When history books narrate the story of 2020, few will capture the true extent of the change this year will bring about. At the time of writing, governments around the world are ushering us back into the office, having spent most of the past 6 months urging us to stay at home. The genie is, well, truly out of the bottle. Many of us simply cannot go back to the drudgery of a daily commute. Hopefully a new normal will emerge which allows us to fill the professional, social and economic impact that our absence has created, whilst locking-in the manifest benefits most derive from flexible working. For some, the notion that their roles would ever support, let alone encourage, such latitude would have been risible just a year ago.
The post Covid-19 world will be a very different one for all of us. We hope and believe it will be a better one too. One of the many other, less apparent, waves of change is crashing over financial services. It has long been held that face-to-face financial intermediation is the “be all and end all”. Now, advisory and wealth management products are moving at breakneck speed to integrate digital into their solutions. This hasn’t been driven by desires to reduce costs or improve outcomes – it has been existential expediency. Nonetheless, as in the work-from-home setting, the advantages of digital wealth are becoming germane: costs are indeed going down, and engagement is on the rise.
We could spend the remainder of this blog talking about the myriad number of ways the pandemic is manifesting digitalisation in financial services. That would be a worthy read [we’re sure…]. We aren’t going to do that though. No, we want to believe that we are now so clearly on the road to digital wealth that the future is locked in. Indeed, the more nuanced question is not the “What?” and the “Why any longer?”, it is the “How?”. Should you: a) Build it yourself b) Buy it in or c) Do a bit of both?
Building yourself is not the “be all and end all” – far from it in many circumstances. However, we would expect, and notwithstanding our raison d'être as tech vendors, still encourage firms to give it serious consideration. Developing, maintaining and operating your own IT infrastructure offers clear advantages. All things being equal, speed and flexibility should be optimal when relying on deploying internal resources. Customer orientation, internal or external, should be optimal as well when solutions are built in house. Most importantly, strategic direction remains in the hands of the firm, vendor lock-in issues could be effectively avoided.
Like in any classic SWOT analysis, unfortunately many of the ‘Strengths’ reciprocally feature on the ‘Weaknesses’ ledger of insourcing too. Whilst internal development resources are often optimal, they are invariably also finite and locked-in by BAU/roadmap responsibilities. Speed and flexibility are not a given, they require time and investment in modern techniques and practises [such as Agile and DevOps] which can be challenging to internalise. Innovation in financial services is being driven by nascent fintech firms and it can be difficult for in-house teams to build mechanisms for value capture in disrupted verticals without outside help. The combination of these factors most often makes it impossible for large incumbent financial services firms to build in-house.
So next, let’s go to the other end of the spectrum – full outsourcing. The software vendor landscape has never been more provisioned to mitigate issues that exist in client’s tech stacks, wherever they appear. XaaS frameworks have been developed which support fully de-centralised, best-of-breed infrastructure development. At the hardware and middleware level, IaaS and PaaS respectively offer corporate IT teams the facility to leverage tools like elastic scaling and pre-developed microservices which can radically upshift latency, solution focus and granularity. At the application level, SaaS solutions abound which offer encapsulated tools for both internal business processes and client-facing portals. Moreover, such are the advances in solution focus, new portmanteaus like BaaS [banking-as-a-service] and WaaS [wealth-as-a-service] are facilitating market entry in previously locked-down segments by transposing capability against complete industry value chains. So, if you want to offer banking or wealth management products to your new or captive clients, the route to market can be an order of magnitude more straightforward than it was even just 5 years ago.
With such a munificence of options to outsource to the services, why would firms hesitate to delegate more and more to XaaS options? Well, many are not. Firms we know are well committed to a decentralised infrastructure future which is entirely reliant on external service providers. Whilst this is and will continue to be a successful strategy for some, there are pitfalls with this approach too. Cost can be a double-edged sword. On one hand, spinning up server capacity on-demand should always prove to be more cost-efficient than building in-house for most corporates. On the other, controlling cost with respect to enterprise service providers, particularly regarding implementation and maintenance can quickly become toxic. Business focus is another problem for some firms. Whilst many companies are served by XaaS options, which have been standardised for their precise requirements, some survive by differentiating their services and/or, operate in niche markets. For these firms, trying to fit square pegs into round holes is rarely worth the marginal effort. Linked to this, and perhaps the weightiest criticism of cloud offerings, is vendor lock-in. How do firms ensure that strategic decisions they make today don’t tie their hands in the future?
Like so many things in life, the middle path could be the optimal approach. Whilst we can see the benefits and shortcomings of both building entirely in-house and full outsourcing, a more nuanced approach could offer the best of both worlds. Customer centricity should always be more targeted when driven from internal resources. However, rather than develop solutions from the bottom-up, API first solutions are becoming the favoured approach by many incumbent financial services organisations. API first is currently the engine for digital value creation in open banking where enablers like Tink, TrueLayer and Yapily are helping to create new customer journeys for incumbent firms based on powerful data aggregation. The business mode is clear: Allow the infrastructure provider to do what they do best - build world class enablement tech - and let the business do what it does best - serve its customers with the most relevant solutions.
This model can easily be transposed to other segments to drive end customer utility. For example, direct investment has seen strong growth in 2020 as financial consumers found more time and focus to dedicate to building their own wealth. So far, platforms and service providers have focussed on cost mitigation and the digital parsimony of their solutions, front-to-back. We strongly believe that value creation can be driven by additional levers: Delivering better and more relevant analytics to customers in order to optimise financial outcomes and overall health is now achievable. Equipped with growing data unity, there are boundless opportunities to create new wealth journeys for all customer segments. The future of wealth will need a new, truly holistic, solution layer which requires cutting edge analytics and total customer focus. Tech vendor and channel owner can work seamlessly to build this new reality.
We aim for balance and don’t suggest API first is always optimal, nor without its downsides. Building with APIs still requires organisations to devote significant internal IT and operational resources to creating new infrastructure with the outsourced tech. Other firms may simply not have sufficient domain knowledge/infrastructure to enter new segments without the holistic wrapper that many new XaaS frameworks offer. Finally, as with any IT outsourcing, implementation can be complex and involve costs that can be tricky to quantify and control.
In the “How?” of building the future of wealth, firms are faced with some distinct options. Building internally should always be considered, but few organisations can commit to this. Full outsourcing offers another clear route, but organisations can risk losing strategic control. We believe for most incumbent financial services firms, adopting an API first approach will be optimal. Open banking integrations are proving the value of this model and it will only be a matter of time before organisations adopt API first to power the other critical pieces of their IT infrastructure.