By Manoj Peiris, Head of Legal, Credit Kudos
Over the past eighteen months we have experienced a new pace in technological innovation and adoption for financial products and services driven by Open Banking. The pandemic has supercharged mass migration to digital, and as a result, people have come to expect – and demand – more of the convenience, speed and choice that digital financial services offer.
This presents both a challenge and opportunity for the financial institutions providing these services. The opportunity lies in the ability to improve existing services, to create products that meet these consumer demands and to use technology to offer new, innovative ways for people to access a broad spectrum of financial services. The challenge is to keep pace with evolving consumer demand and to deliver market-ready, high-quality financial products within a short timeframe.
To meet this challenge and seize this sizeable growth opportunity, banks can pursue two routes. Firstly, to build – to funnel money inwards and invest in an in-house team of engineers to deliver services that meet the needs of the market. Or secondly, to buy – to look outwards and invest in partnerships and acquisitions that allow them to harness the power of technology to support new product developments. But which of these approaches is the right one, and why?
Key considerations when building new financial products
Banks are expected to seamlessly adapt to the post-pandemic consumer demand for digital financial services, and there is unrelenting pressure on them to innovate at speed. Whichever way they choose to do so, whether that be through building new technologies, innovations or services in-house or ‘buying in’ technological capabilities from fintechs, there are several factors that must be considered if they are to succeed.
Being familiar with and abiding by regulations is critical. Each market is different when it comes to regulatory obligations, which can prove complicated for engineers when building services intended for roll-out across multiple markets. This is where a legal or compliance team comes in. Having experts who are familiar with the unique regulatory requirements of each market is invaluable. With experts working side by side with developers to build regulatory compliant services from the ground up, organisations can save time and money and deliver services faster, while simultaneously mitigating legal and regulatory risk.
Delivering the right outcome for consumers is essential, and a priority also recognised by the FCA, which is consulting on a proposed Consumer Duty – the intent of which is for regulated businesses to embed policies that have positive outcomes for the consumer at the forefront of its thinking.
Finally, speed to market is critical. There is little point in an organisation investing millions of pounds to develop its capabilities if all its competitors have got there first and market demand has dwindled. To reap the benefits of innovation – in the form of widespread consumer adoption – technology must stay one step ahead of consumer demand. The ability to anticipate people’s needs and quickly offer services that meet them, is pivotal to success.
To build, or not to build?
For some banks, using an in-house engineering team to build and refine their own technology stack is preferable. Using one internal team rather than outsourcing development means that all individuals involved in the process are familiar with the core business, creating fewer hoops for developers to jump through and potentially a more streamlined path to success. As well as offering banks more control and privacy over the innovations they develop, building in-house is especially beneficial from a regulatory perspective, as it allows the legal team to provide input and guidance from the initial design through to deployment.
Building in-house can come with downsides too though, including the potential difficulty and subsequent high cost of recruiting and retaining highly-skilled engineers, and the length of time it takes to build complex technology from scratch, which could potentially result in the technology being dated by the time it’s ready to hit the market. Furthermore, as the diversity of services that banks offer continues to grow, it may become difficult for in-house teams to keep pace with the design and development of such a wide range of financial services.
The power of partnerships
Strategic partnerships or acquisitions between fintechs and banks can be one of the fastest ways for banks to deliver new services to market or to significantly improve existing offerings. Buying-in technological capability is typically cheaper than building, and can save banks time by acquiring customer-ready, easily integratable solutions that enable them to scale fast. Additionally, fintechs tend to specialise in particular areas of the financial ecosystem, for example in open banking, which means that – through partnerships or acquisitions – banks can work with leading sector experts and use cutting-edge technology to develop offerings that meet specific needs of consumers and help banks to build a broader financial services proposition.
Furthermore, partnerships can be mutually beneficial, and provide an opportunity for both parties to learn from and collaborate with the other. One such area is in product design. When developing new financial solutions or making improvements to existing services, big banks tend to be more experienced than fintechs in knowing what to look for when it comes to identifying risk and mitigating against it, and fintechs stand to learn and grow from these interactions.
Embracing a hybrid approach
When it comes to developing the next generation of financial services, both buying and building have their unique benefits and in short, neither approach is explicitly right or wrong. A hybrid approach, where a bank develops some solutions in-house while simultaneously partnering with fintechs to expand its service offering, can provide the best of both worlds, and empower banks to embrace innovation from the inside out.
Whether a bank chooses to build or buy, one thing is certain – they must prioritise innovation and the development of new solutions that cater to the growing consumer demand for speed, convenience, choice and security. Those that do will be the ones that succeed, attract new customers and set the pace for innovation in financial services in the years ahead.