The path of a financial startup to profitability is long and difficult: the development of new applications is time-consuming. In addition, there are expensive marketing measures to reach a critical mass of users. Collaborating with established banks on an open platform can help. A guest article by Mitesh Soni.
The fintech scene is facing a new boom: By the end of September 2018, according to a comdirect study, 42 new companies in this sector started in Germany alone. One reason for this is certainly that the conditions on the market could hardly be better at the moment. Because of the EU PSD2 (Payment Service Directive) guideline, financial institutions are obliged to open their customer data and IT to other actors such as Fintechs – of course only with the consent of the customers. The young financial companies can offer new services to bank customers on this basis.
But the regulatory interfaces that institutions must provide only allow a limited range of innovations. The key to success lies therefore in the collaboration: The banks allow fintechs access to a broad user base and go beyond the requirements of the directive a big step towards open banking. In return, the financial institutions can satisfy their customers in the long term thanks to innovative offers from the young companies. Because the customer of today, for example, from the GAFA players (Google, Amazon, Facebook, Apple) a comfortable and fully digital offer used and expects this service in other areas.
Legacy banking systems have hindered cooperation so far
The basis for a collaboration between banks and fintechs is that the solutions of both sides are compatible. But that was the biggest hurdle, as the complex legacy IT of financial institutions required specialized knowledge and proprietary solutions. After all, these systems essentially use historically grown systems written with long-obsolete programming languages such as Fortran or Cobol. The proprietary back-end systems, when introduced decades ago, helped accelerate certain tasks such as account opening and transactions and make them more efficient.
This legacy IT is still the basis in the banks on which they built every other application. Because with increasing customer demands, for example on online banking or mobile payments, financial institutions have always been developing and buying new applications. Each of them was specialized in one task: it provided an overview of different accounts, increased operational efficiency or reduced downtime. However, they also introduced other file formats and programming languages such as C ++ and new operating systems such as Unix, Windows and Linux. This created silo structures in the data and applications that required extensive IT maintenance and had to be painstakingly integrated.
This complexity of legacy environments requires correspondingly long cycles in software development – for the programmers in the banks, but also for fintechs who want to make their applications available to the institutes and their customers. New projects require experts who are familiar with individual inventory technologies, which in effect means that startups have to commit themselves to a financial institution. In addition, it is also very time-consuming to adapt the applications to the complex production environments. If a new application makes it to this point, it is often too late to gain a competitive advantage. Possibly difficult conditions for a collaboration of banks with agile and flexible financial startups.
Open platforms enable common innovations today
This problem therefore required a new and comprehensive approach, which allows an uncomplicated connection of applications to existing systems. In the age of digitization, cloud-based banking platforms now provide the ability to simplify communication between financial institutions’ legacy IT and Fintechs apps, as well as accelerate application development and delivery. Such a platform should have the following central components for this purpose:
Open interfaces for easy integration
Using so-called Application Programming Interfaces (APIs), newly developed apps can be quickly and easily connected to existing core banking solutions. Because the APIs enable the communication of different programs, systems or software applications, without an external developer having to have in-depth knowledge of the core system of a financial institution or another API holder. Banking applications can be integrated into the solutions of Fintechs within a very short time – and vice versa.
Faster development through low-code approach
Low-code development environments make it quicker to build apps than traditional software development methods. Because the visual linking of program elements requires less source code to be rewritten from scratch. For example, there are so-called visual editors, with which components of the user interface can be combined by mouse click or drag & drop.
Data models and business logic can also be mapped using these design tools. This is helpful, among other things, when banking processes have to be designed. Even the structure and access to databases as well as basic services such as authentication or authorization can be created and defined using modular low-code building blocks – of course adaptable to the individual requirements of each financial institution. If necessary, they will be expanded to include handwritten code.
High scalability in the cloud
It is associated with immense effort to build up and maintain own computer capacities – a stumbling block for the innovation power, which can be eliminated within the framework of a banking platform. In terms of platform economics, innovation should not come primarily from its own new IT infrastructure, but from the cloud. Because resources are available flexibly and highly scalable as needed. Also in terms of security, cloud data centers in Germany today are up to date. And institutions such as BaFin support and promote the use of such solutions through appropriate legal framework conditions.
Compliance and standardized processes
No sector is as heavily influenced by regulations and requirements as the financial sector. Especially in the past ten years, the compliance requirements have been significantly tightened again. Therefore, the banking platform must be designed so that all applications developed on it meet the German and European security and privacy requirements. Likewise, supervisory requirements must also be covered. Another important factor is standards: for applications to be flexibly integrated into various banking environments, they should comply with generally applicable financial standards in terms of processes, processing of customer orders, and employee efficiency.
Fast monetization in an app store
The best innovation is useless if no user profits from it. Apple and Google have also recognized this principle and combined their products with an app store right from the start. This success factor should also consider open banking platforms – because the marketing of the finished applications is an important key to success. The app stores in open banking should be immediately accessible without much installation and implementation effort and display the app offer as clearly as possible.
The platform revolution has already begun
The lone fighter mode in the finance industry is clearly a thing of the past today. In a globalized, digitized world, it is natural to use the expertise of many market players through collaboration for shared success. It’s not just the financial institutions that can offer their clients innovative applications that benefit from an open banking platform. Fintechs are also gaining through faster time to market and a broader user base. The platform approach will therefore drive collaboration in this industry far beyond the requirements of the PSD2 Directive. And the resulting open banking paradigm will eventually fuel the fintech boom.
Also published on Medium.