By Jim Baxley, VP, Global Market Strategy at nCino

The pandemic has driven a radical shift in how financial institutions (FIs) conduct business and adjust to everchanging client behavior. With this shift, FIs are facing increasingly complex decisions in offering the digital capabilities that have largely become “table stakes” to their clients. To win this race, a smart FI requires an understanding of the evolving client and vendor landscape and an actionable roadmap for a technological infrastructure uniquely suited to meet the specific needs of their institution.

Evolving Expectations in Financial Services

For years, the only option for most of the financial services industry was to design and build technology solutions in-house, however, this came at great expense and expenditure of resources. Over the past couple of years, we have seen drastic changes in consumer behavior, spurring the financial services industry to evolve faster than ever before. Paradoxically, digital technology has evolved to become both the primary mode of differentiation, as well as the means of leveling the playing field for FIs of all sizes. People have come to expect easy, digital access to their finances, along with the ability to apply for loans and new accounts and complete transactions remotely from anywhere, at any time.

At the same time, consumers of financial services are demanding more personalized, convenient, “always-on” experience, and are seeking to conduct more of their banking via remote channels. While this generally began with online banking, it has extended to all facets of a customer relationship – including up through complex corporate lending.

Evolving Through Cloud Adoption

Modern, cloud-based digital technology is necessary for financial institutions that are seeking to address the customer experience, improve internal operational effectiveness, streamline internal communications and allow access to data across the enterprise. Increasingly, financial institutions are adopting cloud solutions to replace legacy banking systems.

It’s clear the industry will continue heavily investing in digital platforms and products to provide the seamless experience consumers are seeking. By 2024, more than 45% of IT spending on system infrastructure, infrastructure software, application software and business process outsourcing will shift from traditional solutions to cloud, according to research conducted by Gartner.

Historically, the financial services industry, which is known for its conservative in-house approach to embracing new technology, had limited choices at its disposal to deploy cloud solutions.

The availability of durable, standardized options that were configurable to an institution’s unique specifications were limited. While large enterprise banks are typically endowed with the resources and capacity to build some of their technology in-house, mid-sized and smaller FIs were largely left behind.

And, many FIs are shackled to legacy architecture, a technology stack growing increasingly and rapidly obsolescent, and limited access to the financial, technical and human resources they require to get where they need to go fast enough.

Expanding Avenues for the Digital Transformation Journey

However, as demand has grown for digital interactions and more efficient, streamlined back-office processes, the range and quality of solutions and third-party vendors providing these digital capabilities grew exponentially. Another option became available – to buy or outsource these solutions from an external vendor – and the industry now faced the decision of buy vs. build.

While building technology internally used to be the de facto choice for FIs, buying has become a far more appealing option. With pressures growing for FIs to act fast when it comes to tech adoption, buying a ready-to-use tool or product offering can be a much faster way to react to market changes – such as the pandemic, which required agility and flexibility unlike anything seen before in financial services. Sourcing an external provider is a direction even larger institutions are heading toward.

As the banking technology ecosystem has matured further, we’ve seen another major shift in third-party partners: better integration – which some technologists refer to as “composable architecture” or the “composable enterprise.” To the original question of ‘Buy or Build?’, FIs can adopt the composable architecture approach now that their third-party partners are now able to work together more effectively and form a true ecosystem.

Today, in most cases, it’s no contest. When comparing critical factors like speed to market, ROI, the ability to hire specialized skillsets and ongoing IT maintenance, the choice to buy is overwhelmingly the correct option for nearly all institutions. The best offerings on the market now offer a depth of capabilities and features, backed by a commitment to reinvest in continuous improvement and agile development, along with sound architectural purity and platform stability.

That said, there are some unique situations in which in-house development of some digital pieces can make sense. For example, if the specific capability and FI is looking for is not currently available or requires a bespoke feature that is not customizable through other providers. Also, if an institution’s driving principle is to innovate or disrupt the market through technology, they may choose to build some capabilities for further competitive differentiation. Regardless, the need to connect built solutions to vendor solutions will continue to expand as the ecosystem grows.

An Emerging Strategy: Buy and Build

No matter the need – FIs no longer need to navigate digital transformation or cloud adoption on their own. Even if the intention is to build internally, partnering with a best-in-class solutions provider will be necessary. This represents an alternative option: buy and build.

Ron Shevlin, research director at Cornerstone Advisors, has talked about a “broken approach to build vs. buy decisions.” He argues that the buy or build dichotomy is actually broader and more nuanced, stating that it should be viewed as “build, buy, integrate, enhance, and partner, and banks must do all five.” This is a wise approach to the process, no matter where an institution falls on the size or digital capability scales.

The bottom line is this: even if and FI has the resources or need to build some capabilities in-house, it makes sense to partner with a leading solution provider in the market for at least some technology functionality, particularly those that fall outside core competencies and competitive differentiators.

By partnering with a best-in-class strategic partner, an FI will benefit from their expertise and experience, allowing them to configure the solution to unique needs and objectives, while leveraging leading practices developed over dozens of implementation projects. All of these advantages equal greater speed to market so smart FIs can meet the needs of their customers.