By Ravi Pratap Singh, Executive Director and President – Products, Nucleus Software
The Financial Services industry came number two on a recent Inc.com survey to identify “The top 5 industries for disruptive growth in 2015.” When people think of disruption and financial services, the rise of thousands of fintechs (start-ups in the financial technologies space) comes to mind.
According to Ernst and Young’s first Fintech Adoption Index based on a survey of 10,131 “digitally active” consumers in Australia, Canada, Hong Kong, Singapore, the UK and the US, 15.5% of the respondents had used at least two fintech services – financial services products developed by non-bank, non-insurance or online companies — in the past six months. The survey also found that adoption rates among digitally active consumers could potentially double within the next 12 months. Research by Traxcn (a data analytics company) states that there are over 750 fintech companies in India, out of which, 174 were launched in 2015.
It is easy to understand the proliferation of these fintech players. Customers today are demanding; they are tech-savvy, thanks to the explosion in device usage as well as near ubiquitous access to the Internet. The internet and mobile have changed the way people interact with each other, travel, shop and eat. And now customers are looking for the same experience when they carry out their financial transactions as well. Many banks are struggling to deliver what their customers want.
This is the gap that the nimble and technology-savvy fintechs are seeking to exploit. Unencumbered by the legacy infrastructures that banks need to deal with, these start-ups are seeking to disrupt the incumbents with better technology and a greater focus on customer experience. From payments to wealth management to peer-to-peer lending to crowdfunding, a new generation of startups are disrupting the financial services sector. Companies like Paytm, Capital Float and Lendingkart are fast gaining acceptance in India.
In the lending space, consumers, small businesses and entrepreneurs alike are turning to alternative lenders for credit. They value convenience, mobile support and ease of use. Lendingkart, for instance, not only enables its customers to complete the entire loan process online without human intervention, but it also allows for instant decisions on loan eligibility by analyzing the customer’s real creditworthiness and cash flows.
For their part, banks’ response this threat has been to question the regulatory compliance of Fintech players, demanding that they be brought under the purview of regulators. While this is a valid reaction from banks, because the services offered by these fintechs are just so new and disruptive they often dodge regulatory issues, it doesn’t address the underlying issue.
The fact is that customers want these services. So, the banks’ resources may well be better spent trying to fix their own technology backend to enable them to offer similar services, rather than spending too much effort on the regulatory aspect. Ageing, inflexible IT systems, often decades old, written in archaic computer languages few people understand are the bigger threat- not the fintechs. Therefore, technology transformation has to be the number 1 focus.
Legacy IT systems are ill-equipped to handle today’s requirements
Despite being one of the early adopters of enterprise technology, the Indian banking sector seems to have missed the boat when it comes to newer technologies such as cloud and analytics. Most banking organizations in India still rely on complex, old technologies that simply do not provide the scalability and flexibility they need to support growing transaction volumes and changing business needs.
But the biggest problem caused by legacy systems is that they severely inhibit customer engagement strategies, they make it harder to launch new products and support the channels customers demand. Historically, the focus of enterprise technology has been on automation and simplifying processes in the backend, or to put it another way they have been focused on efficiency. Since legacy banking systems are designed to improve processes rather than promote customer engagement, information in these systems is present in siloes that cannot interact easily. As a result, they restrict banks from getting the 360-degree view of the customer that is crucial in order to take customer experience to the next level.
Legacy systems are neither equipped to offer a complete/integrated view of customers nor do they support multichannel / omni-channel engagement or allow for real time engagement. More crucially, legacy systems were designed for a different era, before the internet, before smartphones and before social media. The pace of change – in technology and customer requirements – is simply too fast for legacy systems.
The good news is that today’s technology solutions are sophisticated enough to seamlessly integrate with a range of legacy solutions. For instance, if the bank wants to transform its lending operations, cutting edge lending solutions built with a modular design exist. These solutions enable the bank to deploy the components it needs when it needs them – be it loan origination, loan management or collections. Augmenting the legacy system with such technology would therefore help banks to create and launch a new loan product in a matter of minutes, simplify and shorten the loan approval cycle, thereby helping the bank to deliver a market leading, omni-channel customer experience.
Coupled with the banks’ inherent advantages such as scale and existing customer relationships, such a strategic technology augmentation can really empower banks to beat the fintechs.
Build or buy?
While the idea of building your own customized IT solution seems appealing at first, it is in fact fraught with risks and is often too slow in delivering value. Additionally, no matter how good your solution is, it will become legacy in the future if it can’t be easily upgraded every few years.
Banks would therefore be better placed investing in packaged software rather than trying to build their own in-house system. Not only is packaged software much faster to implement, it is also easy to upgrade. Additionally it brings with it best practices from the world’s leading banks, something that is almost impossible to get if you’re building your own software.
A sense of urgency
The most successful banks in the future will be those that understand the tremendous power of technology and use it to transform their businesses. The best time to transform was three years ago. The second best time is now.