European fintech innovation: from build vs buy, to a hybrid model

With the global banking system largely rooted in three primary core technology stacks, all of which were initially developed in the 1980s, it's no secret that banks lack the ability to scale on legacy architecture.

This leads to the overarching question across the industry: Should we spend an extraordinary amount of time and money on research and development to engineer an in-house technology solution, or should we buy a ready-made fintech solution or corporate carve-out that can be immediately integrated into our operations? Simply put, there is no right or wrong answer.

Some larger banks, particularly those free of budget constraints, may choose to build technology stacks themselves - though this is growing increasingly rare. The upsides of this scenario include obtaining the precise capabilities that work within the financial institution's ecosystem, and maintaining control over when and how to roll out new products. However, the potential pitfall  ? beyond time and cost - includes the near-immediate risk of this technology becoming dated.

As banks ponder their choices, customer demand continues to evolve. Rather than risking the wait in the queue among other banks looking to develop a personalised product, there is another option for banks that allows them to take advantage of the best of both worlds - buy and build. A hybrid approach means outsourcing the technology stack but looking for a solution that is future-proofed and adaptable, so the bank can leverage that technology to customise financial and payment products in-house.

This hybrid option provides banks with the ability to lean on fintech specialists to provide a framework for banking and payments without needing to pull internal resources, re-staff or pivot their strategies. Once the technology is integrated via APIs - thanks to the capabilities afforded through PSD2 - the bank gains full control of how to leverage that technology to innovate based on the needs of its customers.

Fulfilling these needs is key in today's day and age. Recent research by J.D. Power revealed that the pressure on digital banking induced by the impact of Covid-19 has led to significant customer satisfaction declines in digital experiences.

As they enter the post-pandemic-era, banks are expected to seamlessly adapt to customer demands for mobile banking, digital lending and tokenised and real time payments. With fintechs disrupting legacy models and rapidly gaining market share among the ?Wallstreetbets? generation of younger financial consumers, banks have a particularly heightened sense of urgency in their approach to modernisation.

Reaching the peak of the innovation curve could be a mountain that banks are constantly climbing, or they could choose a partner that will accelerate their efforts. A hybrid partnership approach allows banks to lower their cost to market while maintaining control of their products. Selecting the right partner is critical in adopting a highly customisable solution in which the bank is allowed to determine exactly how to use it.

There is a strong case to be made for a hybrid approach, but whether a bank buys or builds, one thing is certain - they must modernise to keep up with demand for digital capabilities or risk falling behind.

Click here to find out more about Episode Six's hybrid approach, or email Katrina Beckwith.

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