I recently read Chris Skinner’s book “Digital Human”. It provides an inspiring and insightful account of the current state of banking, focusing in depth on the rapid growth of Chinese fintechs, and presents a very clear case for pursuing Open Banking.
To that end, Chris devotes an entire section under the quite provocative heading “Build or Buy. Or Build and Die” His point is basically that banks too often insist on building the technology that underpins their value chains themselves.
I fully agree with him that this is inefficient (everybody is basically building the same thing) and takes away focus and resources from what is most important: client relationships and client service. Here are some key principles for FIs and banks to consider when deciding between build or buy.
Ask the right questions
Prior to taking on the role of Head of OpenAPI, I spent four years as one of three Saxonian Enterprise Architects reporting to our CTO. Back then, as is the case now, Saxo Bank was continuously looking as how it can extend its offerings in terms of products, services, capabilities, and reach, so the Build/Buy discussion often came up.
The first question in our Build/Buy decision was always “Is this core to our business? Does the system support and extend a business capability for which we already have extensive knowledge? Is this new system, which we are about to build or buy, so important to our business and our mission that we want to invest not only money but also people, vision, and focus into the area for many years to come?”
A typical follow-up question would be: “Is there something out there that we can buy or integrate with?” Maybe we cannot buy all of the functionalities, but maybe some parts have actually been produced by someone else, requiring us not to start from scratch. This question touches upon a core question: Where is it that we want to differentiate and where can we accept to integrate with a third party or off-the-shelf solution?
To become a world-class facilitator in the global capital markets, we often ask ourselves: “can we implement the new feature or capability, using a third-party provider or third-party software while still staying true to our mission?” Is this new capability, something we would like to offer as part of our Open Banking platform, and if so, will that be possible if provided by a third party?
If the answer is “yes” we actually choose to buy/partner with someone over building it ourselves. This is why asking the right questions to suit your business needs is so crucial at the start.
Tap into synergies
Rather than trying to reinvent themselves as technology companies, banks and FIs should curate the best third-party solutions to support what is basically their core competency: client service. If the argument in itself isn’t compelling enough, the empirical fact that on average banks spend more than 80% of their IT budgets maintaining legacy systems makes it obvious that the current approach is not sustainable in the long term.
Finding partners who can help complement your strengths makes a good starting point when it comes to digitization. For a fintech startup in Australia like OpenMarkets, which had quickly established itself as one of Australia’s top 10 broking organisations based on volume, one of the things that set them apart – and a key differentiator – was their innovative cash-at-bank model where its clients can trade using funds held with their existing banks and settle cash post-trade.
Its ambition is to become one of the first players to offer a consolidated solution through which clients could settle all trades via one linked cash account. However, due to its local engagement model, where clients could only trade locally listed Australian securities with dedicated holder identification numbers, via the CHESS system, providing clients with true global market access would be a significant undertaking.
OpenMarkets needed a solution which would open its model – and clientele – to global markets. To do so, it required a partner that would enable it to bypass the traditional significant costs and development times associated with such solutions. The resulting partnership provided a solution that is tailored toward retail traders and investors, consisting of a third-party platform which connects to a proprietary backend system and leverages the entirety of an open banking solution.
Now, OpenMarkets is a much more visible player within its market, with a more competitive international offering. It has widened its client base from catering primarily for the retail segment, to becoming a considerate party for independent advisors and institutional firms.
Have an open mind
Often considerations about the ability to partner are discarded early citing lack of suitable partners, lack of suitable solutions to integrate with, or concerns about data security. Sometimes such objections are real and well-intentioned, sometimes they are perhaps driven by lack of knowledge or simple organisational inertia.
The first step in a potential open banking partnership is for the organization to be open minded to the possibilities that the entire open banking ecosystem offers.
We have seen how the opportunities for integrating products have evolved over time, and consequently the build/buy decision must often be revisited. Back in 2000, we had our own custom-built CRM, Data Warehouse, and analytics solutions. Nowadays we use Microsoft CRM, Data Warehouse, and Power BI. Back in 2000, we also had our own custom-built websites using ASP.NET and a home-grown CMS system. Today we use SiteCore. We also used to have a home-grown incident and problem management system for our IT Operating center, now we use ServiceNow.
The key here is to believe in a win-win and collaborative approach. The Saxo platform, for example, does have several key custom-built components, but they are custom-built because there is no viable solution on the market as of yet which allows us to support multi-asset trading on a single account in a completely customisable and configurable manner and in a way that we can make it available to our partners as part of our Banking as a Service in the Cloud offering. But even within core trading, we do not own and have not built our entire value chain. For example, with trading we often interface with other banks and brokers. For access to reference and market data, we work with a number of large data vendors. And when looking at other parts of the value chain, we also use third-party solutions for custody, corporate action handling, fraud detection, network acceleration, and other issues.
This is why I wholeheartedly agree with Chris Skinner, and this is why we are seeing more and more companies taking the leap of faith and choosing to “buy” (or partner) rather than build when it comes to trading and investing capabilities.