After a sustained period of investment in financial technologies and services, the last decade has seen an explosion of disruptive fintech offerings that are challenging to the traditional banking system.
The boom in consumer access and choice, along with the challenging of the status quo in currencies, transactions and financial systems, creates an exciting environment for those involved in or around the fintech industry. However, recent trends and reports suggest a shift in where the investment and interest are being directed. Most indicators are showing a decrease in investment in saturated consumer fintech with a large shift to investment in backend technologies and services that have the means to reduce costs and deliver improved services across financial services.
As with most industries, the drive to automate processes and drive tighter integration between systems is helping to deliver major efficiencies. In most cases, user (human) interaction is not required. With this in mind, it means that systems (especially backend) need to be modernised and updated – and a key requirement is fixing flaws in the existing systems. This provides opportunities as the emphasis switches from new shiny consumer-facing products to the critical, yet somewhat less glamorous, backend services infrastructure.
Let’s quickly define what we mean by the backend. I would describe the backend as data and technology repository of everything that makes a bank’s web presence and mobile apps run. In many cases, all the information required to run a system is stored on remote or even cloud-based servers. For larger enterprises, backend systems include a much broader scope of information and systems. In all cases, the information stored in backend systems will be critical, sensitive and vital to a company and its customers. The data housed in the backend can be expansive and extremely sensitive.
What are the benefits of improving backend systems? The benefits usually manifest themselves in three categories:
Efficiency: The ultimate goal of backend systems is to improve access to a company’s data -automating the availability, analysis and insight provided. This could be sharing information with customers in the best format and on the device they want to consume it on, or, providing rich, integrated information to a decision maker based on all available data. Removing systems and people from critical pieces of the process reduces errors and increases speed. Both of these lead to a natural reduction in cost and a greater availability of opportunities.
Improved decision making: Again, better data, availability and insight drive better decisions. Imagine if you can go to one single place and find all information about an individual or company. The more information you have available, the better your capacity to make a good decision. Add this to real-time information, and things start to change really.
Future: Only by having better integration and availability of data can you then think about using new technology such as AI, machine learning or predictive analytics. This can’t be done without significant improvements in backend systems and the integration of the data available to them. On top of this, by modernising your infrastructure, you can begin to think about leveraging other technologies and services that would have previously been out of reach.
Plug and play infrastructure and services create an enormous opportunity, but they also carry some risks. If everyone has access to the same technology and can leverage the same services with relative ease, they can also provide the same or similar experiences to their customers with very little to differentiate the experience. How do you add value when everyone has the same information?
When picking a backend provider or set of providers, it’s important that you take the time to do proper due diligence. Investigating the technology’s capabilities and ensuring they meet your business requirements is critical – it’s vital the technology and the access to services are both at the required standard. With most backend technologies, you will need some level of hand holding while you work out the best and most efficient way to access and utilise the APIs provided, so make sure you pick a vendor that will work with you, and that understands how to ‘play nice’ with other third parties.
It’s also important that you look into the vendor. How long have they been in business? Do they have good customer references? Get a feel for the people too. Are they honest, straightforward and trustworthy? A reputable account manager won’t sell you the wrong technology, no matter how close to their sales quota they are. Finally, a reputable organisation will have a great track record of responding to customer issues and feedback, working hard to resolve them as quickly as possible.
Below is a list of things we recommend companies think about before considering a new technology vendor:
Standards: Try and find a vendor that can work with data standards or standard ways of integrating, such as the payment service directive 2 (PSD2) in Europe, which paves the way towards a greater commitment to ‘open banking’ by other governments and regulators. We expect that further emphasis will be put on fintech organisations to leverage open banking, API platforms and the adoption of standards.
Infrastructure: Banks run mostly on mainframes used to run overnight batch processing cycles. These can be decades old and have been adapted and changed over time to work against different business needs. The cost of maintaining this old infrastructure is consuming the lion’s share of most bank’s annual technology investments without returning any new value.
Security: Security is more important now than ever before. It’s vital that your vendor understands the security of their technology and whether they can provide you with the relevant documentation. Backend tech can often be over-looked but a report on cyber-attack statistics from June 2015 showed that most hackers (almost 60%) attack targets with the intent of accumulating data and making money. That same report showed that around 72% of known attacks occurred in the “backend”.
Data integration: It is rare that an organisation has all its financial data in a single database or data warehouse. Due to acquisitions, technology transitions and other business factors, data tends to get fractured and housed in many different locations. Any software solution must have a way to easily integrate with data sources that are both on premise and housed in remote locations, including the cloud (which has become increasingly popular in recent years due to its flexibility and cost effectiveness).
Data availability: There have been large investments and a lot of buzz around AI in the fintech space. To properly leverage AI, it is vital that data is available, as this can only be achieved once the pieces above are all in place.
Fintech startups are disrupting the marketplace by offering technology and services that challenge the traditional ‘brick and mortar’ financial institutions and their software providers. However, all fintech technology needs to be considered through the familiar long-term lens. Will the technology provide a better experience, will it provide a solid ROI over time and will it put the organisation in a more solid financial position opening significant future opportunities?
A positive response to all these questions is crucial for future success.