Control

Banks used to build technology in house as an important way to ensure its offerings adhered to high standards and reflected its brand identity. This process gave them full control over up-time, the quality of their data, and their clients’ experiences while shielding them from cyber-security threats.

The fixed costs associated with building tend to be much larger when compared to partnering with a performance measurement firm (10X as large), and the recurring costs are typically 50% higher for in-house solutions. However, this is a small price to pay for the peace of mind of knowing that your data is available, clean, and secure.

As the fintech industry has matured, the calculus has changed. Most reputable firms have SLAs guaranteeing that their products are available. Moreover, they are well-equipped with personnel and technology to prevent business disruptions.

These firms benefit from economies of scale. By processing billions of data points across hundreds of data feeds, Performance Measurement firms develop comprehensive processes for identifying and handling exceptions. While banks will have their own quality assurance processes, it is unlikely that those processes will reach the same level of maturity as the processes used by performance measurement vendors.

On the cyber-security side, there are certainly risks to migrating to the cloud or to remote data-centers. For security, it is hard to beat an on-premise setup with a modern firewall. However, security is an important part of the FinTech value chain, and players in the space are investing heavily to ensure that data flowing through their walls are secure. Meanwhile, banks that have built their own solutions and stored them in house are struggling to make the investments needed to keep up with an evolving cyber-security landscape. This has led to the unfortunate scenario where banks that chose to maintain their own technology specifically to keep their data secure are in fact creating significant vulnerabilities through the use of legacy technology.

Innovation

The difficulty of investing in new technology has impacts far beyond security. In a sensitive and highly-regulated space such as banking, innovation requires more than monetary investments. It requires a deep understanding of relevant laws as well as dependencies across the entire system. Gareth Anderson describes the challenges banks face like this:

“Many of the incumbent banks will seek to innovate within their four walls through building their own new technologies, remaining fiercely protective of the value of their brands, IP and legacies, but in fear of falling foul of regulations or being unable to execute without huge operational upheaval and customer detriment, any innovations will often be watered down to the fringes and crow-barred into legacy systems architecture. No matter how well conceived and able to solve customers’ problems an innovation might be, they are often lost to the abyss once plugged into the legacy tech stack.”

These “watered down solutions” and “legacy tech stacks” are leaving banks more vulnerable than ever to disruption. In fact, a recent EY study showed that the Financial Services industry was one of the most vulnerable industries to new entrants, with roughly a quarter of incumbents at risk of being replaced by standalone firms and 80% of top executives expressing concerns about the speed of technological change. There is a tragic irony here as well, because firms have invested in in-house technology to get a competitive edge find it is the very thing that is leaving them unable to compete in an evolving marketplace.

You Don’t Have to Choose

Financial institutions are no longer in a position where they have to go all in with one approach or the other. Thanks to the adoption of open API specifications and digitalization across the industry, firms have more flexibility than ever before when choosing a path forward. Firms can now focus on areas where they are strongest and uniquely qualified to add value while partnering with outside firms to bridge gaps across the remainder of the value chain. For some firms, that means outsourcing the entire data lifecycle to outside vendors so they can focus on their clients rather than fighting through operational headaches. For other firms, data aggregation and management are important parts of their value proposition, but they can leverage partners to augment the data with enhanced analytics and present it effectively.

Wherever your firm is strongest and wherever it is looking to grow, First Rate would love to hear your story and see if we can help you serve your clients better.