As in-house tech solutions within the finance industry continue to run at an increased loss, experts have predicted a seismic shift across the FinTech sector over the coming months as banks are expected to increase their reliance on external software solutions in a bid to reduce tech spend.
A growing financial problem across the banking sector
Banks boast a long and illustrious history with pioneering new technologies to enhance products, modernize IT systems, and strengthen their relationships with clients while simultaneously overcoming the threats posed by hackers and criminals. However, the speed of technological advancements has seen many banks lose financial control.
The continued developments of new tech, as well as implementation, testing, and staff training have seen costs soar. In fact, reports show that JPMorgan had an IT budget of $11.4bn in 2019, while Bank of America spent $10bn.
Furthermore, the everchanging FinTech landscape means that banks are under even greater pressure to adapt their systems accordingly in order to comply with the latest demands of IT operations.
Among those requirements are the concepts of updating IT operating models, adopting A.I. to a more sophisticated level, taking SaaS beyond the cloud, using intelligent big data to meet client needs, preparing digital architecture to provide connections in any environment, and tightening up cybersecurity. Failure to comply with all issues can result in severe damages and legal repercussions.
It's a lot of work, and often too demanding for in-house tech teams. While the biggest Tier 1 banks can afford to implement the tech, the traditional model no longer works and cannot be considered sustainable. If FinTech continues to run at a loss, small banks will be destined for disaster.
External solutions are the only answer
Amendments to the Bank Act have facilitated an even stronger relationship between banks and FinTech solutions, with improvements particularly noticeable in regards to removing unnecessary delays in the approval processes required by banks teaming up with external solutions. This, combined with the unsuitability of in-house operations, has seen a huge shift towards outsourcing for banks.
Robert Cooke, chief technology officer of 3Forge, has pinpointed the damage caused by “internal development teams re-building the same software over and over again,” both financially and logistically. By the time that a process of research, development, testing, and implementation has been completed, big data and FinTech systems are already outdated and need further tweaking.
Banks can subsequently fall into the trap of being caught in a cycle of being one step behind. It's a big issue for Tier 1 banks, but Tier 2 banks are at even greater danger.
Integral's chief revenue officer, Vikas Srivastava, states “I think it is simply a question of all those drivers such as the cost of building it, cost of running it, cost of making sure that you are evolving that software as the market evolves” suggesting that using external solutions can reduce tech spend by up to 80%. Crucially, it's a move that may also produce better outcomes.
Regulatory Technology to the rescue
The changing landscape of banking and FinTech has opened the door to a greater link with Regulatory Technology, also known as RegTech. Banks face annual Compliance costs of an estimated $80bn, but increased operational efficiency through RegTech can significantly reduce the figure.
RegTech can help banks overcome several challenges in reaction to various matters, including fragmented data across compliance functions, enterprise-wide single customer view, Anti-Bribery and Corruption (ABC), Know Your Employee (KYE) activities and alert investigations and transactional conflicts of interest.
Utilizing a RegTech company for Compliance purposes can cause a few teething issues with Cooke stating, “the biggest criticism that we got with trying to bring in vendor solutions in general is how well do they integrate with the existing processes.”
However, Srivastava explains, “the risk is lower if you’re already going with a provider that is already using that software to serve hundreds of large institutions and who are using their technology every day to run their business. I would say that the risk of using their software is hugely lower than if you build something from scratch”.
In previous generations, the in-house option would have been the only way to develop software and technologies that meet compliance regulations while additionally feeling customized to the needs of the bank. Due to the changing landscape, though, many RegTech compliance software developers work exclusively with Financial Institutions. They are the new industry leaders, developing breakthrough technologies, many of which can be tweaked to create the bespoke models needed to help Tier 1 and Tier 2 banks differentiate themselves from their competitors.
Crucially, RegTech software developers have the fundamentals in place to roll out their products to banks in rapid response times, thus enabling banking institutes to overhaul their approach to tech with smooth transitions that integrate with any existing facilities that will survive the change while also transferring big data to the encrypted cloud storage that is now considered the norm for top-level companies across multiple industries, including the finance sector.
The increased accuracy and cost optimization have already won over several high-profile banks. As other banks discover that they can meet their compliance needs, including all future developments, through external solutions that are underpinned by value and convenience, it will inevitably become the new norm.
It's more than Compliance
Compliance with various financial regulations at a reduced cost is the most significant driving force behind the shift towards external software developers. Nonetheless, banks are also set to see a number of additional benefits in relation to recruitment, staff management, asset management, security, and time-efficiency. RegTech can, therefore, facilitate the dawn of a new era in which banks can finally embrace advanced technologies ranging from A.I. to wireless communications in a safe, efficient, and cost-effective manner.
RegTech for the banking sector remains in its infancy, but the possibilities for banks and Financial Institutes (FIs) are endless. Big changes are coming for the way banks handle their tech spending.
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