Big banks can level the innovation playing field

The Situation: Big banks can only dream of the agility that start-up rivals have. Financial services leaders may cast an envious eye toward the fast-paced autonomous teams at the likes of Spotify. But when your environment is highly regulated, the chances of using autonomous teams in any form of a scaled agile approach rapidly collapse under the weight of the regulators’ need to know that every team is being compliant.

Michael Anyfantakis believes there are ways to level this innovation playing field, drawing from his long experiences in product design and architecture at major UK retail banks, and on building a fully regulated bank, from home, during the pandemic, in 18 months.

Digital banks’ pace of innovation threatens traditional banks

The arrival of digital banks such as Monzo, Revolut, and Starling in the UK shook established banks. The speed with which they could get to market took many by surprise.

Their ways of working made the most of cloud and SaaS to rapidly develop digital products and services in line with the emerging customer needs they sought to serve. The established banks’ scale and legacy technology slowed their ability to respond.

As the digital banks broke through, Anyfantakis was among those trying to understand how the major retail bank he worked for could digitally transform to be more like the new kids on the block. The reality of a very large, complex institution with significant process controls and matrix management meant that progress proved slow, even in tech development. He estimates it was as much as 100 times less productive than a start-up.

Look beyond technology—business and operations must change, too

One approach was the internal “greenfield” start-up. RBS Bank (for example) came up with Mettle. That model was something Anyfantakis was keen to explore, but much of the new agility required a commitment to the cloud, and back then (in 2017), few banks were interested in the public cloud. The greenfield approach also raised the question of how to reintegrate its outcomes into the main business.

Anyfantakis’ team felt it was not just a question of updating technology; the business and operations models would also need to change. However, the bank decided its focus should be on simplifying its technology estate to create significant cost savings and drive an improved cost-to-income ratio rather than looking for new business opportunities by changing the model.

Exhibit 1: HFS identified four models for digital transformation in BFSI firms—all with different needs

*“Speedboating” coined by Mambu
Source: HFS Research, 2022

Use the power of cloud-native SaaS to deliver rapid transformation

It became clear to Anyfantakis that the UK big bank he worked for at the time was not ready to adopt the greenfield “speedboat” approach in Exhibit 1, at least not one with its own business model and separate go-to-market plans. In Europe, the opportunity to transform a traditional bank was emerging. Anyfantakis moved to Amsterdam Trade Bank (ATB) with a mission to use the power of cloud-native SaaS to transform it from a traditional commercial lending bank into a new fintech—Fibr—a digital business bank to support small and medium enterprises throughout Europe.

Spoiler alert: Fibr’s story does not end well. Owner ATB had Russian shareholders, and sanctions imposed because of the war in Ukraine resulted in what the court described as “a solvent and healthy business” being placed into bankruptcy in April this year. Even so, the lessons learned in its build and launch – and the drivers the bank was responding to, remain valid for today’s financial services technology leaders.

In financial services, most established software is still virtualized SaaS (literally, the same old, same old tech, but ported into the cloud) or mainframe. When traditional banks adopt the cloud they tend to run their operations through to application just as they did before. The value from cloud-native architectures and a true service basis offered by the public cloud makes the digital native banks nimbler. For example, changing the hard-coded fields in mainframe core banking for a payment term to accommodate shorter “buy-now, pay-later” payment cycles takes months for legacy systems. It is a rapid tweak for cloud-native core systems such as Mambu or ThoughtMachine.

As Head of Platform for Fibr, Anyfantakis, together with a small team working remotely, was able to piece together a new front-to-back banking platform using Amazon Web Services (AWS) to integrate Mambu, Salesforce FSC, FORM3, Onfido, ComplyAdvantage, Dynamics 365 Finance & Operations, and ABACUS360. The team used Tableau for reporting and Snowflake for data warehousing.

ATB was small and operated with a new management team with a fintech focus and a start-up background. This time, the transformation would not just be about the tech. This time, there would be a new set of products and a new organization.

A fully regulated bank built, from home, during a pandemic, in 18 months

“This opened my mind to the speed we could go. This was a fully regulated banking institution. What was needed was a very small and capable team that made decisions quickly,” said Anyfantakis.

Fibr became a fully regulated bank built in 18 months, from home, during a pandemic, with less than 50 people. This is the pace that using cloud, SaaS, and fintech can deliver. Referring to Exhibit 1, Anyfantakis describes the journey as a combination of “Speedboating” … build the speedboat, then migrate the legacy system to the speedboat.

“We could do this because we were able to quickly select and integrate cloud-native SaaS players,” says Anyfantakis.

The thing that took the longest was all the risk mitigation and compliance verification work the team had to do to ensure all the SaaS partners involved delivered to the regulated standards of the industry.

Faster still—if we could automate the due diligence for cloud and SaaS

What we really need, he added, is to automate or offer as-a-service the completion of all the security, data management, and other control due diligence that would ensure a fully regulated financial services institution could select any SaaS and be fully confident that it complies with all regulations and policies.

It’s an opportunity that some service providers are taking very seriously. For example, IBM’s Cloud for Financial Services offers to handle the onboarding of independent software vendors and partners to the cloud as part of a proposition.

Three challenges big banks should focus on to increase the pace of innovation while remaining compliant

Anyfantakis identifies three challenges for banks to focus on to increase the pace of innovation while remaining compliant.

• Bring the data room approach of M&A to engaging cloud-native SaaS vendors. Industry-level accreditations may act as a shortcut for compliance needs in many industries and even among fintechs and smaller banks, says Anyfantakis, but bigger banks need to see the evidence that led to accreditation. With NDAs signed, if SaaS providers provide the data needed to support the detailed assessment by sourcing and compliance teams, bigger banks would be able to complete the required due diligence process quicker and engage them faster. Speed remains critical when innovating toward market needs.
• Automate and standardize internal development of software. Just as software testing and release have become more automated, banks are introducing standard development patterns-as-code and automated compliance processes to ensure internal teams develop using approved software that meets cybersecurity standards at the speed of automation.
• Use autonomous agile teams, but only where it matters. Not everything needs to be innovated, so not every team needs to be autonomous. Identify the strategic digital products and teams that require ongoing innovation, but also recognize when you are dealing with legacy systems that don’t need changing to continue to do their jobs well. You can design for simple, efficient delivery and reuse. Reserve the benefits and challenges of autonomous teams for those products that must respond at speed to changes in market conditions and ones that have a focus on customer engagement and value delivery.

The Bottom Line: Big banks have the tech, insight and market access to win – if they focus their innovations on customer need

Big banks can access all the tools and technology their newer, smaller rivals have been swifter to adopt. If the big banks also adopt the level of customer focus that the fintechs and digital banks have prioritized, there is no reason why the established players can’t apply their advantages of access to market, and to deep customer insight, to at least level the innovation playing field, if not tip it in their favor.