Historically, banks have relied on a small number of monolithic suppliers and systems to provide them with broad capabilities, augmenting their own internal development, to provide all their infrastructure.
These systems are patched to add features as banks grow and markets evolve. Mergers can lead to overlapping, incompatible systems; the bank’s infrastructure can make these systems brittle, costly and time-consuming to change.
Still, this suits the entrenched oligopoly of suppliers: locked-in customers unable to sunset anything but stuck paying substantial recurring license fees. Interfaces between systems are often proprietary, making integrations multi-year projects. Most of these are undertaken by a select group of implementation firms that are incentivized to install systems that maximize billable hours and ensure years of lucrative integration work.
Covid-19 and the subsequent government interventions, however, are forcing banks to move quickly: multi-year projects would never adequately address the emergency needs of customers and existential challenges of businesses. The crisis comes at a seminal moment for the industry, when many banks are beginning to experiment with cloud infrastructure. These solutions are able to provision (or decommission) infrastructure in seconds what previously would have taken years, and are well suited for rapid experimentation. This has led to an appetite at banks to try new things and “fail fast.”
The Darwinian effect of running multiple parallel experiments lends itself to thinking of a bank as an ecosystem, where the best providers can be brought in for each functional area. Meanwhile, the bank’s own technologists can focus their people and budgets on key priorities, rather than spending large portions of ever-shrinking budgets patching a leaky ship.
This requires a change in emphasis for financial technology firms: Rather than attempting to disrupt incumbents, there is now a unique opportunity to cooperate with them, providing a much-needed injection of innovation and dynamism at a crucial moment for the economy and communities. Fintechs need to be able to prove their value fast, so the emphasis is on deep vertical expertise that can be deployed rapidly in a variety of environments. Having open APIs and the ability to play a part in a diverse ecosystem of providers is an absolute necessity. Suppliers with “Mechanical Turk” solutions that paper over missing functionality with services will battle to scale rapidly enough and struggle to meet the demand from multiple client banks.
The qualities required to thrive in this new order already exist at banks and fintechs; the winners will be those that can get out of their own way and utilize these strengths. Over the last few years, banks have learned how to integrate disparate systems. The pandemic is forcing them to learn how to do to this quickly.
They need to remove obstacles in their purchasing processes that entrench large suppliers and prevent them from building tech stacks made up of agile and best-in-class solutions. If they back their own ability to craft a cohesive and comprehensive ecosystem, they can tailor this end-state to achieve their desired results. Fintechs are used to bringing innovation and dynamism to the table. Creating lasting impact requires them to follow through and turn this into tangible products. There will be no shortage of opportunities for them to prove their value.
The extraordinary circumstances brought about by the coronavirus have led to a moment of unique opportunity for both banks and fintechs. The economic environment and policy responses by the federal government has meant that banks are forced to act with surprising resourcefulness and agility. They are now seeking to carry this momentum to radically transform projects that seemed previously destined to move at a snail’s pace.
To do this at speed and at scale, they have had to look beyond the short list of traditional vendors and implementation partners more accustomed to project timelines of several years, to a constellation of smaller, more agile fintechs that are able to meet specific needs at a rapid pace. The Davids and Goliaths are finally working together — so far, the outcomes have been pretty phenomenal.