Buy versus build is a dilemma for those seeking to provide an effective and innovative digital banking app, but a third option offers them the best of both worlds says Ben Goldin, founder and CEO of Plumery, the digital banking platform.

Here, Goldin explains that buy versus build is a dilemma for those seeking to provide an effective and innovative digital banking app, but also explores a third option that offers them the best of both worlds.
Ben Goldin, founder and CEO of Plumery

For an industry long regarded as staid, banks and the nature of banking are transforming at an accelerated rate through digitisation. At the time of writing Zopa’s online bank has just welcomed its millionth customer three years from launching; Malaysia’s first digital operation, GXBank, is making its debut and UK banking licences have been approved for fintechs Adyen and Perenna.

Increasingly, the speed with which banks can anticipate consumer needs and innovate now determines their success. Take the example of Monzo Bank, which launched only eight years ago, but had expanded into business banking within five years and from this month is adding an investment feature that gives users access to a number of funds managed by BlackRock.

AI, which has been a buzzphrase for years, is already used for expanding customer services and improving the safety of transactions, better loan approval processes, helping customers via early alerts to avoid overdrafts and also to deploy their money more efficiently and out of low-interest accounts. Increasingly, it can be fine-tuned to provide highly personalised insights and spending predictions.

This ongoing process of creative disruption will continue for several more years, a period that will determine which long-established banks and newer competitors are still at the forefront of the digital banking pack and those that either fall behind or retire hurt.

By the end of the 2020s, when banks’ exit from brick-and-mortar high street branches will be in its final stages, digitisation will have brought about the complete self-serving of our financial lives and needs. Mobile is already established as the dominant banking channel of those aged under 65, while older consumers are increasingly comfortable with using the Web to bank online.

Buy versus build

To keep one step ahead, the question for both the incumbent banks and their newer rivals is do they have enough of a nuanced view of where to ‘buy’ versus ‘build’ to ensure growth capital is allocated to deliver maximum bang-for-buck. What technology choices and investments will return the maximum competitive advantage to them?

Radically – and swiftly – reinventing their offerings could prove particularly challenging for many building societies and smaller regional banks, although some are responding robustly such as Newcastle Building Society, which is focused on helping cashless communities and high streets via the in-branch OneBanx kiosk. For those with greater resources at their disposal, the ‘buy or build’ debate will be influenced by various criteria.

For banks, neobanks and other financial service providers, launching a digital solution – or enhancing the appeal of an existing one – means diverting already-stretched IT teams that work overtime simply to ‘keep the lights on’ and meet day-to-day demands such as compliance with regulation. Reports confirm that product development is being impacted as banks attempt to get new products and services swiftly in response to customer demand.

Laying on more manpower in perpetuity to augment the team might seem an option but it is a costly one and it is a well-known phenomenon that scaling up engineers has a precipitous diminishing return. Nor is the timing ideal: as demand for skilled software developers grows, the IT industry is expected to face a shortfall of four million developers by 2025 and nearly 200,000 developer jobs will need filling annually by the end of the decade.

Amplifying the power of each engineer to deliver much more is a far more impactful alternative for any financial institution seeking to ‘move the needle’.

Regular continuous innovation

Given these obstacles, the option of using a traditional off-the-shelf digital banking platform has appeal. Why waste money reinventing the wheel, when off-the-shelf is cheaper to buy and cheaper to run? Yet none of the leading digital-first banks opt for entirely off-the-shelf solutions. Much as with buying a suit until now they have not provided as comfortable a fit as one that is made-to-measure.

The logical alternative to purchasing a standard off-the-shelf solution – but one unexplored until recently – sits midway between the buy versus build options for a digital banking offering. To gain the best of worlds, the bank can buy a service layer for its digital app that isn’t bundled with the presentation layer. Instead, the bank retains the presentation element and the ability to control and direct its digital offering. This approach is called ‘headless’ and has already been adopted by the e-commerce industry with a huge positive impact. Technology is used as the enabler for the bank to develop its own capabilities faster and more easily and to focus on improving the customer experience.

Why does this third option work better? In short, because the presentation layer, in the form of the web or mobile app seen by customers, is the bank’s equivalent of a shop window. By contrast, the service layer is the bank’s stock room. At the same time, providing a staging area to ensure that the shop window has what and when it needs, goes relatively unnoticed by the customer. Yet the typical ‘buy’ solution automatically bundles presentations and services in a single package, allowing the bank little scope to differentiate its products and services from those of others.

The power of modern technology

For a digital bank planning to launch an app, while speed is important, the ability to provide a unique experience with differentiated capabilities is of as much importance as that of delivering features as quickly and inexpensively as possible. In this case, it’s less an issue of acquiring features, as looking at the tools engineers need to be highly productive.

In short, rather than a wholesale ‘buy’ or ‘build’ choice, the bank can choose a combination of approaches in a way that suits them best: acquiring table-stake features for low cost and acceleration but retaining the ability to create unique capabilities where it competitively differentiates. I refer to this philosophy as ‘buy for parity, build for competitive advantage’.

The more digitally advanced new entrants, which include Nu, Revolut and Chime, have demonstrated conclusively that modern technology enables businesses to deliver many times more product innovation using a fraction of the resources of legacy organisations.

Future success will depend on the ability to roll out rapid continuous innovation. Megabanks such as HSBC and Barclays might see their market share eroded by the newer entrants but will undoubtedly still be here in 2033. A toolkit that enables businesses to keep pace with those organisations with far higher budgets can help ensure both survival and success in the continuing digitisation race.

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