Five years ago, a lot of traditional banks were left scratching their heads as to how quickly new, so-called challenger banks were popping up all around them. They were rolling out new features at lightning speed, grabbing market share and offering services and products at far lower prices than established market players.
Now, the good news for financial services is that the FinTech battle is far from over - it’s barely started.
Whether your strategy as a financial institution is to be proactive and aim to beat the challengers at their own game, or whether you are reactive and want to move second, there’s still a lot of time left on the clock.
The bad news is that there’s one problem you’re going to have to overcome to get there.
Inertia is the biggest challenge facing the industry. It’s easy to prioritize short-term safety in financial services. After all no one wants to end up making headlines because they’ve had an outage or a payments system (opens in new tab) has gone down.
The danger is that financial institutions will get so caught up in protecting their status quo that they continue to build bigger and bigger businesses all balanced on a precarious foundation of outdated tech that can’t keep up with market demand. But it’s not just the dangers you’re putting yourself into, it also means you’re really going to struggle to be able to capture new opportunities as well.
Build for longevity
In December 2019, not many people were planning for a pandemic. No one was predicting the scale of the challenges the industry was facing. If you look back 10, 20, 30 years we have seen complete shifts in technology and consumer attitudes that most in the market at the time would have found it impossible to predict. You can’t build for specific future events. There’s just too many unknowns. The journey you embark on to change your payments infrastructure has to see you through the next two decades of business. The only thing you can be sure of in that time period is uncertainty.
Build for business priorities and technical realities
Financial institutions have to make decisions that meet the needs of a suite of decision-makers. The customer teams, technology teams, security teams and business teams rarely align the first time you sit down to build a product. Payments infrastructure must therefore reflect how aggressive the business is on payments within the business model. The needs of a global bank and a small building society are very different.
Build for your business model
The cost of putting your infrastructure in place won’t be sustainable if it doesn’t reflect the business model that the world of finance operates under. Fully anticipating the cost of building, licensing, and running your payments infrastructure is an essential step. We know that payments are a volume-sum game. You need infrastructure programs that reflect that reality.
If we look even further into the future, disruptions from the likes of Blockchain and AI could bring further, more dramatic change to the industry. While they are still very much in the early stages of development and roll out, a CTO must be able to anticipate the change that these, or other unknown technologies, might bring - and be in a position to react and adapt. Technology leaders must be able to keep pace with the new products and services that technology will introduce. And do it efficiently.
Meeting regulatory requirements
Financial businesses will need to work closely with regulators, especially as new rules develop to manage how technology works with consumers. A big part of a successful payments infrastructure is understanding how to quickly adapt to new regulatory changes. The other part is how you can quickly pull and provide regulators with data they need. If a regulator introduces new requirements on you tomorrow, you need to be confident that you have a system that can be adapted.
But the work doesn’t stop once you’ve designed your new system. You need to put it in place as well. There are two options for banks to consider, and which route is right will depend on a number of factors, from your current infrastructure, to budget, to appetite for change.
Should you ‘big bang’ your infrastructure?
Of course, once you know that you need to update your infrastructure you’re left with the question of how you go about doing it. There’s two fundamentally different options.
First, you can rip and replace. If speed and market opportunity are your priority then acting quickly is the way to go. You can rapidly open up new payment types, bring in new channels and process them all. The development of microservices has enabled this approach. Combining lots of small building blocks to develop new applications very quickly is now an accepted best practice.
Of course, this doesn’t just mean turning the lights off today and loading up a new system tomorrow. In practice it means a graduated switch away from your existing architecture and putting new ones in place. The downside of this approach is that the system you’re running is probably so complex there are parts that no one quite understands any more, overlooked areas of connectivity where systems many layers deep are plugging into each other.
The second option is to slowly implement the latest technology on new applications and challenges until eventually you’re at a point where the old system is naturally not used anymore. The timeline is extended, perhaps by several years, but it provides a way forward for cautious CTOs who want to address structural challenges without trying to turn too quickly.
This approach is great as you can bring in specific new services, products and revenues and easily demonstrate the return on investment as they happen as well as reducing complexity in the project by allowing you to focus on one aspect at a time, and gradually migrate the old onto it. The downside is that your timeline is significantly extended.
The only bad choice is no choice
Don't delay change, because the longer you leave it, the harder it's going to become. Remaining dependent on a stack of legacy infrastructure will leave you vulnerable. The pandemic might not have knocked it down, but the next challenge might.
We don’t know where the marketplace is going. We don’t know what will happen in FinTech. Banks need to prepare their systems for as much flexibility as possible.
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Dave Smith, Payments Specialist, Lusis Payments (opens in new tab)