The past five years have seen intense discussions and various recommendations on how banks can leverage technology to innovate within their company. To sum up, three options have always been in the mix: buy, build and partner.
Buy is the most common approach: a bank buys a solution off-the-shelf and offers it to its customers either as a label or as a white-label product. There are no modifications and the solution implementation sticks to the design.
Build implies that the bank builds a solution internally. In doing so, it builds on existing infrastructures– most likely as part of a legacy environment.
Partner means a bank either invests in, or collaborates with, a Fintech or WealthTech company to develop a solution tailored to the bank's needs.
Innovation comes with several challenges for banks, especially when following the building approach. The issues are not just those that come with the need to build around legacy systems, but also include:
- Limited tech resources and budgets
- Securing budget and commitment from the executive team
- Creating an innovation-friendly culture
- Vying with FinTechs and BigTechs for new talents
- Validating actual customer demand
- Increasing speed to market while meeting risk and compliance requirements
- Setting the right priorities
- Decision when to shut something down
(cf. Christer Holloman (2021): „Transactional to Transformational - How Banks Innovate“, Wiley)
But one fact remains: Banks like to build. Indeed there are valid reasons why a bank would prefer to build inhouse. In some cases, it is reasonable: If you believe that your offering is so unique that no provider covers all your requirements, or that in-house development is cheaper and faster, or if you don't want to depend on an external third party, you build. The bank's arguments for in-house development are usually very convincing and sometimes even understandable. The problem is: Banks are generally very slow at building!
So, how can banks build, without wasting too many valuable resources?
Numerous examples and experiences prove that getting the base right is crucial for successful innovation. Whenever feasible, banks should, therefore, leverage already existing solutions for the base or the non-unique features of their offering and build their own individual offering around it.
This way, they can capitalize on the years and effort someone has already spent on a particular base. In a nutshell: They should combine buy and build.
Getting it right from the start
Creating a hybrid system that combines third-party components and internal development means that innovation can flourish. Technology teams can release a wave of creativity to customize not just their front end but also beneath – and all without struggling with constant debugging, stabilization and suchlike within the core technology stack.
There are two critical components when building an individual offering based on a third-party solution or with third-party components.
First, the chosen solution needs a sophisticated, intelligent API layer. This enables flexible integration with existing systems. Secondly, it must contain a BPMN engine that allows the implementation of individual processes. Thereby, based on process and workflow templates, the bank can easily tailor processes to its needs.
As any provider aspiring to satisfy a genuine customer need, the bank should think in terms of customer processes. The technology employed should support this. The bank must be capable of breaking down the entire customer journey into sub-processes. There should be enough interfaces for data exchange between the external solution and the bank's systems, which can then be adapted.
Only with modular, well-thought-through separations within the solution can the bank actually create an individualized offering. That means that the technology solution needs to allow the bank to think in complete journeys while at the same time allow for individualized processes. This empowers the bank to put its DNA, its fingerprint, into the customer interface, beyond a mere branding of the front-end with the bank's colors and fonts.
Though it very often strategically makes sense to select one third-party provider with a broad range of flexibly applicable solutions, the described approach also implies the possibility to build up a bank’s offering universe by deploying multiple third-party solutions. With the right base, a bank can smart-shop around it, rather than to go for best-of-breed in all microcosmic parts of its offering.
Looking at different examples in Switzerland and Germany, some very creative offerings have arisen based on a buy-and-build approach. The buy-and-build approach allows banks to maintain their building spirit yet be much faster. The average development time declines from approximately one year to 3 to 6 months. Without compromising on the core features of the bank offerings, this means a time-saving of between 50% and 75%!
One example where such a buy-and-build approach can lead to attractive new offerings is a portfolio management system. Essentially, nine building blocks are required for a portfolio management system: a rebalancing mechanism, monitoring functions, an investment guideline, portfolio construction, allocation checks, order management, risk profiling, a risk engine, and portfolio analytics.
Given the ability to customize these building blocks and the processes that steer them, the bank can re-use its portfolio management capabilities to create many more offerings with minimal effort. The bank could drive its portfolio management system to wherever its creative juices flow. This could be a trading platform for cryptocurrencies and digital assets, a retirement product offering, a personal CFO and financial coach, B2B, the possibilities are many!
Sounds too good to be true? Contact us, and we'll show you how it's done.
Re-using portfolio management capabilities to create many more offerings with minimal effort!
Figure 1: Re-using portfolio management capabilities to create many more offerings with minimal effort! Source: aixigo
This article was part of The Wealth Mosaic's Swiss WealthTech Landscape Report (2021). Access the full report here.
