Industry · 6 min read

Core Banking Digest: Build vs Buy in Banking Technology

Financial services providers find themselves in an increasingly competitive landscape, where the tech stack can make or break the organisation. Modern, cloud-based digital technology has quickly become the norm, and financial institutions need to have a clear strategy in place to digitally transform their business if they have not already done so. 

Despite the leaps and bounds that have been made in technological innovation, the task of modernising old banking systems is one which still causes significant headaches for financial institutions. When undertaking such a project, one question will inevitably arise: “should we build our own software from scratch in-house, or do we buy off-the-shelf solutions from third parties?” 

Naturally, there is no ‘one-size-fits-all’ answer; however, in this article we will highlight the approach that is generally preferred, and explore cases where the traditional ‘build vs buy’ dichotomy need no longer apply. 

Drivers of Change in Financial Services

Having helped numerous financial institutions in their digital transformation journeys, we have been able to broadly identify the main drivers behind the decision to pursue a modern core banking system. 

Lagging behind competition

A common concern for incumbent banks and other FIs is the market share they are losing to more nimble fintechs. Operating on dated legacy systems, the incumbents are unable to match the pace of these new challengers and often find themselves playing catch-up. Compared to modern core banking systems, these legacy platforms are cumbersome to use and difficult to maintain. 

Managing regulatory compliance

This is of particular concern for financial institutions operating across various jurisdictions, as they must adhere to various geo-specific regulations which can be subject to change. Naturally, an agile core banking system is preferred as it allows for quick adjustments to be made. Additionally, legacy systems feature siloed architectures which make regulatory reporting more difficult.

Chasing innovation

Aside from playing catch-up, many financial institutions are in fact keen to get ahead of the curve, and seek to roll out innovative new products and services at pace. 

It’s clear that having a modern core banking system has become mission critical for businesses in the financial services sector. Traditionally, the answer to this had been to design and build these new solutions in-house, but now a new generation of core banking platform providers has emerged. With innovations such as cloud computing and APIs making integration more seamless than ever before, the pendulum has shifted.

Whilst building can provide certain benefits around customisation and control, our work with financial institutions of all sizes has led us to the conclusion that outsourcing technology to a proven provider is, for a number of reasons, usually the best path.

The Case for Building Banking Technology

With the availability of modern, cloud-based core banking platforms, the case for building banking technology has become less and less relevant, to the point where use cases supporting the build argument are limited. There are, of course, certain benefits to the build approach, such as greater scope for customised capabilities and control over desired functionality. However, when weighed against the short and long term costs, many of which are hidden at first glance, the case for build is a weak one.  

The Case for Buying Banking Technology

FIs tend to be slow adopters and big on tradition, but this slow, conservative approach is no longer feasible. Whether chasing competition, complying with regulatory requirements, or seeking out innovation, the ability to act quickly while conserving resources is paramount.

With modern core banking providers, FIs no longer have to commit to lengthy building and implementation processes. These providers enable financial institutions to buy technology and implement it faster, cost effectively and more efficiently. By doing so, ROI is achieved more quickly and, by adopting an incremental approach to transformation, risks are reduced.

There are certain use cases where building is the preferred option, for example, when there is a need to add fully customised capabilities. Ultimately, however, choosing to buy is the more efficient option across all resources: monetary, manpower, and time.

Cost

Over the short and long term, choosing to buy is the more cost effective option. Initial capex for buying a core banking system involves a clearly defined one-time payment, while for building there are a number of variables which drive higher costs, for example: building new infrastructure, hiring new talent, etc. A

Additionally, building comes with the risk of cost overrun (which averages 27% for IT projects), and the price of incremental changes will need to be considered – a factor which is priced into the services of third party providers.

People

Software developers are in increasingly high demand, and any organisation undertaking a build project will need to be acutely aware of the available skillsets within their workforce. A large digital transformation project will undoubtedly require a team of specialised developers and, in certain cases, the talent pool may simply not be there (and if it is, it will be expensive).

By taking a buy approach, organisations can refine their hiring needs and focus on a narrower set of skills, affording them greater flexibility. Core banking platform providers already feature a team of specialists dedicated to maintaining and improving the system.

Time

There’s no way around it: build projects are exceedingly long. The planning stages alone can take months, and any hiring requirements will further lengthen the process. 

By taking a buy approach, the time to market is greatly reduced; especially when adopting an incremental approach to transformation. Additionally, a faster implementation also results in a faster ROI.

Build vs Buy? Both?!

Although the build vs buy argument is often framed as a binary choice, this is not always the case. In fact, in certain situations, a strategy which incorporates elements of built and bought technology can reap the most benefits. A case such as this can arise, for example, when the specific capabilities required by the business are not readily available on the market yet. As with all decisions, it is important to have a clear understanding of your organisation’s goals to decide which approach is best.

Take, for example, Januar, which is utilising Tuum’s platform to offer account and payment solutions to crypto businesses, but still opted to build its own customer channels. By doing so, Januar is able to leverage the capabilities of a modern core banking system, while still owning the entire customer journey.

Choosing Your Core Banking Vendor

When weighing up the pros and cons of each approach, it is clear that ‘buy’ has a broader appeal. As always, the objectives of the business must be weighed in order to form the right strategy and, in some cases, this can include a combination of the two. Indeed, even tech giants such as Google and Amazon outsource some of the capabilities they cannot build or those which are deemed as outside of their core competencies.

For those that make the decision to buy, inevitably another challenging question arises: from whom should we buy? Fortunately, we have taken an in-depth look into the considerations which need to be made when choosing a core banking provider, download our whitepaper for all the insights.

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