First and foremost, it’s clear that financial institutions must build a comprehensive (and coherent) technology strategy in order to select and effectively work with technology vendors. Of equal importance is avoiding being locked-in to a relationship where
one party holds dominance over every decision, typically for an extended period of time.
As in any healthy partnership, the relationship must instead be mutually beneficial so that both parties are able to effectively carry out their roles and assist each other throughout and following deployment.
Financial institutions would do well not only to hone their internal strategy around technology, but to sharpen their understanding and expectations in order to understand what they truly need from any potential partnership ahead of inking the deal.
In conversation with Finextra, experts from OakNorth Bank, Nationwide Building Society and Compass Plus elaborated on their experiences with maintaining strong technology partnerships, and the many opportunities and challenges that come with it.
Does partnering with third-party providers rank high on your business strategy?
Shubhanga Prasad, director of strategy at OakNorth Bank states: “Yes it ranks very high. This stems from the fact that we are hyper focused on certain aspects of financial services. This essentially means that we need to partner with organisations that are
hyper focused on other aspects of the business so that the ultimate customer experience doesn’t suffer. We have to rely on partnership with folks who are excellent in their own sector or service. We do this across multiple business and technology partnerships.”
“We also consider partnerships from the perspective of ‘while it may not help us as a business or our architecture directly, it may help our customers directly. So that is the next layer of partnerships that we’re thinking through.”
Prasad furthers that transparency is important for OakNorth Bank with respect to partnerships. The bank prioritises talking to every stakeholder about its story and how partners can fit into that story. “We place enormous emphasis on ensuring potential partners
understand what we have set out to do.”
Maria Nottingham, executive vice president, Compass Plus, explains that as a vendor of the underlying payments platform (rather than a fintech partner that only offers niche, narrow-focussed value-adds), Compass Plus is increasingly seeing customers select
them as a strategic partner.
“They choose us as one of several core vendors in their payments infrastructure that will provide the pillars for the rest of the ecosystem; or as a powerful orchestration system with advanced integration capabilities to support all other members of the
ecosystem; or as both.”
Nottingham adds that Compass Plus’ strategy has evolved in order to satisfy its customers’ appetite for “interconnectivity on steroids” so they can, in turn, best serve their customers.
For Gary Delooze, chief information officer at Nationwide Building Society, partnership plays a leading role in the society’s tech strategy, and he explains that the form it now takes has evolved into an ecosystem-centric approach.
“Our strategy approaches technology from a member’s perspective, we always start by asking ourselves ‘what kind of payments systems, techniques, and methods do members want from our ecosystem?’”
The ecosystem structure has emerged as a result of the myriad payment systems, rails and payment types out there – and while Nationwide doesn’t support every single option (the cost would simply be too high), the building society looks very closely at demand
from members to assess the true investment value for any new partnership.
Does partnership work as a two way dynamic?
It takes huge amount of collaboration for partnerships to find alignment in their expectations. Delooze explains that defining expectations and talking through what is needed upfront is essential to understand how the two parties can effectively work together.
“The key word is partnership,” Delooze states.
“Moving beyond what we may picture as a typical vendor-relationship into partnering with organisations, you have to ask ‘how do we achieve success together, and what would that look like?’ The more effort you invest early on in this cycle, the more
you get back as you won’t find yourself reworking things later on.”
Further to this, Delooze elaborates on partnership as a two-way dynamic, explaining that the building society is receptive toward the expertise that potential or established tech partners can offer. “We go into these discussions with eyes and ears open,
very much wanting to understand their perspective on the marketplace. We want to understand how they believe that can help us solve the challenges and the opportunities that we have.”
Delooze adds that it is important to strive for a balance with the people you partner with. In addition to software and hardware vendors, Nationwide works with analysts and consultants to generate a broad range of perspectives about their experience.
“We get a range of opinions in our discussions to build a position from different perspectives on how this will work for us, making sure that everybody is being as transparent as possible.”
Prasad explains how OakNorth Bank approached its partnership with payment provider Shieldpay, where the relationship started with mutually hypothesising a solution and progressed into co-innovating how this solution could be deliver through Shieldpay’s platform:
“there is always the temptation to build yourself versus working with an expert in the specific space. Our business strategy around what we want to buy, versus what we want to pay has made it very simply for us to listen to experts, and work with them to co-innovate.”
Nottingham acknowledges that the process of choosing a payments platform vendor is no mean feat, and that Compass Plus encourages an open and honest communication from the outset. Part of this involves trying to understand a customer’s short, mid, and long-term
goals, including the ‘what ifs’ and off-the-wall creative ideas.
“To truly understand the nature of the business, it is important to talk to people from every area, not just business and tech, but also operations, customer services, finance, etc., because there are differing pain-points that need to be addressed.”
She states that understanding the real drivers behind a business’ requirements is essential, because organisations’ thinking is often constrained by their experience of working on legacy systems.
“They need to be open not just to the advantages new technology brings, but other ways of defining their requirements that aligns with this new technology that could streamline their business, rather than provide a like-for-like replacement – otherwise an
FI can end up insisting on ‘installing a petrol tank on an electric car’. We try to ensure we partner with companies whose values align with ours in creating future-proof, properly architected payments ecosystems,” asserts Nottingham.
Where do partnership challenges arise?
Prasad admits that while there have been partnership challenges in the past for OakNorth Bank, these experiences helped to refine its approach to working with new tech providers.
For one situation in particular, Prasad notes that OakNorth Bank had originally set out wanting to onboard a particular third-party provider, but the promises that it thought this solution would deliver were vastly different from what it started seeing once
the actual integrations and build started.
“We had to, somewhat painfully, cut the relationship there. In hindsight it is something that we could have done better in terms of studying what their actual capabilities were, because often there is a massive difference between the PowerPoints in the first
meeting, to what we actually see on ground with integrations. It is more a lesson to us rather than saying they should hold us back – more than we should have done better diligence.”
Since this episode occurred in late 2019, Prasad adds that OakNorth Bank defined a fairly robust supplier management policy, which outlines the roles of the business and sales teams, and how the procurement /compliance/technology functions should operate.
“As an internal policy/guidance document, we have disambiguation in terms of what is expected of which teams, and greater clarity on technical factors so that nothing is missed.”
Another tweak OakNorth Bank is working on is around customer due diligence and building a detailed set of things to ask vendors before signing any contract.
Building clarity around expectations early on in the process is also important to manage the situation when things start going awry. Delooze circles back to comments around transparency when negotiating any agreement early on.
“It's very important that we are super clear on what we're trying to do, and what our strategy is, and what we need of our partners in this context. If there are any gaps between what you can do, and what we're looking for, then how do we work together to
close those gaps.”
This is essential as it shifts the conversation away from products which should be bought, into a conversation around a specific
outcome that should be achieved.
The challenge is getting the commitment right on both sides. This includes what needs to be provided to the vendor in order for them to deliver the product smoothly, “but equally, what’s expected of them, how we hold them to account and how to make sure
they’re delivering on those expectations.”
Occasionally (and inevitably) things don’t always go to plan. But Delooze argues that managing these hiccups in an effective way can serve to reinforce the strength of a partnership rather than undermine it.
“For instance, one of our partners has been experiencing regular DDOS attacks over the past year. A number of their customers including us have been impacted by these attacks. The key for us is not just to sit there waving the contract at them and say ‘this
hasn’t worked.’ The key is to work with them, to help them understand and resolve or minimise the problems being faced. Their problem is our problem in many respects, and we're accountable to make sure that our members get the great service they expect from
us.”
How to manage a portfolio of vendors
Increasingly, financial institutions are struggling to build their payments business through just a handful of vendors, which can result in almost a patchwork of vendors supporting a firm’s system.
Unfortunately, Nottingham explains, with this large number of vendors to handle, institutions reach a tipping point where the number of these relationships (which need to be managed) can become detrimental. In fact, having too many vendors can prove to be
a disadvantage as the institution “essentially becomes a system integrator that spends its time managing vendors and does not have a single view of its operations,” she continues.
It is always worth taking stock of the resources available to you and your incumbents’ capabilities before searching elsewhere to avoid unnecessarily adding to your vendor portfolio, Nottingham notes. “Logical as it may sound, unfortunately we are seeing
the opposite behaviours where it has become trendy to grow your vendor portfolio.”
If a financial institution has no choice but to source a new partner, Nottingham states, “it is imperative that the underlying, mission-critical payments platform has superb integration capabilities to effectively engage with other long- and short-term partners.”
OakNorth Bank has adopted a tiered structure for managing its 100+ technology vendors. These tiers are categorised in line with how critical the vendor’s solution is to its business processes.
“We have segregated them across four tiers, and the way we look at it is (of course) tier one representing the most critical solutions. This means those which cannot go down from a customer experience viewpoint such as AWS and Mambu which provides our core
banking system. From tier one vendors we expect nothing less than 100% uptime.”
These tiers also relate to the length and nature of how contractual agreements are determined. For OakNorth Bank tier one vendors typically boast a long term engagement with 36-60 month horizons. Tier two vendors which Prasad explains are considered important
but not critical from a service standpoint tend to have 1-3 year horizons.
“We do however insist on break clauses so that if the technology is fleeting – as we’ve seen over the last few years – we have the option of latching on to better technologies. There is no perfect science here, it is more of an art form.”
Delooze explains that Nationwide’s approach to managing its portfolio of vendors centres on the need for optionality.
“Big organisations will typically work with multiple vendors as we don't like to put all our eggs in one basket. Our board would expect me and the team to be really clear on having optionality, and that's important. However you need to get the balance right.”
Optionality for everything would not only be impractical, but prohibitively expensive. This also ties-in to the question around selection of off the shelf solutions versus more bespoke ones.
According to Nottingham, financial institutions must have access to off-the-shelf solutions, particularly when it comes to payments schemes and security standards, however, they “categorically cannot have off-the-shelf innovation.”
“Obviously, there is cost associated with bespoke solutions, but in a highly competitive and saturated market, the cost of not having a USP is destructive. In comparison with legacy systems, these days modern platforms offer such significant levels of vendor
independence that tailored products can be launched to the market at a fraction of the cost.”
Delooze notes that while there are often gaps between off-the-shelf solutions and what Nationwide may need, tailored solutions are typically expensive and can take a long time to implement.
“I tend to favour a different approach, which is to look at a product and then say, if it does not do what we need, can we change our processes rather than changing the technology?”
“We favour a view that tries to keep technology vanilla as possible, as close to industry standards as we can. We therefore attempt to use products that are as close to the off-the-shelf as possible. If there is a need for it to be tailored, we ask if there
is a good business case to do so. The more you bespoke things, the harder they are to maintain, and the more expensive they are to maintain long term.”
Finding balance with optionality lies in standardisation. Delooze argues that especially when talking to multiple vendors and trying to get technologies from different organisations to work together, standards are key.
“It’s really important that everything we choose technology-wise adheres to industry standards. This is particularly so in areas like payments there are so many different standards and different guardrails that we work with.”
How can vendor lock-in be avoided?
Contextualising the very real challenge of vendor lock-in, Nottingham says that that many established banks use core systems that have been around since the 1980s, and these banks are very reluctant to replace them. While it’s possible to plan for exit strategies,
without a drastic change to vendor circumstances these strategies are rarely enacted.
“The more mission-critical your system is, the longer you’ve had it, the more you have integrated with it and the more you have built on it - the more difficult it will be to replace, regardless of the vendor’s actions.”
Noting that while there are nefarious vendors which attempt to lock-in clients to exploit the relationship, vendor lock-in tends to more commonly occur over time. The best strategy, therefore, is to invest in long-term partnerships with companies that not
only have the right future-proof technology, but also the right attitude to partnerships and the expertise. “Exit strategies are for short-term partners that are easy to navigate in and out of, with the right core platform in place.”
Delooze believes that standardisation plays a key role in avoiding vendor lock-in, as the more bespoke, the more variance away from the standard, a given piece of technology may be, the harder it is to swap something out and replace it with another product
or another vendor.
“For Nationwide, every time we implement something we really need to understand what is and isn’t standard, and then work around the edge of that to make it work. Additionally, we do insist on being very clear about our exit strategies.”
With material outsourcing agreements, Delooze explains that Nationwide works closely with regulators to ensure that they are comfortable with the building society’s implementation and overall strategy – which includes clear exit plan.
“Part of that is designing and testing an exit strategy, to know that if something goes wrong inside a particular vendor or organisation, we would know how to step away from that vendor and switch to another smoothly.”
When asked whether he views vendor lock in as a true concern for financial institutions, Prasad explains: “It’s like the housing market right now, folks who are on the red movable renters, versus those who are landlords. There is always that question of
whether its better to be locked in or not.”
Noting that there are pros and cons to both scenarios, he believes that ultimately the decision should be dictated by how it fits with the firm’s overarching business and technology strategy.
“While many vendors tend to prefer having the security of lock-in, I'm not personally a big fan of it lock-in. Openness is important, and I love the ‘pay-as-you-go’ model which allows you to leave when you want.”
“The good part for OakNorth Bank is that we are seeing both sides of the equation and I think as long as both parties are feel as though it’s a fair agreement, it can be a good approach.”
The most important factors for a mutually beneficial partnership
Offering three final factors which he sees in a mutually beneficial partnership, Prasad notes:
- Transparency: ensuring the vendors are accurately saying what they're good at, and demonstrating that by walking the walk.
- Flexibility in pricing: often vendors come by and say okay, we have A-Z features and that is why it’s this price. I might respond by saying – that’s great that you have 100 features, but I know that we only need say ten of those features. Good vendors
recognise this and are flexible with the price.
- Speed: the ability to quickly gel well with what we are trying to do as an organisation, and aligning it to our mission is hugely important for us especially as a fintech.
Delooze echoes Prasad’s observations, adding that there is an imperative need for willingness to work together and collaborate. On top of this, he believes that the best partnerships are those in which both sides recognise the ultimate goal.
“We know that software companies and technology companies exist to deliver great services and products, and they want to make a profit at the end of the day. Equally, we as the buyer of these products should get what we expect – what is agreed to when we
sit down when we draw up the contract.”
Recognising the mutual benefit aspect of each party getting something out of the relationship is very important concludes Delooze, and if things go wrong, there must be a “willingness to work together to get us back to a place where we both win. At the heart
of most relationships, it has to work for both sides. That is really important.”
This thinking is emphasised by Nottingham, who argues that in a true partnership there must be understanding on both sides, as it would be ill-considered to simply “do what we’re told” as vendors like Compass Plus have extensive relevant experience. This
does however need to align with the institution’s deep knowledge of their customer requirements.
“Let’s face it, a dictatorship-style relationship, led by either the vendor or the FI, benefits no-one - it is how you work together to deal with unexpected issues that ensures a successful partnership.”