundations of their pillars:
- capital finance (pushing riskier forays to alternative channels or lending in bulk through digital players like marketplace lending players, several of which were either financed with equity capital or snapped altogether;
- payments (rebuilding networks based on modular and universal rails allowing banks to push more context through the channel, while decreasing cost and increasing speed / delivery, cutting off the need for big outlays to maintain the float;
- process automation (where algo-rules manage trading, routing of payments, outbound campaigns or inbound customer service traffic), adding new layers of data change the nature of the processes originally manned by people working for people: now there are algorithms working to contextualise data emanating not just from humans, but from their devices. Where originally it was you buying your groceries, today it may be your bot. This reinvents banking;
- sales and advice (where originally people travelled great lengths to bank with a bank, now they bombard bank digital braches even more often, casually refreshing their apps to inquire the momentous change of their balance, payment being cleared, card transactions being relentlessly monitored — but as users appreciate quick interactions with all services that deliver data they rather crave for meaning, than just the plain fact. The context, rather than the core of finance, becomes the norm.
How such a rapid change happened? Who else is to benefit and who would suffer?
The ongoing change is supported by increasingly available bandwidth, in turn decreasing the risk of downtime for cloud services processing data for a fraction of a cent, built on universal rails where access to developer community is rampant. All in all, the tools are there, banks just need to know how to approach and properly utilise all this paraphernalia. Here the long touted recommendation for t-shaped teams, coupled with agile development (while dev-ops is now the new vogue) and user testing made way to the ears of the senior executives, and lauded and heavily publicised digitisation campaigns are launched, originally to placate shareholders seeing how the cost of capital is eating into the minuscule returns and wondering if they should put their money elsewhere.
Mind you, the fintech revolution is propelled by the same money that originally sat in the coffers of big banks — and as they are looking for arbitrage, so increasingly banks are seeking refuge from the cost pressure in the fintech domain.
As the smart money is looking for ways to excel in the arbitrage game, it is looking for smart carriers already appreciating the change of pace with which innovation comes to the mass user doorstep. Hence, the danger from the non-banking financial institutions, operating on the fringe and selectively buying into financial services to mask them in the world of seamless consumption (see the Ant Financial recent USD 3 billion raise for global fintech venture finance foray. The potential for smart application of data accumulated by the Chinese consumption drive champions would dwarf pretty much all international glitzy startup stories.
Banks would have certainly lost unless another painful challenge have not arrived, giving them a jolt and a reprieve to start changing — instituting big renovation programs. The negative interest rate. Exacerbating the cost-to-income (CTI) ratios, it gave to board a chance, while seeing the abatement from the Deep Recession, to funnel the reserve funds into tech, pausing the expansionist mode and focusing on rebuilding the pillars.
Full stop is that the bank as a platform is not meant for challengers, it is meant for T1 banks
Where over 60 per cent of money flows in corporate, trade, retail and investment finance is controlled by banks with their CTIs in upper 50ies — rendering them digital, modular and cloud-based, would potentially decrease them to high 30ies, opening 100s of billions in capital.
There are several notable examples:
- PWC “Bank in a Box” project, with the consultancy offering a set of tools and consulting packages to offer non licensed upstarts access to start offering financial services;
- Rails Bank, a recent newcomer and Solaris, an incubated bank as a platform by FinLeap are already offering fintechs access to critical licensed infrastructure;
- Launched last year, London-based 10x, founded by Anthony Jenkins, is a modular architecture offering general ledger, payments and corporate banking services, already primed to start supporting one bank;
Where one would say the motive is to level the playing field for new fintechs often having little to no clue what is required to operate in the midst of centennial peers, it is a primitive or in other words a short-term view.
Where the flow of small fintech would dissipate after the interest rate policy reversal and VC money being burned by both this and free-ware pushed by upstarts, someone else has to start using bank-as-a-platform — and they can be rendered to outsourced modular architectures for the very Tier-1 banks, helping them to complete the digital transformation.
