Sorting out if and how banks should launch a digital bank

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Fintechs may seem to have the upper hand in the digital banking movement, but banks and credit unions of all sizes are not conceding the contest. Some of them are launching their own digital banks, including giants like Goldman Sachs with Marcus, and smaller institutions like Cambridge Savings Bank with Ivy.

Many other banks and credit unions have an interest in doing the same, but getting started is not easy. Jargon alone is a nightmare: build or buy, low code versus no code, platform banking and even the “buy, build, extend and assemble” model.

To compound the confusion, there are important questions often left unanswered in the digital banking conversation. A big one: did all of those banks and credit unions that launched a digital bank hire specialist experts to develop the technology or did they buy a digital banking package from a fintech that can do it faster and better for less ?

Why launching a digital bank could be crucial

Creating a separate digital banking unit is a vital step for banking growth in the 21st century, McKinsey argues in a report. 40% of people use fintechs for their daily financial activities and more than nine out of ten of them are satisfied with the experience.

“Banks must excel on multiple fronts, combining the strengths of an incumbent with the agility of a start-up,” the McKinsey report says. “They also need a unique idea, a top-notch team and a clear path to profitability. None of this is easy. However, banks that achieve the grade are likely to drive performances of the group and, potentially, to create a star of the future.

Read more: How strong is your council’s digital banking technology IQ?

Analyze build or buy strategies

The “build or buy” debate can be applied to any question of banking technology. However, the term is now applied more often to financial institutions interested in developing a separate digital banking subsidiary. “Build” refers to when a bank or credit union hires technology experts to create online banking technology in-house, while “buy” in this sense means purchasing the necessary capabilities from a fintech or another supplier.

McKinsey surveyed banks that have invested in a digital banking subsidiary and found that it takes an average of 15 months to build a digital bank from development to launch and 18 months from launch for a bank to reach the threshold of return on investment. This often requires an investment of $20 million or more before breaking even and an average of 30 employees at launch, although more than half (55%) of new business leaders often come from the central team of the existing bank.

A Harvard Business Review study found that any business would benefit more from purchase on construction given that “companies can reduce innovation time by up to 19% if technology licenses are used as an input in their R&D”.

Digital banking providers, unsurprisingly, support this view. Liz High, Executive Vice President of Nymbus Labs, says The financial brand that buying a pre-packaged digital bank can be easier and much more cost effective for a traditional financial institution looking to raise their game technologically. Nymbus calls its product a “digital bank in a box”.

“It allows us to develop a business case for building one of our digital niche brands or helping a bank invest in their desired market,” says High. Nymbus Labs is currently working with around fifteen financial institutions.

Read more: The most popular digital-only banks in the world

Banking technology firm nCino recommends that banks and credit unions consider purchasing technology, saying financial marketing teams can “benefit from the rapid adoption of new capabilities – typically within 12 months – to respond to immediate needs and market demands”.

“Choosing to purchase your key technology solutions will also help you achieve a faster return on investment (ROI) because implementation costs can be spread over time and a faster implementation cycle means faster delivery. rapid benefits such as internal efficiencies and cost savings, or increased sales and revenue growth,” according to an nCino report.

Digital scorecard

There are many arguments in favor of buying the technology components needed for a start-up digital bank rather than building it, but it’s not entirely one-sided.

Nabeel Wyne, Digital Banking, Digital Transformation and Enterprise Architecture Advisor at Capgemini, suggests smaller community banks take the “buy in” approach, if they can.

“‘Build’ is a difficult road that is generally not suitable for companies that lack basic technical expertise in-house and rely on partners to deliver apps,” Wyne wrote in a LinkedIn post.

All of this suggests that buying is the way to go.

But is this always the right approach for a community or regional bank or credit union? It turns out the answer might not be that simple, and each institution needs to weigh the pros and cons to determine what works best for their backend systems and teams.

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The benefits of creating your own digital bank

There are some non-financial factors that banks and credit unions should consider before relying solely on an external fintech for the technology to create a digital banking subsidiary. As banking technology provider Technisys points out, when purchasing a bundled technology package, the financial institution itself will rarely own the technology. In addition, it will be difficult to differentiate the product from competitors who hire specialists in-house. The company summarizes the pros and cons in the table below.

To build To buy
Advantages (1) Design the customer experience for the bank and customers

(2) Own the technology

(3) Better control of the development process

(4) Less dependence on third parties

(1) Less time to market

(2) Immediate access to new functions offered by the supplier

(3) Reduced total cost of ownership

(4) Proven Solutions and Results

The inconvenients (1) Longer time to market (must implement, test and release new features)

(2) Need for human capital with highly specialized skills

(3) Site risk

(1) Difficult to differentiate from competitors

(2) Dependence on the supplier

(3) Supplier Reliability and Risk

Technisys recommends a platform approach, explained below.

The benefits of building your own digital banking technology are obvious, but a bank or credit union needs to be able to afford the technology experts to design and maintain the website and mobile apps. Big banks are paying top dollar for these digital banking specialists. PNC Financial Services, for example, pays technology engineers an average of $107,834 a year and M&T Bank pays $105,380 for comparable talent, according to Glassdoor.

The cost of tech talent:

Technology engineers at PNC and M&T Bank receive average salaries in the six figures.

Do ‘Low Code’ and ‘No-Code’ change the math?

You may have heard the terms “low-code” and “no-code” in technology. Like The financial brand described in a previous article, low-code programming “uses a development system from one vendor or another that essentially creates ‘building blocks’ of code that accomplish common tasks”. People with varying levels of experience with code can work with low-code programs.

No-code, on the other hand, is a simplified version for people with no coding experience. The “building blocks” are configured as a model interface with drag-and-drop graphics. Low-code and no-code strategies are often designed for institutions looking to upgrade backend technology under their existing brands and the technology is usually purchased from a fintech vendor.

Is there a middle ground between building and buying?

The build-or-buy debate rages on, but some experts recommend that banks and credit unions consider a compromise – the platform approach.

“A fixation on building or buying negates a third option, which is to partner together to create an ever-evolving and adaptable banking platform,” writes data technology firm MX. They call this the “buy, build, expand and assemble” model.

The platform approach means that a bank or credit union can engage multiple fintechs in digital banking for different needs in a more scalable way. A bank can build a platform together with a vendor with an open API infrastructure and hire one fintech for digital payments, another fintech for credit checking, and another for a chatbot.

It is important to note that many fintechs and vendors use different terms to describe platform products and services. In summary, however, these mixed-approach models mean that a bank or credit union will purchase a “digital banking platform” and a network of fintech partners to expand that platform as the financial institution grows. developed.

Other companies, like Nymbus, offer pre-packaged digital banks that are upgradable within that company. Liz High uses the most recent digital bank she launched – Hitched – as an example.

“We came up with the idea, we built the brand, we did the messaging and positioning, and built the technology,” says High. “And then we sold it to the bank.” The bank in this case was Iroquois Federal Savings and Loan.

Besides the purchase price, Nymbus makes money the more customers engage with the digital banking platform, High says, which encourages faster technology growth from Nymbus. Ultimately, High says, the goal is for a bank or credit union to buy multiple digital banks, each catering to different subsets of populations.

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