The pressure to transform and innovate is constantly increasing for financial institutions. At the same time banks and building societies are faced with the risk of being held hostage by the limitations of their own platform. To become more agile, financial institutions have now recognised the urgency of collaborating with the leading minds across fintech, to craft and deliver the best products to their discerning customer base. Key to a successful collaboration is an architecture that allows banks to integrate with third party offerings.

This is an excerpt from Finextra Research and Backbase’s recent report ‘The Future of Digital Banking in the UK.’

Innovative fintech firms have already successfully commoditised products and services and therefore, it is not logical to rebuild something that already exists in the financial services ecosystem. Further, it is easier and more efficient for innovation leaders to choose to partner with fintech firms, to progress through their digital transformation journey.

Nick Williams, group transformation director, Lloyds, explains how “customer, tech and competitive trends are faster-moving than ever before and changing our industry in brand new ways.” Considering this, his advice is to look “as far forward as we can – horizon scanning and building our understanding in emergent spaces through experimentation.

“Secondly, we need to help shape the future direction of the industry by applying our areas of expertise to these new opportunities and challenges. In both instances, we recognise the vast amount of innovative activity that is taking place in all sorts of organisations and so we are increasingly building into our decision-making whether the right response is building something internally versus partnering in some format with third parties like fintechs.

“By collaborating in this way, we can better navigate the changing and uncertain environment, supporting our effort to deliver the best products and services to our customers.” Investec’s Rosemarie Pinto, head of new business ventures, has a similar view: “To operate in this complex and competitive digital banking environment and navigate uncertainty, it’s important to create capacity for continuous learning. This means continually asking the right questions and taking quick, decisive action.

“It’s also vital that banks don’t make the mistake of waiting for the right moment to execute a strategy. Thanks to the banking industry’s highly unpredictable nature, plans can often become redundant before they’re even started, so being adaptable is of key importance.”

Arguably, responsiveness and particularly, responding to demand in real time, is the most important factor today. “This may mean embracing the uncertainty that comes with operating in the market rather than defending against it. Fintechs, for example, are continuing to help shape the future of banking and instead of seeing them as competitors banks should see them as potential partners that will help them accelerate their own digitalisation strategies,” Pinto says.

Obtaining flexibility with fintech partners

HSBC’s head of digital, Matt Turner believes that the use of agile approaches allows a bank to continuously experiment to deliver better outcomes, and, where appropriate, these outcomes can be driven through third party partnerships with fintechs and others that complement its own internal core capabilities.

Turner advises leaders at financial institutions to “be clear on your long-term strategy and stay the course. That said, make sure that you have structures and processes that allow you to flex your short-term resources, investments, and priorities where required to weather the storm. The ability to quickly pivot people and priorities helped us navigate and, in many senses, thrive during the pandemic.”

He continues: “Fintechs can be a crucial partner in providing that flexibility. In particular, their ability to support flexible approaches, try out new things, foster new ideas and openness to opportunities that present themselves.”

Flexibility, as well as speed, is also of paramount importance to Standard Chartered’s chief information officer, corporate, commercial, and institutional banking, Rene Keller. Keller believes that while the cloud provides the ability to respond to new business opportunities, to spin up new infrastructure as well as development and test environments in a few minutes or days, cloud also allows integration with new partners.

Keller adds: “We cannot innovate everything inside our company, it's just not possible because there is so much innovation out there. That means we need to be clear on what we consider our intellectual property, and what we want to buy, which means that integration capability becomes a core competency, so we can use fintechs and third parties for new solutions. If someone out there has solved a problem in the industry, we absolutely want to partner with them.”

Ben Sampson, director of digital programmes, Yorkshire Building Society, adds that because the building society does not yet have APIs for everything, it needs to be quite selective and open about its partners. This is why it is looking at fintech firms which are further along in their life cycles.

Integrating third party services

While every partnership is unique, when considering integration, there are two key methods: banks can either stimulate an organisation to build an attractive value proposition against their own platform specifications or acquire an existing service and partner for customisation. What UK bank architecture looks like today, is not what it will look like going forward; digital transformation is an ongoing process.

The architecture of the future will be modular, one that allows additional products to be bolted on and adaptive enough to embed in different functionalities, rather than creating from the ground up. When partnering with a fintech, its engineering team can oversee the issues that are permeating within the legacy infrastructure and find a solution.

On this, NatWest’s head of ventures, Andrew Ellis, advises planning to be predictable. “Having your architecture built in a very simple, purposeful way where as required, code can be built and deployed quickly, you can plug things in and make changes safely. That creates the background or the ingredients to enable adaptability and agility.

“Also, do not confuse adaptability and agility with chasing every squirrel that runs across the path. You must keep that business mindset, focus on the long-term goal, know when to pivot, be very clear to have set patterns and infrastructure that enable you to change quickly.”

Providing the digital bank perspective, Tandem’s chief data and technology officer, Noam Zeigerson says that a reliance on third parties has always been “considered an option.” They continue: “Our procurement process is led by top engineers that continuously examine the market and ensure that we choose partners that bring the best and safest solutions.

“After that, we ensure that the integration is being made in a way through which we still hold the reins, that is both owning the customers’ data and using an API-only approach. This allows us to change in case the level of the service provided is not up to standard or the market is changing and therefore we need to move on to another provider.”

Atom’s chief technology officer, Stewart Bromley, echoes this sentiment and states that “the best way to predict the future, is to create it. And if you are not sure how, then partner with those that do. Further, as you build, ensure your architecture allows you to plug and play with new technologies or partners at pace. Else, those that can, will have the competitive advantage. You don’t have a monopoly on great ideas and therefore you need to be open to partnering with anyone.”

You can download a full copy of the report ‘The Future of Digital Banking in the UK’ here.