A recent survey conducted by Accenture leaves little doubt: the future of finance lies in the cloud. Even seemingly sedate institutions such as banks are determined to migrate most of their core functions away from their mainframes. 82% will operate more than half of their workload in the public cloud in the next ten years (in fact, almost a third already does). This represents a massive shift in IT strategies over the course of just a few years. The main reason? The agility and speed of cloud-based core systems. 

In INCAT we believe that agility and speed are only some – although important – properties that cloud-based core banking systems should boast. When we were designing BOS – our flagship core banking engine, we decided to offer to the market much more than just agility and speed. We decided that full flexibility would be something that will make our system stands out. And flexibility itself became a part of the DNA of our product.

After many years of developing our system, we have identified 4 key areas that have to be covered if the core banking system is to be considered fully flexible: 

  • technology: IT solutions that allow for scalability in both quantitative and qualitative aspects, 
  • functionality: ability to easily shape and modify the customer stories to perfectly fit customer’s needs and the company’s marketing strategy, 
  • implementation: an agile approach to launch and system development, 
  • business: pricing adapted to the scale of operations.

THE FOUNDATION: FLEXIBLE FUNCTIONALITY

Choosing the core IT system is vital to the success of a fintech startup or a challenger bank. Not only must this crucial system allow for crafting products aligned with current marketing strategy and consumer preferences, but it also has to enable adaptation as they change in the future. Also, the ever-evolving technological landscape and regulatory environment require constant, sometimes swift adjustments and product modifications. 

Many fintech brands start with a very limited product portfolio, oftentimes limited to a single product with a breakthrough in its service. While such a focus on perfecting a product is beneficial at the early stages, it may become a barrier to growth when customer numbers increase. Take Revolut – a company that started off as a money transfer and currency exchange is now a full-fledged neobank with 18 million customers, boasting dozens of products, including personal and corporate current accounts, deposits, loans and Mastercard and Visa payment cards. 

While hardly any new player to the market will have a precise, predetermined path of product growth, most will need a possibility to evolve inscribed into its core system. This should be possible via both proprietary modules, supporting all the core banking products (accounts, payments, deposits, loans etc.) and fully documented APIs, allowing for integration with third party solutions. 

BOS does it all. Thanks to its Customer Stories concept, fintechs that run it as a core system can offer their customers banking products ranging from payments, savings through loans based on a foundation of the general ledger. Whether they need the full variety or just the selected product, BOS will suit their needs.

 

TECHNOLOGY MUST BE UP TO THE TASK

All of these require adequate technological solutions – APIs being only one of them. Deploying the core banking system in the cloud is probably the most vital when it comes to scalability. Unlike mainframe systems, cloud-based ones easily and effortlessly adapt to fluctuating workload, be it a sudden growth or a significant decrease. Hardware ceases to set limits for operations: cloud-based core banking systems can serve 10 million customers as easily as it just served 10 thousand. Even though it’s hardware, it still can – and should – be flexible.

Source of data: survey by Accenture, as published in Altimeter vol. 4, The great cloud mainframe migration: what banks need to know

 

Another key feature technology-wise that fintechs and challenger banks should be on the lookout for when choosing a back-end system is a microservices architecture. Not only does it further increase scalability, but it also allows for smooth and simple functionality development. Microservices-based systems also tend to be more resilient and potential issues are easily isolated and fixed. 

Also, there are things that should go without saying – but surprisingly often don’t. In today’s world, when customers access their financial services 24/7, fintechs should be able to provide them with virtually 100% availability. Gone should be the weekend upgrade breaks or downtimes of any other nature.

KEY TO IMPLEMENTATION: AGILITY

The phrase “time is money” is probably even more true than it has ever been: months or even weeks can mean the difference between success and business failure. Thus the dominant MVP-oriented approach among startups, also including those in the financial sector. Product definitions are outlined in general terms and detailed only as the project is already ongoing. Agility is no longer avant-garde or nice-to-have: it’s a prerequisite for survival.  Thus, when choosing core banking solution providers, challenger banks and fintechs should be looking for companies that can fit into this regime. The ability to launch a product within weeks of project start can spell a market win.
This of course requires full support and partnership from IT solutions providers.  In INCAT we understand it perfectly and we make our implementation team fully available to our customers. And last – but definitely not least – is the business aspect.

 

BUSINESS MODEL ALIGNED TO STARTUP’S NEEDS ALIGNMENT

Deploying a core banking system can present significant business risk, as it often means high initial investment and significant monthly overheads. These in turn have to be counter-balanced by adequately high sales and margins, which may be challenging for a newcomer. According to Statista.com data, there were over 26 thousand fintech startups globally, as of November 2021. It’s a 26% percent rise when compared to 2020, and a whopping – 116% –  leap from 2019. 

The twofold rise over the last two years represents both the sector’s attractiveness and lower costs of entry, but the sheer number of players shows how competitive the market has become. If a fintech is not able to start off light, its chances of success – or even survival – grow slim. The possibility to build a business over a core banking system with flexible price plans, with relatively low initial investment and price tiers based on scale of operations (e.g. the number of customers, accounts or transactions) can make the business case solid and as safe as it can be in today’s environment.

 

ABOUT THE AUTHOR: 

Zdzisław Grochowicz is Head of Business Development at INCAT Sp. z o.o.
Zdzisław has been involved in banking and financial sector for almost 30 years. Previously, he worked for Comparex Ltd. For many years he was also associated with the Sygnity S.A. – where he played numerous roles.  
Zdzisław Grochowicz graduated from the Electrical Engineering at Szczecin University of Technology. 

Contact an author: zdzislaw.grochowicz@incat.com.pl