Partnership: a success model for banks and financial software suppliers

Can banks and their financial software suppliers survive on their own? In the recent past, which was less technically complex, less volatile and with less frequent regulatory change, they could. But today is different. Technology is changing and evolving at a faster rate, with trends such as Open Banking, AI and cloud combining to democratize capabilities that were once the preserve of massive institutions. Today, new banks can launch as fully formed digital challengers with cutting-edge customer offers in just 100 days. Yet we estimate it’s likely to cost a large bank in the region of €2bn to re-architect itself. How can a large incumbent weighed down by its systems compete with fast-moving newcomers?

Cost pressures are mounting, too, with demands that tech expenditure should always be linked to ROI. That’s tough to achieve when just maintaining business as usual is itself a huge cost. And then there’s external disruption from constantly evolving regulatory demands. The LIBOR transition alone is estimated to cost each major bank $100m and on average, around 10% of banks’ IT spend is dedicated to managing regulatory change. Meanwhile all pressures on banks and vendors are amplified by the current pandemic, which is battering bank profits while simultaneously forcing financial institutions to pivot immediately to remote working and digital provision.

Against this backdrop of complexity, the traditional software and services model can struggle to help banks deal with some of their most pressing priorities: reducing risk, simplifying architectures, changing business models and upgrading legacy systems. We believe that a partnership model built on shared outcomes offers an ideal way forward for banks and vendors looking to prosper. Two simple examples illustrate why:

• Because of security concerns, system monitoring interventions were typically on the customer side, and largely on-premise. Today’s secure access means vendors can routinely carry out remote monitoring of banks’ core systems. This is convenient for the COVID world, of course. But it goes further. With 24/7 remote monitoring as part of a close partnership, vendors can shift to a proactive model, identifying potential issues before they arise, getting visibility of downstream problems and paving the way for smoother maintenance and easier upgrades. They work in step with the bank’s priorities.
• Upgrades are another area where partnership can change the game. With a heavily customized in-house system, testing an upgrade can become a full-blown retest, tying up a great deal of IT resource. Typically, testing is the single biggest part of an upgrade project, with IT time split 30/70 between checking interfaces and testing new versions. Under a service-based model such as the one Finastra operates, UAT test cases can be built in partnership with a vendor and then automated, reducing costs and increasing speed. In this model, while banks will of course pay the vendor for automated testing, they will nonetheless spend less overall than under the traditional in-house testing model.

The kind of support offered by remote monitoring and automated testing can be part of a managed service model, which is proving to be an attractive and effective partnership model for many institutions. The end goal of this model is simple: systems that are always on, always upgrading, always working well and able to adapt easily to changing business models. For banks, managed services is about much more than outsourcing – although it can of course enable them to outsource a whole host of tasks to vendors: application management, UAT, application support, incident management, change control, disaster recovery – even user training. Managed services can become an outcome-oriented partnership, where bank and vendor share goals and incentives, run joint teams and ensure both solutions and processes are optimized for one another.

It’s under this kind of partnership that banks and software vendors can thrive amidst today’s complexity: alone, they will struggle.

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