Ian Massingham, UK Technical Evangelist, Amazon Web Services
Some incumbents in the financial services industry may think they have the market locked down so that new entrants don’t have an opportunity to disrupt and displace them. However, start-ups are using cloud technologies to break through using their on-demand access to secure, and compliant technology to create new ways to bring value to customers. They are doing this in a fraction of the time and at a fraction of the cost that it’s taken some of the more established institutions to build up their in-house technology infrastructure.
Cloud-based fintech start-ups, unburdened by complex and costly legacy infrastructure, are accessing technology resources, on demand, with a broad range of services with deep feature sets. Add the fact that the cloud platform that they are using has the same advanced security features and capabilities as the bigger financial services players and this is forcing many of the incumbents to reconsider their position.
You only need to take a look at how cloud technology has changed other traditional industries to understand the implications of this to the finance sector. Airbnb is transforming hospitality, challenging the incumbent hotel chains, while Netflix successfully took on the video rental market, changing the way we buy and watch movies at home forever. Looking at how these two companies have shaken up their respective industries in the last five years, we are beginning to see similar disruptive trends emerge in the financial services space.
A good example of this disruption is happening in the area of credit scoring. Traditionally, this market has been dominated by a core set of long-established credit bureaus. These bureaus have spent millions establishing themselves as the suppliers of the credit scores that banks base their lending decisions on. The upfront investment required to enter the market and challenge this small set of dominant players has been paralysing and near impossible to do. That is until now.
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Aire is a London based start-up, built on the AWS cloud that is enabling access to financial products by providing an alternate credit score for people who are incorrectly classified because they have no credit history. Aire developed an algorithm that uses data-driven analysis to generate a score based on educational background, professional history, and knowledge of financial risk. This is very different from how traditional credit bureaus calculate credit scores and as such is targeting a section of the market previously ignored by the big banks. The reason Aire has been able to rapidly grow and take on the bigger players was their ability to acquire vast amounts of secure technology infrastructure through the cloud.
Changing the playing field
There is little doubt that the availability of the cloud has led to an explosion in fintech innovation in start-ups and is changing the financial services playing field. Traditional organisations are not blind to this opportunity, however, and we are starting to see more activities that are intended to stimulate, nurture and capitalise on innovation, such as hackathons and running accelerator programmes for startups, being undertaken by banks.
Bank Hapoalim, Israel’s largest bank, has started running hackathons using anonymised retail banking data stored in the cloud. Working with AWS and the Israeli developer community, the bank is using their imagination to develop new financial applications that help them to better understand their customers and provide a better banking experience. In addition to hosting these types of events, banks are also beginning to play a hands-on role in the incubation and growth of start-ups. In the UK, Barclays is running the Barclays Accelerator in conjunction with seed funding organisation TechStars. TechStars is also supported by AWS Activate, the AWS programme for start-ups, start-up accelerators and incubators.
This kind of activity is allowing institutions, such as banks, to partner with and benefit from the creativity within the start-up community. It enables their teams to explore new ideas and trends early in their lifecycle, helping them to shape the development of future financial services products within their own organisation.
Whether it is in traditional financial services organisations or in start-ups, the cloud has levelled the playing field and is changing the financial services industry, bringing new business models to market. Traditional institutions are now not only driving their own innovation but also partnering with startups and the developer community to integrate innovative and disruptive behaviour in their own business strategies. As a result, the financial services sector is changing and I for one am looking forward to what the future brings.