Today, a company can spring up in a matter of weeks. Perhaps a new idea is planted overnight during a hackathon and germinated in a garage over a couple of weeks using unlimited cloud computing power, free developer tools and open APIs. Then, the startup might get watered by incubators and accelerators like Idealab and Y Combinator, helping to direct the young company toward the sunlight while sprinkling it with occasional funding to grow its products and team.
Fintech startups Betterment and Moven, for example, were nursed in the Anthemis Foundry incubator, alongside 33 other financial services companies. These new market entrants build fast, move fast and alter consumer expectations on the types of experiences they should be getting. Traditional banks, often fraught with calcified processes and monolithic infrastructure, are being challenged, stunted and in some cases, uprooted.
With billions of dollars being poured into VC-backed fintech startups–$13.8 billion across 653 deals in 2015 to be exact, according to CB Insights and KPMG–traditional banks are realizing that in order to survive, they need to ramp up their own digital investments and operate more like these nimble startups. And to do that, they need to unbundle themselves.
One way banks are unbundling themselves is by turning their existing capabilities into a set of reusable assets that are designed to be composed and recomposed into new product offerings as the market demands change. These initiatives are often called Everything-as-a-Service (EaaS) or banking platforms. The assets are made accessible through an application network–a network of applications, data and devices connected with APIs to make them pluggable and reusable.
For example, if a bank turns its lending products into a set of services accessible through its network, a fintech startup looking to build lending capabilities into its app could gain controlled access to valuable business data or capabilities through an API. This platform approach changes the bank’s business model. Instead of trying to own the entire value chain with the consumer, the bank becomes part of many different value chains and can reach new constituents and demographics. It’s a symbiotic relationship for banks and fintech startups. Some financial institutions are already executing on this type of strategy. For example, MasterCard has turned many of its core services into a platform of APIs and is growing an ecosystem around its capabilities.
For big banks, the real call to action here is solving their problems in a new way. That’s scary, because it means structuring themselves differently internally to do new things externally. It means change.
The biggest threat to banks
Contrary to popular belief, I don’t think fintech startups are the largest threat to banks today. Fintech startups build for the consumer, and banks have traditionally built within their limitations. As a result, the biggest threats to banks are disconnected technologies and archaic operating models that are incapable of evolving with consumer expectations.
In 2001, I worked for an investment banking firm in London on a large initiative that was going to connect over a hundred systems. During the first phase, we connected seven different software systems. I worked with the heavyweight back and middle office systems trying to move information around. The integration tools of the day were big and complex, and I quickly found that my teams were working around the software tools rather than with the tools. There were two problems: First, the technologies available at the time were complex and limited, and second, large banks were organized into silos and unable to move quickly. I set out to solve the first problem; the second problem can only be solved by the banks themselves.
The ability to move fast, be agile and innovate quickly is centered around culture and constructs first, and technology second. Shifting culture involves people and feelings. For those of us that have spent the last 10 or 20 years in front of computers, we’re probably secretly hoping to avoid both people and their feelings.
After all, it’s hard to branch away from what’s known and comfortable, especially for large institutions built in previous decades. It often takes a new, more nimble market entrant to ignite a sense of urgency. For this reason, it’s more beneficial for banks to adopt an operating model that can insulate core business systems that are moving at a slower pace while also offering intuitive software and services that move as quickly as agile startups.
Make no mistake, this doesn’t mean you can avoid innovating at the core. Success for banks today requires a mindshift in the way they think about solving problems and then figuring out how to leverage technology at the core to accelerate change across the entire organization.
Driving innovation at the core
Fintech startups can be successful because the building blocks of unlimited computing power, open APIs and open source creates an environment for innovation. These building blocks allow any type of application to be built and scaled quickly.
The key learning for banks is that they need to provide the same agile environment for their own developers. Banks may fail if they try and create this environment at the edges of their business. If the edge is agile, but the core is calcified and monolithic, the projects at the edges eventually wither and die due to the difficulty and cost of accessing core resources and the immense burden caused by small changes. Banks need to drive innovation first at the core and then the edges.
Every bank, and in fact every company, should be using APIs as the preferred way to exchange information internally. This means every new project should open up its key assets as APIs for others to use in the bank–a discipline that I believe most successful banks in the next five years will become great at. These APIs are the building blocks that allow developers to build new products and services quickly and without being gated by old development processes that don’t work for the digital era.
Many banks are looking at their private Platform-as-a-Service (PaaS) strategies, but very few are looking towards the cloud–often for regulatory reasons. However, there are many scenarios where a public cloud can be leveraged by banks to reduce the complexity of getting computing power. Not all applications are regulated the same way and developer and testing environments in the cloud are a great way to enable developers to build safely without asking for permission.
Once banks can easily open up their internal assets and capabilities as APIs, it becomes much easier for them to then open up some of those APIs to outside developer ecosystems too.
Partnering with fintech startups
APIs create a collaborative environment with fintech startups–of course, with healthy doses of competition to quicken the needle. For example, J.P. Morgan’s Corporate & Investment Bank announced an in-residence program in June for fintech startups looking to build independent products based on access to the bank’s “facilities, systems and expertise.” Additionally, J.P. Morgan Chase & Co. partnered with fintech startup OnDeck Capital last December and recently launched a digital lending platform using technology provided by the startup–of which 70 percent is reusable for potential partnerships with other banks.
Banks are also beginning to experiment with hackathons, traditionally reserved for more nimble organizations. Earlier this year, Barclays partnered with MuleSoft to host a digital banking hackathon that explored emerging technologies and the way APIs play a role in evolving products and services. Following the event, new ideas were taken forward for development within Barclays. (Disclosure: I am employed by MuleSoft.)
Additionally, Citi announced last May the top innovations emerging from its public virtual accelerator called Citi Mobile Challenge, where developers attempted to solve financial problems with Citi’s digital platform. MasterCard, a sponsor of the event, awarded four teams with a week-long mentorship opportunity in its European startup engagement program called Start Path.
One thing is certain: Banks are being highly aggressive in trying to figure out what they need to do to thrive amidst today’s startup frenzy. Their challenge is figuring out if they can unbundle their core to support innovation at the edge, all while still keeping the lights on and transactions cleared.
To weather the fintech market’s overgrowth, banks need to sway with the breeze being created by consumers. I believe banks that are willing and able to evolve with their environment will survive.