How to deliver effective transformation with fintechs

Customers are the reason businesses exist – and if businesses are unable to keep up with customers’ constantly changing demands, they will be left behind.

The global fintech market is expected to reach $332.5 billion by 2028

This is particularly relevant in financial services, where legacy processes and technologies are often a hindrance to innovation and progress.

Open banking and a move to ‘as-a-service’ models have given rise to many new fintechs who are providing the shiny innovative capabilities that customers want. Banks are increasingly interested in B2B fintechs to take advantage of their new business models, quicker transformation and advanced technology, so it’s unsurprising that the global fintech market is expected to reach $332.5 billion by 2028.

However, most of the data driving fintechs’ capabilities requires integration with legacy systems hosted by banks and other financial services institutions. This can lead to several unique integration challenges.

Establishing a cultural fit

A primary challenge is the difference in culture and ways of working. Larger banks are heavily regulated and have vast operations and systems – far from fintechs’ nimble cloud-based approach – which inevitably affects how these organisations work together.

Speaking at a recent KPMG panel event, Allan Woodcock, engineering director at Lloyds Banking Group, explained the role that education plays in solving this problem.

“Banks have a responsibility to educate fintechs on the regulatory environment and how pervasive that is within a bank, as well as how it can vary by product or division. Knowledge sharing helps banks and fintechs to align on a common purpose and work at pace,” he said.

At the same event, Conrad Ford, chief product officer at Allica Bank, mentioned the problem is that large financial institutions typically want to get everyone involved with everything. He explained that there is a perception that if many people are included in a decision, it is a less risky one, but that is simply not the case.

He commented: “This leads to a culture where people do not take accountability. Instead, large banks need small, cross-functional teams to move things forward. This not only makes accountability clearer but speeds up implementation.”

Technology as an inhibitor

On the technology side, data models are a key culprit for causing incompatibility, as it is difficult for fintechs to integrate them with banks’ systems. This ranges from defining appropriate IT service operations to making sure the bank has the correct IT skills to implement and run the technology.

Where fintechs frequently advertise ‘plug-and-play’ solutions, in reality the implementation process can be a painful one.

To smooth the onboarding journey so that a working solution can be realised sooner, Ford argued for the end of the request for proposal (RFP).

“RFPs are the worst way to choose a technology solution. The starting point of selecting a fintech supplier is to ask, ‘does it do what we want it to do?’. If it does, the chances are it will get through the confirmatory due diligence that RFPs require upfront.”

He added: “Banks should focus on proof of concept and then determine if there are any gaps that need addressing.”

Legacy systems are often a ball and chain for larger banks. Their complexity and IT teams’ lack of understanding of older systems can be a stumbling block when integrating a fintech’s technology.

However, legacy technology can also be viewed as an advantage. Legacy technology offers a plethora of opportunities for working with fintechs, according to Woodcock.

“There are ways around legacy technology. We have multiple working environments so we can collaborate with fintechs without causing security issues. Increasingly we are working more in our legacy systems with partners because that is our opportunity space,” he said.

Balancing risk with value creation

Balancing risk and regulatory requirements without disrupting the use of fintechs is another problem banks are grappling with. However, modern ways of working, such as Agile, can remediate this issue.

Ford explained: “The way for banks to work best with fintechs is to have small and empowered teams, who make little and rapid steps so they can pull back when things go wrong.

“We have seen many high-profile system failures where banks have attempted transformation projects, but a modern engagement mechanism can prevent these disasters happening and create a strong partnership.”

Achieving effective transformation

According to our latest report, a record number of fintech deals were made in 2021 with a total investment of $210 billion, and over 2021, there was a rush in interest in fintechs able to help with digital transformation activities, particularly from tier one banks.

As more larger banks seek to partner with fintechs to deliver effective transformation, there are three questions these organisations should ask to minimise the aforementioned challenges:

1. What is the problem that needs solving?
2. Is there a fintech that fits that space?
3. How can we align ways of working to proactively address integration challenges?

It’s true that fintechs have much more to offer to banks than technology platforms, but only if these considerations are made at the outset so the solution can be used in the right way. Without taking this approach, transformation is destined to move at a snail’s pace.