FinTech Part 2: Building the FinTech Ecosystem

Part 1 of this series looking closely at the development of FinTech. We considered how the industry has begun to develop with new payments and banking landscape. In part 2, we look at the technology that is driving the development of FinTech.

Having access to flexible banking and payment options in the palm of your hand is now familiar. The FinTech industry as a whole is one of the fastest moving, as it rapidly develops its products and services. Challenger banks with new digital services aimed at a mobile-first customer base are leveraging the power and flexibility of the cloud when connected to advanced digital devices.

Using technologies including AI and Machine Learning coupled with APIs and intelligent user-interfaces that embrace bots, FinTech is leaving behind the legacy systems that have supported and driven banking and payments for decades.

What is interesting across the FinTech sector is the dominance of start-up enterprises—embracing the Open Source paradigm, where Java and Spring [https://spring.io/] meet to create exciting new financial services apps that themselves use advances in biometrics, as the basis of their security.

Says WNS Decision Point in their report: “Disruptive technologies include the use and deployment of cloud computing, robotics, artificial intelligence and Machine Learning, mobile applications, big data analytics, blockchain or distributed ledger technology, cryptography and quantum computing. While many of these technologies have been in existence for decades, the extent of their application as path-breaking technologies in financial services is a key determinant of them being categorized as FinTech disruptions.”

Using a well-understood and mature development toolkit has enabled the FinTech companies – particularly the start-ups – to innovate quickly and establish their brands amongst users of these services.

In their latest report, Capgemini talks about the evolution of FinTech and that the Open Banking initiative could be overtaken: “As banking ecosystem partnerships become more accepted and valued, the industry is re-bundling services. While the Open Banking concept is still emerging, it is at risk of quickly becoming yesterday’s news.

“The next phase is Open X – a shared marketplace in which players leverage data extensively and collaborate with other players to provide customers with a seamless experience. Banks will need to smoothly integrate within the overall customer journey and experience irrespective of whether or not they control the whole process.”

Speaking to Silicon UK, Ian Bradbury, CTO for Financial Services, Fujitsu UK explained: “One of the most significant changes that FinTech companies have brought to the industry is an added impetus on mobile banking and services. This has been welcomed particularly by younger consumers, with over half (53%) of 25-34 year-olds saying they look forward to doing all their banking through mobile devices.

“Through FinTech services interfacing their platforms with other providers, they can capitalize on the expectations of the speed and convenience that modern consumers have,” Bradbury continued. “The introduction of the Open Banking legislation, as well as advanced data analytics and APIs, has allowed companies to integrate to advance their digital solutions further.”

The available platforms FinTech service providers can use are vast and diverse. This is one of the core drivers behind the technologies FinTech is based upon. LAMP (Linux, Apache, MySQL and PHP, Perl or Python) and MEAN (MongoDB, ExpressJS, AngularJS and NodeJS) are well-understood and robust, making them ideal for application development. Coupled with advances in API maturity and, a move to more open platforms makes the FinTech space one of the most innovative of any tech sector.

Says Nick Ford, VP of Product Marketing at Mendix: “CTOs in the FinTech sector are facing two main challenges: a skills shortage and the quickening pace of change. Building these new solutions and features requires a variety of different skills, and there is a lot of competition to attract people with the necessary skillset.

“This is exacerbated by the fact that business and IT departments within financial services companies are too often working in silos and not properly collaborating, which holds back technological innovation. The pace of change within the industry is also a big problem. Big technological innovations can often take time to implement and deliver business benefit, so the big problem is that these innovations are canned if they can’t show immediate ROI.”

Ford continued: “Low-code platforms have the potential to fix both of these problems for CTOs in the FinTech sector. They enable all makers, both those who are technical and less technical digitally to participate in and add value to the process of creating enterprise-grade applications. This helps foster a spirit of collaboration between business and IT, bridging the gap that currently exists and making sure that digital skills are extracted from all of the company.

“When it comes to the pace of change, low code can also help. A low-code platform really allows a lower barrier to entry and enables more of a fail-fast attitude. Instead of having to spend months and masses of money on application development, low code allows FinTechs to build them quickly and efficiently. This is typically 10x quicker and with 70% less resource.”

Tech banking and payments

To gain an insight into how the FinTech sector is leveraging a range of technologies, Silicon UK spoke with Eli Rosner, Chief Product and Technology Officer at Finastra.

What makes FinTech companies different from the financial services providers of the past?

FinTechs don’t just supply a functional service such as enabling a payment, they build customer experience into their core business offering, giving end-users joining the FinTech ecosystem the same level of usability they expect from the BigTechs. FinTech offerings are also often designed with ‘mobile-first’ in mind to give end-users a total view of their finances on the move.

These organizations form a significant part of the competition in many of the markets that banks traditionally owned, but they should not be viewed solely as poachers of market share. FinTechs are first and foremost technology specialists, operating and engaging with the latest software development tools and practices, and are eager to have their technologies leveraged by financial institutions.

Collaboration is a win-win scenario that allows banks to tap into the wealth of innovation going on outside of their walls. Finastra advocates collaboration through a platform-based approach vs point-to-point integration. It helps FinTechs by integrating once and getting access to a broad market, shortening time to market. This also allows bank in-house development teams to focus on their core business, collaborating to innovate with FinTechs, and having the freedom to build and test new applications in a risk-free environment.

How are FinTech companies leveraging the latest technologies to deliver innovative services to their customers?

Our recommendation is for FinTechs to leverage cloud-based open development platforms that focus on providing access to banks’ core systems via standard-based open APIs. These remain the most effective means of enabling collaboration between FinTechs and banks. A platform-based approach can offer a safe and secure environment in which agile third parties can build, test and run applications efficiently.

Also, by deploying the best data analytics and Open Source toolkits to gather, clean and augment siloed data, FinTechs can deliver sophisticated Machine Learning products that enhance their applications. This involves a circular process of training the machine learning models to realize the right outcomes for customers and enable the data to be actionable.

In the age of ‘mobile-first’ services, how are FinTech services interfacing with the other service providers to deliver an integrated experience for consumers?

FinTech’s interface with multiple service providers to deliver and enhance their apps. For example, FinTechs and mobile providers have an important symbiotic relationship. FinTechs bring rapid innovation and flexibility; operators provide powerful access to the market with their marketing and distribution capabilities.

Their services converge most often in co-branding, in Know Your Customer (KYC) user authorization and when facilitating payments. As mobile is becoming the digital tool of commerce, customers are demanding simple, intuitive and customized services. An ecosystem of open APIs enables systems to interact and share data while protecting data privacy and ensuring data security. Through the mobile internet, FinTechs can offer services via non-traditional channels, for example, social media.

How is the Open Banking initiative connecting to FinTech?

Open Banking and The Payments Services Directive II (PSD2), combined with the EU’s General Data Protection Regulation, gives customers more access to and control of their data held by banks.

This data access enables start-up FinTechs to safely access and store sensitive data, enabling more organizations to leverage data access and develop sophisticated applications. This has the effect of democratizing financial services and offering end-users greater choice and a higher level of customer service, which are core principles underpinning many FinTechs.

What are the challenges CTOs face when developing for the FinTech sector?

CTOs face several challenges when developing for the FinTech sector, including access to talent, dealing with regulation, competing with the incumbent banks on customer acquisition and gaining customer trust. The “war on talent” is on and even with university enrolments in computer science tripling in the last 15 years, CTOs will need to raise their game to recruit and retain the best talent with cloud, data and security skills.

The CTO must also drive innovation in a way that delivers outcomes and applied innovation. Finastra advocates 90-day sprints where a ‘two-pizza team’ is delivering a working proof of concept. CTOs must keep up with tech development trends without being swayed by hype. Emerging technologies are advancing faster than ever, but when something new appears, a CTO should consider whether they need to adopt it or not and make the most pragmatic choice. Just because we can don’t mean we should.

How do you see FinTech developing over the next few years?

Open platforms will continue to drive innovation. Open Banking in the UK has surpassed its millionth customer, and the cloud economy in the United States has tripled over the last 15 years. Big Data and Advanced Analytics (BD&AA) and Machine Learning will evolve across the banking industry. We’re already seeing banks partnering with AI providers to help them manage data and provide mobile banking services.

This year will be important for digital challengers, who will face profitability challenges. Fifty per cent of consumers anticipate using BigTech for financial services within the next three years, and payment initiatives such as Amazon Pay’s Cash-Load continue to move money away from deposit accounts, for both legacy banks and challengers. Exacerbating the competitive challenges is regulatory “mobilization” to stimulate competition. This underscores the need for standardized regulation across the entire ecosystem, particularly with regards to the use of cloud and emerging technologies.

Cooperation between FinTechs and established banks is in everybody’s interest. FinTechs are faced with the high costs of customer acquisition in financial services and barriers to cross-border businesses that banks are well-equipped to bridge.

Meanwhile, FinTechs recognize the opportunity to have a role as part of a broader banking ecosystem, developing technology to help transform an entire industry. Yet for FinTechs, it can be a difficult to negotiate the long procurement cycles of big banks. For banks, it’s a challenge to successfully implement the latest technology in large organizations based on legacy IT from as far back as the 1970s. By working together, FinTechs and banks can overcome these problems together and enjoy the best of both worlds.

As businesses further expand their reach via the plethora of FinTech applications now available, CTOs and CIOs need to think about how they can offer their products and services to this rapidly expanding service sector. The API will continue to dominate in this respect. How FinTech apps will also evolve to provide more functionality their customers are now demanding.

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In part 3 of this series, Silicon UK takes a look at how the FinTech is likely to evolve and expand over the next decade.

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