• Andrew Smith, CTO at RTGS.global


• 30.06.2022 02:15 pm
#banking

The financial services ecosystem is currently witnessing a spate of disruptions brought on by modern fintech players. These disruptions are mostly attributed to the rise of “plug and play” providers, which is still in its infancy when it comes to the banking industry. API or Application Programming Interface is a software intermediary that allows two applications to talk to each other. Plug and play providers offer products via a cloud API which just plugs into the bank to offer something new, and can be activated in days or weeks.

There are, however, nuances to the capabilities of plug-and-play providers. It is possible for banks to connect parts of their system to plug-and-play providers within a few weeks, but most of these parts are disconnected from main systems and capabilities. This means that the value of plug-and-play connections can be limited.

For richer integrations, most banks will require lengthy assessments of the plug-and-play provider where integration will be treated more as a project and this process will also include security assessments, as well as risk and operational testing. That being said, marketplace offerings from core banking providers often come with these more complex areas of integrations pre-completed. In these cases, plug-and-play capabilities can indeed be integrated in weeks. 

A common misconception is that banking has become more experimental in recent years in direct correlation with the rise of plug-and-play providers. I would argue, however, that this is mainly due to the speed and volume of fintechs and challenger banks that have emerged, particularly since the pandemic. This rise in demand for digital transformation and technical capabilities has led to an increase in popularity and market share and the banks are more experimental in response to the speed of market challengers in getting new capabilities and features to their customers in the marketplace.

With banking software continuously changing as a result of innovations in technology, the industry is slowly moving towards the idea of ‘composable banking’, where cloud providers are connected like Lego to create a whole, and can be switched out rapidly for new services. There are lots of banking software providers, and even more traditional technology providers, offering modularised approaches to banking software. As a result of this, there are now lots of elements of banking that can be layered and built around like Lego, plugging in products as desired. This will lead to hyper-personalisation for catering to the consumers of today. 

Take providers of Banking-as-a-Service and embedded finance solutions as examples. In these cases, traditional financial products and services are de-constructed down into granular modules, allowing elements to be swapped out on demand. As the underlying layer of regulation for BaaS, banking and other players play a crucial role in its success. In order to foster collaboration between banks and third parties, banks need to upgrade their existing technology stack, open their APIs, and support third-party integrations.

But it’s important to remember that there is no existing set of standards in banking on how modules connect and communicate and even implementations of ISO20022 vary between providers. So, while swapping out one module for another is relatively simple and risk-free, when you try to blend providers to take a “best of breed approach”, this can require bespoke adaptors and connectivity work. In other words, this approach does not help banks streamline their plug-and-play solutions across the wider system.

As fintech solutions continue to excel, effective financial service providers (and by this, I don’t mean just those with traditional banking licences) are able to slash costs of implementation and the timelines associated with bringing products to the market. The most pressing area of cost reduction, however, is that of system maintenance. 

Ongoing operational costs are being driven down by these cloud-first approaches and financial service providers moving away from a model categorised by a mindset of: “we must build and own all our own IP”. Because of this, they are making huge operational savings which obviously benefit their key metrics. 

In terms of income, this variable is becoming increasingly based on the customer experience and the suitability or competitive nature of the product. Challengers and FinTechs are making it easier for bank customers to avoid dependency on their bank to give access to all their required financial products. As a result, there is an opportunity to grow income by getting products to market quickly as well as delivering great customer experiences.