Banks embrace external tech to replace in-house systems

By Emma Olsson | 21 February 2020

Banks will seek external software solutions as in-house tech debts increase, according to vendors trying to reduce tech spend.

According to Robert Cooke, chief technology officer and founder of 3Forge, there will be an increase in tech companies creating “holistic” platforms providing full front-end integration. 3Forge consolidates institutions’ front-end infrastructures, targeting tech budgets at three out of the top five global banks, including Morgan Stanley.

“The way I see it is this – vendors are going to keep trying, we're going to keep building software and we're going to keep building systems and keep learning from our mistakes. What doesn’t make sense, and what has to stop, is internal development teams re-building the same software over and over again,” says Cooke.

“And the only solution really is for another company to build a product and then sell that into these institutions, that’s the pattern that makes sense.”

Cooke believes internal developer teams will decrease in size as banks seek external solutions for several, if not all, aspects of their tech.

“Ultimately it has to go this way. I don’t see any other path, because the only other path is to rebuild systems over and over again.”

Concerned with increasing tech budgets, banks have been turning to external solutions to help minimise spending. Nine out of the top 16 banks employ BlueOptima, a company that measures the productivity of developers and quality of software. According to a 2019 report by UBS Labs, tier-1 US banks are spending as much as $11bn on their tech stack.

Vikas Srivastava, chief revenue officer at FX cloud solution provider Integral, says the majority of this spend is focused on maintaining internal software.

“I don’t think it is a matter of the process or the tools used to develop software, I think it is simply a question of all those drivers such as the cost of building it, cost of running it, cost of making sure that you are evolving that software as the market evolves, all of those drivers – you can save probably 80 percent of your cost by using cloud, rather than doing it in-house,” says Srivastava.

Despite banks looking externally for more efficient software solutions, Srivastava doubts that internal solutions will disappear completely. He says automation focuses on manual processes but not the software development process itself.

“When banks are hiring in-house developers to help develop the technology, that is the case when you want to make sure they are efficient. But I would say to some extent that while you will always need developers to do things that are very proprietary to a bank, a lot of other services that a bank needs to run their businesses are not really as proprietary anymore, and we see a trend towards people using cloud-based technology to run the business rather than build it in house…

“Even if there are banks that are using the modern software development techniques that are agile, and some of the software development automation tools, even those are working on something that does not necessarily need to be proprietary.”

Still, the move to external solutions takes time, and banks remain cautious about partnering with tech vendors.

“The biggest criticism that we got with trying to bring in vendor solutions in general is how well do they integrate with the existing processes,” says Cooke.

“A lot of these smaller vendor systems are just designed to kind of be manually installed, manually maintained and not go through these sort of [integration] procedures.”

Srivastava believes the risk associated with implementing an external tech solution is on the decline.

“I think the fear is a lot less than it used to be. At the same time, I would actually say that the risk is lower if you’re already going with a provider that is already using that software to serve hundreds of large institutions and who are using their technology every day to run their business. I would say that the risk of using their software is hugely lower than if you build something from scratch. Just because you build something in-house doesn’t make it risk free; you’d rather use something that is already proven in the battlefield than something that is brand new.”

According to Cooke, many banks attempt to replace an old system but end up with two systems, as the new solution lacks the complete coverage of the original.

“I think the worries that banks have, and rightfully so, is you go to replace the system and you just end up with two systems…

“I think banks are nervous about that, and I think that pattern is something they’re always concerned with. But at the end of the day you have to bite the bullet at some point. These systems have to be replaced.”

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