When looking at new solutions to enhance productivity, efficiency and customer satisfaction, financial institutions and banks traditionally refrain from looking outside of the business to their competitors. However, there is a huge amount to gain for these institutions by outsourcing and pairing with an unlikely partner, the FinTech.
At its best, outsourcing can make banks more efficient and drive innovation in an increasingly competitive environment. (Source: PWC)
Here, we look at the advantages of partnering with FinTechs, the considerations and how to overcome them, and ultimately, why it bodes well to enter into a refreshed outsourcing model with FinTechs.
For the established bank or financial institutions, there is often a reluctance or hesitance to bring in an external resource or solution from a competitor because of the idea that, in the main, it can be built in-house with a bit of budget and small project team. Even if there is some budget for the build, the end result often doesn’t work as well. Why?
The main reason is that a bank’s core business isn’t to build innovative business process solutions, even if it’s inherent to its work. Outsourcing to FinTechs in the as-a-Service model, whether Banking-as-a-Service (BaaS) or Business-Process-as-a-Service (BPaaS) allows the best of a particular solution to enter the realm, designed by experts who truly understand the drivers and have already invested in it, through cost and time.
As mentioned in the PWC study, “to remain relevant in the long term, established providers need to be able to deliver innovative solutions in strategic partnerships that allow banks to focus on their core business.”
In other words, a financial institution’s core business is in, well, finances; a FinTech’s is in innovation through technology - i.e. leave the experts to their expertise.
Time is the key factor in true innovation. While banks generally have the budget, their time resource is limited making it impossible for any team - no matter how adept - to go into R&D for three months and come out the other side with the best technology that really serves them. This is why FinTechs exist - 100% of their focus and time is spent on continued innovation as opposed to a means to an end.
In addition, software development requires an ongoing development environment to enable testing of new technologies and tools to remain competitive, relevant and secure. Outsourcing allows you to place this infrastructure responsibility outside of the organisation, saving further costs and resources.
While there is a predicted uptick in outsourcing, there will always be some concerns around the new, even if the benefits are clear.
“Whether the fintech is big or small, in the UK or France, focused on payments or lending, the right choice of outsourcing partner is critical to fueling growth,” - Vicki Gladstone, CEO and COO at Moorwand.
Here are the common risk categories and ways to work with them to meet your end goals of efficiency and cost saving, while ensuring you’re picking the right partner.
One of the most common reasons to outsource is to save on costs while helping to deliver on the greater business strategy, whether that’s improving the quality of service, innovating a product or remaining competitive. However, when it comes to introducing an external solution, the ROI can become a little unclear due to a lack of planning for the long term. The answer to this is to treat the solution just as you would a new in-house project: make clear objectives, define the parameters of its quality, and formulate a process to regularly assess its performance and business impact.
A good FinTech partner will not only be able to offer their own performance indicators but will be able to use your data and processes to show its relevance to your business’ goals.
Another main reason to outsource is because of the efficiency and effectiveness it can add. An out-of-the-box solution that’s ready to plug and play is a developer’s dream - if it works well with the systems already in place. Due diligence is a requirement before signing up to a new solution, and as any good engineer knows and practices habitually, risk assessment and anticipation of all operational risks is a must.
Again, this can be done in alignment with a new partner with quarterly reviews and helped by a good support team.
Whether it’s a backend product or one that clients will be engaging with, there is a need to ensure that it represents your brand and its values correctly and fully. Ongoing quality control and monitoring can be seen as a barrier to adopting an external solution, however this can be remedied with clear oversight abilities and full workflow transparency enabled by the FinTech partner. Along with this, a set of clearly defined metrics to regularly assess the solution’s KPIs will ensure it remains in accordance with the customer standards set.
The financial industry has plenty of regulatory and compliance standards that are non-negotiable, and that extend to any third-parties they interact with. Of course then, it’s key to ensure that your chosen partner understands how and where it sits within the compliance line, its related legal obligations, and that it acts accordingly.
Due to the various data breaches and leaks, there is an inherent risk when it comes to third-party access to sensitive or confidential data. To help minimise this, ensure that not only does the FinTech partner adhere to relevant data regulations, but that its solution accesses only what is needed for it to function.
As Open Banking and Embedded Finance have entered into the mainstream, the shift for FIs and banks to collaborate with FinTechs has too.
Outsourcing various elements that enable the business’ core function has shown “an improved customer experience as well as expansion into new markets or customer segments, and launching of new products and services,” says Gladstone.
So, what are these benefits?
The financial industry is becoming increasingly more competitive because of a growing digital demand due to newcomers like neo-banks and app-based services entering the market, and traditional institutions need to keep up.
As the world has come to expect digital products in all areas, outsourcing to FinTechs helps FIs and banks to develop them and have a quicker time to market.
PWC found that as most banks expect to see a growth in automation, there will be an increase in outsourced BPaaS rather than in-house solutions being built. The FinTech’s focus in this area, along with AI, machine learning and data analytics allows banks to include these critical features in their existing or new products without having to shift their focus away from their core business.
Using an expert and specialist knowledge means you’ll get the best of a solution. Your business won’t be left behind with an inferior product and your existing customers are less inclined to move to a competitor who offers more.
While a level of outsourcing has always been present within the financial industry, it now makes more sense than ever to adopt it further and with the innovators.
Rampant inflation and rising supply chain costs have negatively impacted profitability and therefore increased the need for efficiency and cost savings within all businesses - from the smallest business through to the largest banks.
When it comes to front-office processes, like risk management, adopting a standardised solution built by a FinTech is the most sensible and cost-effective way for any business. Designed and created for a wide client base, the solution will be fit-for-purpose and addresses key priorities like scalability, compliance and business strategy so even SMEs will benefit.
Outsourcing is becoming far more the norm as tech innovation continues to surge and the abilities within non-tech businesses to keep up is increasingly limited.
No matter how complex a solution seems to be, it’s important to remember that the FinTech business and its developers have made it that accessible and easy to use after many attempts, often years of background experience and now expertise, and at its very basic level, quite a bit of resource and money.
Crucially, we have now entered into the phase that the partnering of FinTechs and financial institutions in fact makes strategic, operational and cost-saving sense for all parties. Avoiding such partnerships will see a bank lose its competitive advantage, and as a result, its customers. It’s now more than just an idea to entertain, but a key differentiator in today’s ultra-competitive environment.