Keeping up with banking can feel like trying to watch a Star Wars spin-off with too many characters. The latest cohort of fintech innovators includes Ordo, Kasko, Mantl, Kani, and Tuum (respectively a payment processor, product distributor, customer onboarder, reconciliation specialist, and a core banking provider).
The ecosystem is bulging with startups with colourful names but a similar premise: offering a cloud-hosted service, connected via an API, to offer something the bank can’t build internally.
BioCatch is a great example. It monitors behavioural patterns to distinguish between users and criminals. In the first half of 2021 in the UK, criminals stole £754m through fraud, a rise of more than a quarter, so banks are keen to explore any tech they can find. BioCatch is thus booming, signing up 62 customers including Barclays, Citi Ventures and HSBC. BioCatch is cloud-hosted, so there is nothing for the banks to run or maintain. They simply connect via an Application Programming Interface (API).
If banks need, they can outsource every aspect of operations. Options include Thought Machine for the core operating system, Jumio for AI verification, FintechOS for the onboarding interface, Feedzai for fraud detection and so on. A systems integrator such as Synpulse or GFT will build the entire thing if needed.
It has led to an analogy with LEGO. The parts snap together. If a block isn’t working well, rip it out and replace.
The challenge for the industry is to assess how well this works in practice. Investments in fintech average $170bn (£135bn) a year. If banks are offered services but are reluctant to experiment with plug-and-play providers, a lot of that VC cash will be wasted.
The speed of adoption can be exaggerated. “The actual connectivity is straightforward,” says Michael Mueller, CEO of Form3, one of the most high-profile cloud-native payment processors for banks such as Lloyds, Barclays and N26. “We have had clients who received access to our API in the morning, and they managed to get connected in the afternoon.” Yet the timeline is considerably longer.
“Banks are probably as conservative as they’ve ever been,” Mueller says. “But that conservatism is not necessarily rooted in the bank itself, but in the environment that they are operating in. All our bank customers must adhere to strict security, certification and audit criteria. There is no time for risk when dealing with payments that drive the global economy.”
Delays can be frustrating to fintech providers, who are keen to connect to banks as fast as possible. Ivan Maryasin, co-founder and CEO of Monite, a Berlin-based provider of embedded finance systems to banks, confirms there are serious delays: “The typical experience for most fintechs is for a deal with a bank to take 12 to 18 months for something that the decision-maker already approved to materialise. There are all kinds of additional steps such as due diligence, legal compliance, and the list goes on.”
Often, it’s just pointless bureaucracy, says Maryasin. “Currently, it feels there are thousands of unnecessary steps in that process and people from all sorts of departments become involved, even if they will later have nothing to do with the service whatsoever. In the worst case, it prevents them from improving the service. At best, it massively slows integration.”
Neobanks are faster in connecting to third-party services, proving how much traditional banks could improve their performance. “Neobanks are the ones that are very close to this LEGO concept, built from composable blocks and using a lot of their infrastructure as a service. And this gives the opportunity to grow very fast and surpass traditional banks,” Maryasin observes.
How to accelerate the rate of adoption
Three things may accelerate the rate of adoption of new cloud-hosted services. First is competition from fast-moving neobanks. Second, is the attitude of regulators, who are increasingly comfortable with cloud-hosted innovation. And the third is the maturity of banks in dealing with API-connected services – this model is the new normal.
“Banking is becoming more experimental, but we’re still in the early stages,” says Iana Dimitrova, CEO of OpenPayd, which offers banking and payments via an API. “The real experimentation and innovation will come in the next few years.”
She says the potential is there for truly rapid iteration. “Banking-as-a-Service providers really can connect their clients in a matter of days,” she says. “I would compare banking technology to electricity. A hundred years ago, if you wanted a lightbulb in your house it took a team of workers to install all the wiring, sockets, connections and bulbs you needed. Today an electrician can do the same job in under an hour; every component and process has been standardised. This is the change that banking has gone through in the last decade.”
Ultimately, the rise of plug and play for banking will reshape what it means to be a bank. We are on the cusp of true composability, where an entire organisation is composed of third-party services, with all parts able to be switched out. When Banca Mediolanum Group launched Flowe, a new digital-only bank for younger customers, it did so using a composable banking structure based on a core-banking system provided by Temenos. It went live in just five months and attracted 600,000 customers in its first half year.
Varo Bank, another tech-first digital bank in the US, claims to run at 25% of the cost of a traditional bank by a similar approach. It attracted 4 million customers in its first 13 months.
Banking is awash with brilliant new services, from core banking and payments to AI fraud detection and automated ID. The challenge for banks is to accelerate the adoption cycle to make the most of these opportunities. There is a galaxy of innovation out there just waiting to be explored.