In part one of this two part blog series, we examined the need for co-opetition between the fintech and banking industries. In short, fintech firms need to scale quickly and financial institutions need to implement better services and technologies or risk losing market share. Both industries agree that the need for smooth integration is required, but few companies are successfully achieving this outcome. Partnerships between small, nimble fintech companies and large banking institutions are structurally difficult to execute. Regulated and non-regulated industries encounter complex impasses. Industry experts are hard at work analyzing case studies of these problems. In this article, we will highlight their findings and best practices.
The Economist Intelligence Unit
In 2015, the Economist Intelligence Unit (EIU) undertook a massive reporting project called The Disruption of Banking which offers a solid topical background and a six point fintech/bank co-opetition roadmap. The overview points will act as the outline to be followed by expanded commentary. Points 1, 4, 5, and 6 all revolve around Information Technology and data issues, so let’s start there.
“Include IT in the due diligence and integration planning.”
Mapping the IT territories of both firms provides the foundation of the merger. This process may be the most tedious and time consuming for both parties. Banks are likely to have clunky mainframe architectures developed in the 1970’s and 80’s. Mainframe back offices eat up more than 80% of banks’ IT budgets, leaving little room for development. On the other hand, fintech firms are likely to have fully functional, cloud based API’s (application program interfaces) which don’t communicate well with legacy systems. Steven L. Antonakes from the American Banker, (and reproduced on Bloomberg) further illustrates the friction point, “they (fintech firms) are not saddled with an extensive branch network or legacy IT systems, resulting in substantially lower operating costs.”
Knowing where you come from makes it possible to know where you are going. Bank IT infrastructures are based on outdated software and hardware. Developers of legacy banking IT infrastructures are, in many cases, retired and unavailable to assist in the integration. While it would seem prudent to try and extract old data and redesign the systems from scratch, legacy banking systems provide structures familiar to regulators. New structures such lack regulatory comfort. Regulatory rules make it difficult for banks to transition systems quickly and new policy rarely keeps up with the pace of innovation.
“Ringfence the new culture”
With heavy focus on IT integration, cultural integration is often overlooked. Missing cultural integration early on can lead to massive rifts in both systems. To address this problem before it becomes a problem, the EIU recommends installing cultural boundaries which allow new fintech cultures to enter the system and integrate with a small subsection of the old bank. Similar to biology, for an immunization to take hold in an organism, a small dose of vaccine is introduced to the organism. The host organism incorporates the lifesaving antibodies and becomes stronger. Insert too much vaccine too quickly, the host will not be able to integrate, and, in this metaphor, the new culture will be rejected.
“Make regulatory integration an early priority”
Information technology, culture and regulation all go hand in hand. Historically, fintech has been able to out-innovate banks because they do not have to comply with the same regulatory structures. No compliance means lower costs, lower overhead, and more resources directed at innovation. However, when merging with the banks, the necessity of integrating with regulatory structures looms larger than the Great Wall of China. Developing a shared regulatory understanding is just as important as building the IT roadmap. Banks have to educate an industry new to the game. Fintech must bring patience and creativity to merge their systems into a regulated environment. Regulation is inevitable at scale, and so it would be wise for fintech firms to proactively build regulatory compliance strategies early on in the integration process.
“Make data security an early priority”
Over the last decade, the public has lost trust in the banking industry. Long standing banking relationships only matter if no alternative banking service is offered. Fintech now offers those services but also needs to build trust with customers to scale quickly. With no legacy relationships to build on, fintech must offer superior data security to build trust. Security breaches can be lethal to firms with a small customer base. Large firms stand to lose customers too but fully developed PR departments can help shield the blow. Regardless, fintech firms, banks, and customers all benefit from increased data security. Make it an early priority.
Once IT architectures have been mapped, it is time to integrate data. Legacy banking structures lack sophisticated retrieval and UX/UI displays. The solution? Penny Crosman at the American Banker says, “What was once unthinkable is now fashionable: a bank exposing its proprietary software to outside developers so they can develop their own applications on top of it…By sharing APIs to their proprietary software with nimbler, unregulated tech companies, the argument goes, banks can innovate much faster than they could by limiting application development to their own compliance-inhibited, resourced-strapped IT organizations.”
We agree. Trying to integrate new data architectures into closed systems will almost always fail. The key to success is simple. Open the interfaces and invite innovators to help code. Hackathons and incentives can lead to speedy data integration solutions.
Lastly, digitize! Data that can only be found on paper cannot be integrated into an IT infrastructure. Paper-only banking processes increase overhead. Digitize processes to collect as much data as possible and reduce cost in the process.
“Integration of enterprise infrastructures”
Jim Marous from the Financial Brand believes that, “As opposed to the typical structure of banks and credit unions, fintech firms are oriented around the consumer as opposed to around products. Building a comprehensive data ecosystem using big data and advanced analytics provides a competitive advantage in each step of the customer journey.” If we consider this, along with the cultural and regulatory integration points above, enterprise infrastructure integration should integrate smoothly. If you can get the people, data, and regulators aligned, joint enterprises will deliver better customer experiences at scale.
Successfully merging fintech innovators and banking stalwarts is not an easy proposition. However, the benefits offered by successful mergers certainly outweigh the risks. “Fintegration” tests and case studies will continue to emerge as the field rapidly develops best practices. The points offered by the EIU study offer an early stage set of guidelines to follow as the space develops. Stay tuned!