Technology lets new banks get up and running in record time. What do challenger banks and neobanks portend for the industry in the long term?
Rome wasn’t built in a day; but thanks to cloud computing and application programming interfaces (APIs), building a bank from scratch is no longer as costly and time-consuming as it once was. Using software as a service—in which a third party hosts applications and makes them available for a subscription—to create fully cloud-based, digital core banking platforms, digital-only “neobanks” like Starling, Monzo and N26 are changing the rules of the game. Their digital- and API-first approach means, from an IT perspective at least, they can be up and running in a matter of weeks instead of months.
“It’s like flicking a switch,” says Ricardo Zuasti, chief product officer at Technisys, whose core banking solution was used by Brazil’s Banco Original to bring its 100% digital bank to market.
“We needed a platform allowing the launch of the bank to the market in record time,” said Wanderley Baccalá, then CIO of Banco Original, in a 2017 company statement “The solution of Technisys was an accelerator for us.”
Banco Original has been described by FICO as “the most agile digital bank in Brazil for opening a checking account and delivering a credit card,” all of which can be done via a mobile phone.
Once upon a time, rolling out financial applications like lending, mortgages, investments, cards or payments would have taken a team of in-house software developers months. Now, thanks to the flexibility and agility of cloud-based solutions, combined with the new world of open APIs, launching such new financial products or services is as simple as “plugging in” an app from a third-party provider.
“Five to 10 years ago, the IT part would have been too expensive for a lot of neobanks,” says Mark Gunning, global business solutions director at Temenos, a core banking software provider that decided eight years ago to change the way it built its software: putting everything in the cloud. Temenos has worked with more than a dozen challenger or neobanks, including Judo, an Australian lender to small and medium-sized enterprises; Volt Bank, which is retail-focused, also Australian; Varo Money in the US; Pepper, Bank Leumi’s online bank; and Santander’s Openbank.
The speed, elasticity and flexibility offered by the cloud meant it took just five to six months to set up Judo Bank, “Implementing the actual software took two weeks,” Gunning says. “No big upfront IT investment was required. The software system is preconfigured so they can provision environments almost immediately, which makes implementation more flexible. It’s easy for them to expand, as our software does anything a universal bank would want to do.”
Scrambling to Catch Up
The speed and affordability of establishing a neobank in the new environment affords new entrants a greater chance to establish themselves, at least in the near term; since traditional banks, which are more tightly regulated, have been slower to embrace the cloud. “Five years ago, nobody wanted to do cloud,” says Eric Garretson, CFO and fintech strategy leader at NBKC Bank in Kansas City. “It wasn’t seen as secure.”
This has changed dramatically, however. “Since 2009, we’ve seen a clear trend towards greater cloud adoption, coupled with less resistance, across all types of banks in all regions and for most types of software applications,” says Gunning. “While it may have taken banks longer than other industries to warm to the cloud, the cloud is now mainstream.”
Traditional banks now recognize that the cloud needs to form part of their digital strategy to have any chance of competing against more technologically nimble neobanks. Magdalena Mielcarz, head of Europe, Middle East and Africa digital channels and enterprise services for Citi Treasury and Trade Solutions, says that over the next few years, Citi will gradually move from monolithic legacy IT platforms to a more modular, “microservices”-oriented architecture that can be more easily deployed into a cloud-based environment, affording greater flexibility and speed to respond to customer needs.
Adding a new layer of technology doesn’t automatically make a bank more innovative, however; culture and mindset also need to change. Executives at Banco Original were asked to “change their mindset to being 100% digital,” says Baccalá.
“You need to understand how technology is changing your business, but you need the culture to bring it to market,” says Megan Caywood, formerly chief platform officer at challenger Starling Bank and now managing director and global head of digital strategy at Barclays.
Santander has been at the forefront of digital banking, launching the first iteration of its online banking system, OpenVia, in 1997, expanding in subsequent years to offer online investment and pension management, brokerage services and more. To spearhead its next digital transformation and maintain that leading edge against new challengers, Santander looked to the big tech companies for a new chief digital and innovation officer. In 2017, it appointed Lindsey Argalas, who hails from Silicon Valley, where she had transformed software company Intuit into a global, cloud-driven product and platform company. Ana Botín, Santander’s executive chairman, clearly hopes Argalas can transform this family-owned bank into a technology giant. At Money 20/20 Europe in June, Argalas said Santander was taking deliberate measures to disrupt itself. The bank recently opened an office in Silicon Valley. Santander is recruiting 400 technology staff, including Java, Android and iOS developers, as well as artificial intelligence and data engineers, for its Brazilian business. Brazilian operations account for about 30% of the $2 billion the bank has budgeted globally to drive its digital transformation.
While traditional banks like Citi and Santander scramble to stay competitive, financial software providers are rushing to market with offerings that allow both traditional banks and neobanks to build on the cloud transition more quickly and easily. Signaling that the days of on-premises software may be numbered, Finastra announced its new platform-as-a-service, FusionFabric.cloud, in early May. The solution opens its core systems up to authorized third parties, so they can more easily develop applications on top.
“The future of finance is open ecosystems and APIs,” says Finastra CEO Simon Paris. “Collaboration is the new innovation.”