HOW SHOULD BANKS TACKLE THE INNOVATION CHALLENGE FROM FINTECH STARTUPS?

By Danny Healy, financial technology evangelist,MuleSoft

Danny Healy

The influence of rapidly-evolving macro-economic conditions and regulatory changes, especially following the 2008 financial crisis, have always kept the financial services industry on its toes. However, few could have foreseen the impact created by the waves of new fintech startups that have surged into the market in recent years. The charge is being led by innovative new entrants, such as Atom Bank, TransferWise and Sonovate, which are finding success in using new technologies to deliver traditional financial services in ways that revolutionise the customer experience. Their key advantage lies in their ability to build and move fast, whilst offering unbeatable ease and convenience.

Throwing down the digital gauntlet

Some banks have taken steps to counter these challengers by creating internal digital teams. These groups are ring fenced away from constraints to innovation and given free-reign to experiment in areas that have the biggest impact on the customer, essentially operating like a fintech startup within the bank. However, their impact is limited, because the wider organisation remains constrained by the calcified processes and monolithic infrastructure supporting a bank’s core operations. As a result, innovation is isolated to the edge, where it often withers and dies without easy access to core systems.

To create a real advantage, banks need to change their IT operating model to support the same build fast, fail fast approach that has been key to the success of many fintech startups. Those efforts can’t be limited to the edge; digital transformation has to be driven from the heart of a bank. A CIO at one major bank that I’ve spoken to has referred to this process as the ‘industrialisation of innovation’, indicating the scale of the change that is needed.

Creating a culture of industrialised innovation

Clearly a change of such magnitude requires the right leadership to steer the ship. As a result, banks are increasingly looking to recruit new talent in order to bring fresh thinking and perspectives to the table. In my experience, you’re now just as likely to find a CTO in a major bank that has joined in the last two years from a Silicon Valley startup, as you are to find a long-serving industry veteran. The relative inexperience of these new leaders creates huge value in introducing agents for change. These individuals are just as indispensable for not knowing how things were done in the past as they are for knowing how to do things in new ways.

They are also more likely to look beyond their own industry for ideas. Networking with peers at other banks is becoming less important than meeting with someone like a digital media technologist, who can share insights into how tens-of-thousands of customer-facing application enhancements can be released in a single day, rather than a month. I’ve found that these trends are particularly apparent at the top table within challenger banks, where developers and leaders are as likely to come from a fintech startup or mobile gaming company as from a large financial institution.

Building a platform for a banking revolution

Once the leadership is in place, banks must create a platform on which digital transformation can take place. The best way of doing so is to unbundle the core systems and data that support existing operations in order to expose the invaluable functionality and insight within. Whilst this process would be incredibly daunting following traditional ways of working, it becomes far more achievable by switching to an API-led connectivity approach. This approach allows banks to create an application network, which is a network of applications, data and devices connected with APIs to make them pluggable and reusable. In other words, IT departments can create a series of building blocks that can be used by anyone who has access and is looking to quickly assemble new digital services. In doing so, the IT department ceases to be a bottleneck to innovation and is able to more openly collaborate with line of business and innovation teams. This allows any team within the bank to build on existing technology capabilities to create new digital solutions.

Thinking beyond internal walls

Being able to deliver change from within is a vital first step, but it’s just the beginning. Regardless of how fast organisations can run internally, it’s impossible for them to come up with every idea by themselves. As such, the real opportunities for banks will open up by having the ability to collaborate with third-parties for mutual benefit; including fintech startups. Putting this concept into practice, Barclays hosted a hackathon with MuleSoft last summer, looking at creative ways in which APIs could be used to deliver new digital banking services. Instead of trying to deliver every element of a financial service themselves, banks should look to integrate with broader value chains being created by other organisations. This allows banks to play a role in many value chains, rather than just owning one; reaching new addressable markets that would otherwise have been outside of their grasp.

API-led connectivity and application networks will play a crucial role in supporting this new collaborative innovation strategy. Using external APIs, banks can provide other firms with access to the same building blocks being used to develop new digital services internally. In this way, traditional banks can behave more like Silicon Valley startups, creating new revenue-generating opportunities by sharing their core banking capabilities and customer base with fintech innovation partners. Aside from the benefits for innovation, this will also put banks on a much firmer footing to comply with PSD2 when it comes into effect next year. Opening up customer information to other financial services providers will be much simpler through the use of external APIs, which simply act as a gateway through which secure, controlled access can be granted to anyone that has permission.

Fintechs and banks: friends, not foes

Embracing the industrialisation of innovation and this new culture of collaboration will pave the way for traditional banks and fintech startups to enter into a mutually beneficial, symbiotic relationship. Rather than being a threat to each other’s existence, banks and fintech startups could be the pioneers of a new financial services ecosystem, coupling the immense value currently locked up within banks’ data and legacy systems with the speed and agility that defines fintechs. Ultimately, that creates a win-win for everyone, including established banks, their newer fintech counterparts and the customers they serve.

By Danny Healy, financial technology evangelist,MuleSoft

Danny Healy

The influence of rapidly-evolving macro-economic conditions and regulatory changes, especially following the 2008 financial crisis, have always kept the financial services industry on its toes. However, few could have foreseen the impact created by the waves of new fintech startups that have surged into the market in recent years. The charge is being led by innovative new entrants, such as Atom Bank, TransferWise and Sonovate, which are finding success in using new technologies to deliver traditional financial services in ways that revolutionise the customer experience. Their key advantage lies in their ability to build and move fast, whilst offering unbeatable ease and convenience.

Throwing down the digital gauntlet

Some banks have taken steps to counter these challengers by creating internal digital teams. These groups are ring fenced away from constraints to innovation and given free-reign to experiment in areas that have the biggest impact on the customer, essentially operating like a fintech startup within the bank. However, their impact is limited, because the wider organisation remains constrained by the calcified processes and monolithic infrastructure supporting a bank’s core operations. As a result, innovation is isolated to the edge, where it often withers and dies without easy access to core systems.

To create a real advantage, banks need to change their IT operating model to support the same build fast, fail fast approach that has been key to the success of many fintech startups. Those efforts can’t be limited to the edge; digital transformation has to be driven from the heart of a bank. A CIO at one major bank that I’ve spoken to has referred to this process as the ‘industrialisation of innovation’, indicating the scale of the change that is needed.

Creating a culture of industrialised innovation

Clearly a change of such magnitude requires the right leadership to steer the ship. As a result, banks are increasingly looking to recruit new talent in order to bring fresh thinking and perspectives to the table. In my experience, you’re now just as likely to find a CTO in a major bank that has joined in the last two years from a Silicon Valley startup, as you are to find a long-serving industry veteran. The relative inexperience of these new leaders creates huge value in introducing agents for change. These individuals are just as indispensable for not knowing how things were done in the past as they are for knowing how to do things in new ways.

They are also more likely to look beyond their own industry for ideas. Networking with peers at other banks is becoming less important than meeting with someone like a digital media technologist, who can share insights into how tens-of-thousands of customer-facing application enhancements can be released in a single day, rather than a month. I’ve found that these trends are particularly apparent at the top table within challenger banks, where developers and leaders are as likely to come from a fintech startup or mobile gaming company as from a large financial institution.

Building a platform for a banking revolution

Once the leadership is in place, banks must create a platform on which digital transformation can take place. The best way of doing so is to unbundle the core systems and data that support existing operations in order to expose the invaluable functionality and insight within. Whilst this process would be incredibly daunting following traditional ways of working, it becomes far more achievable by switching to an API-led connectivity approach. This approach allows banks to create an application network, which is a network of applications, data and devices connected with APIs to make them pluggable and reusable. In other words, IT departments can create a series of building blocks that can be used by anyone who has access and is looking to quickly assemble new digital services. In doing so, the IT department ceases to be a bottleneck to innovation and is able to more openly collaborate with line of business and innovation teams. This allows any team within the bank to build on existing technology capabilities to create new digital solutions.

Thinking beyond internal walls

Being able to deliver change from within is a vital first step, but it’s just the beginning. Regardless of how fast organisations can run internally, it’s impossible for them to come up with every idea by themselves. As such, the real opportunities for banks will open up by having the ability to collaborate with third-parties for mutual benefit; including fintech startups. Putting this concept into practice, Barclays hosted a hackathon with MuleSoft last summer, looking at creative ways in which APIs could be used to deliver new digital banking services. Instead of trying to deliver every element of a financial service themselves, banks should look to integrate with broader value chains being created by other organisations. This allows banks to play a role in many value chains, rather than just owning one; reaching new addressable markets that would otherwise have been outside of their grasp.

API-led connectivity and application networks will play a crucial role in supporting this new collaborative innovation strategy. Using external APIs, banks can provide other firms with access to the same building blocks being used to develop new digital services internally. In this way, traditional banks can behave more like Silicon Valley startups, creating new revenue-generating opportunities by sharing their core banking capabilities and customer base with fintech innovation partners. Aside from the benefits for innovation, this will also put banks on a much firmer footing to comply with PSD2 when it comes into effect next year. Opening up customer information to other financial services providers will be much simpler through the use of external APIs, which simply act as a gateway through which secure, controlled access can be granted to anyone that has permission.

Fintechs and banks: friends, not foes

Embracing the industrialisation of innovation and this new culture of collaboration will pave the way for traditional banks and fintech startups to enter into a mutually beneficial, symbiotic relationship. Rather than being a threat to each other’s existence, banks and fintech startups could be the pioneers of a new financial services ecosystem, coupling the immense value currently locked up within banks’ data and legacy systems with the speed and agility that defines fintechs. Ultimately, that creates a win-win for everyone, including established banks, their newer fintech counterparts and the customers they serve.