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The rise of fintech is dramatically reshaping the financial services market. The emergence of new technologies and capabilities has bought about enormous change across the entire landscape, change that hasn’t occurred at such a rate for centuries. To date, this innovation has largely concentrated on the front-end user experience, including extensive digitalisation, improved user journeys and more competitive pricing strategies.
While these changes have been disruptive, to realise fintech’s full potential, this innovation needs to go right down to the core and change the ‘guts’ of our financial system. Unless banking infrastructure is dramatically improved, it will continue to act as a sea-anchor, dulling the impact of fintech innovation and holding back change that could benefit all of us.
So, banking infrastructure must be evolved and adapted, to make way for the next generation of financial services technology and better support the fintech revolution as it improves the ecosystem.
In this article series, I’ll unpack why banking infrastructure is broken, how it fails to meet the needs of people and businesses that rely on it, and what needs to be done to fix it.
Financial services are changing, but banking infrastructure hasn’t
In the past, banks operated a universal banking model where they would offer a plethora of services, from wealth management to loans and payment services. Today, those services are being unbundled by fintechs that each specialise on small groups of services. By being laser focused on specific products and working to improve them with new technology and new business models, fintechs are providing intense competition to traditional banking institutions.
The rise of fintech and its unbundling of financial services is redefining the market in three fundamental ways:
But all these forces of change are impeded by traditional banking infrastructure that was designed for the last century: pre-internet, pre-digital and pre-global. It hinders innovation and, as with the foundations of any physical structure, it is slow and expensive to change.
This permanent layer of museum-ready infrastructure acts like a sea-anchor, holding back the entire market, because all banking services – no matter how new and innovative – must run on these old systems to handle and move money.
The challenge is to unpick financial infrastructure and re-set it for the digital age – similar to how the internet revolution at the end of the 20th century re-set information infrastructure from information-islands such as books, CDs, manuscripts – to make information ubiquitously available and frictionless for everyone.
In the financial world, this means re-thinking how money is held and moves domestically and internationally, how banks interact with customers and each other, and what future banks should actually do in the market.
One of the more promising developments is the ability to create bank infrastructure ‘widgets’ – different elements of banking infrastructure which are unbundled and rebuilt as highly effective individual services that can be ‘plugged’ or embedded into other businesses. These ‘widgets’ allow businesses to access regulated financial services without the cost and complexity of working with traditional players and the legacy infrastructure technology that comes with this.
This approach is enabling new challenger banks, fintechs and non-financial platform providers to cut the anchor loose from traditional bank infrastructure, whilst still benefiting from better banking capabilities without the cost, delays, limitations and complexity that for decades went with it.
If banking infrastructure can be broken out and provided as embedded services that can be offered on demand and compliantly, the major barriers to improving financial services will be removed, dramatically opening up the market, lifting financial inclusion and ushering the next wave of fintech innovation.
In this blog series, we’ll discuss…
Over the coming months, we will focus on the biggest areas impacted by banking infrastructure, with the next instalment focusing on the reasons why banking infrastructure must change and the ways in which current technology restricts business innovation and growth.
By unpacking these issues, I hope to help businesses better understand how they can overcome the limitations of core systems and ensure fintech can deliver on its promise.
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Eimear Oconnor COO at Form3 Financial Cloud
07 November
Karla Booe Chief Compliance Officer at Zeta Services Inc.
Kyrylo Reitor Chief Marketing Officer at International Fintech Business
06 November
Konstantin Rabin Head of Marketing at Kontomatik
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