Many financial services companies today are operating on technology stacks that aren’t up to the challenge of today’s market. Some banks are even operationally dependent on technology that was installed in the 70s or 80s.
In 2022, it’s vital that financial services institutions get a grip on their infrastructure challenges. It’s an urgent problem facing the sector, and how they’re able to rise to the challenge set down by neo banks like Monzo, Starling and N26.
But banking is an incredibly resilient industry – one of the pioneers of technology in business. We’re at our best when we’re putting customers first, developing products that help them in their lives, and enabling the global economy to function – payments are central to that.
At the end of the day, payments are at the heart of the way we live, and that makes them central to an organization’s reputation.
The infrastructure problem
Global growth and opening up of economies will help the payments sector thrive again post-pandemic, but it’s only those with the right infrastructure in place who will be able to seize these opportunities. It’s become a cliche, but the pandemic has accelerated a decade’s worth of change into just a few short years.
While the core infrastructure helped banks keep on top of the day to day challenges in the pandemic, many senior teams will be left wondering what they could have done differently had there been better infrastructure in place.
Customers needed new and different types of products more than ever. They needed protection from increased online fraud. Businesses needed to change how they operated and collected payments. In general, banks were positioned to survive, not thrive going into the pandemic. That could cost them customer loyalty, and ultimately revenue if left unchanged.
Five guiding principles for infrastructure decision making
The danger is that financial institutions will get so caught up in protecting their status quo that they continue to build bigger and bigger businesses all balanced on a precarious foundation of outdated tech that can’t keep up with market demand. But it’s not just the dangers you’re putting yourself into, it also means you’re really going to struggle to be able to capture new opportunities as well.
1.Build for longevity – In December 2019, not many people were planning for a pandemic. No one was predicting the scale of the challenges the industry was facing. You can’t build for specific future events. There’s just too many unknowns. The journey you embark on to change your payments infrastructure has to see you through the next two decades of business. The only thing you can be sure of in that time period is uncertainty.
2.Build for business priorities and technical realities – Financial institutions have to make decisions that meet the needs of a suite of decision makers. Payments infrastructure must therefore reflect how aggressive the business is on payments within the business model. The needs of a global bank and a small building society are very different.
3.Build for your business model – The cost of putting your infrastructure in place won’t be sustainable if it doesn’t reflect the business model that the world of finance operates under. Fully anticipating the cost of building, licencing, and running your payments infrastructure is an essential step.
4.Future proofing – If we look even further into the future, disruptions from the likes of Blockchain and AI could bring further, more dramatic change to the industry. While they are still very much in the early stages of development and roll out, a CTO must be able to anticipate the change that these, or other unknown technologies, might bring – and be in a position to react and adapt.
5.Meeting regulatory requirements – Financial businesses will need to work closely with regulators, especially as new rules develop to manage how technology works with consumers. A big part of a successful payments infrastructure is understanding how to quickly adapt to new regulatory changes.
But the work doesn’t stop once you’ve designed your new system. You need to put it in place as well. There are two options for banks to consider, and which route is right will depend on a number of factors, from your current infrastructure, to budget, to appetite for change.
Embrace your advantages
The traditional bank carries with it a certain amount of baggage, but most of that baggage is good baggage – it’s stability, security and market knowledge. Focusing these factors on customers will be a winning combination. This is an area where banks already excel. Data, customers and capital to fund payments projects are already there, whereas FinTechs have to build from the ground up.
The FinTech battle is far from over – it’s barely started. Whether your strategy as a financial institution is to be proactive and aim to beat the FinTechs at their own game, or whether you are reactive and want to move second, there’s still a lot of time left on the clock.
Continuing to depend on rigid infrastructure leaves banks vulnerable in the long term, and unable to react to changing market conditions. Of course, banks could just carry on another year and another year and another year and leave it for a successor in their role. The pressures on banks to change never feel immediate until there’s a crisis. And then it is often too late.
The worst decision is no decision
Don’t delay change, because the longer you leave it, the harder it’s going to become. Remaining dependent on a stack of legacy infrastructure will leave you vulnerable. The pandemic might not have knocked it down, but the next challenge might.
We don’t know where the marketplace is going. We don’t know what will happen in FinTech. Banks need to prepare their systems for as much flexibility as possible.
