Implementing digital wealth management solutions can be tempting for many companies. However, the choice of whether they should build their own, enlist vendors or mix the two approaches is far from easy to make.
That’s why Swedish WealthTech100 startup Kidbrooke has devoted its latest blog to this topic. The author starts the blog by acknowledging that there are many benefits for a company to develop a solution in-house.
“All things being equal, speed and flexibility should be optimal when relying on deploying internal resources,” the blogger states. “Customer orientation, internal or external, should be optimal as well when solutions are built in house. Most importantly, strategic direction remains in the hands of the firm, vendor lock-in issues could be effectively avoided.”
However, Kidbrooke also identifies several weaknesses with this approach. Firstly, internal development resources are often finite or locked up elsewhere. Secondly, developing in-house could be fast and flexible, but only if the infrastructure to innovate has already been implemented. If it hasn’t, then taking that first step could prove costly and time-consuming. Thirdly, it can be difficult for in-house teams to meet the user experience and value created by external FinTech firms.
“The combination of these factors most often makes it impossible for large incumbent financial services firms to build in-house,” Kidbrooke says.
NatWest can provide an example of a failed in-house built WealthTech solution. In November 2019, it launched its digital banking solution Bó, which was hailed as a Monzo killer.
However, it didn’t work out that well. In the first six months of its existence, its team ran from crisis to crisis. The period was filled with accusations of the venture having posted fake positive reviews, accusations of fraudulent accounts applications, failure to drum up a buzz about the inititative by enlisting the help of influencers, and being forced to replace 6,000 of their customers’ cards as their old ones were non-compliant with the EU’s strong customer authentication rules. Unsurprisingly NatWest shut down Bó in May 2020.
Next, Kidbrooke turns too outsourcing. One of the benefits of having an outside vendor provide a the solution is that there are so many options out there. Financial services firms can easily pick and mix to their hearts’ delight.
“So, if you want to offer banking or wealth management products to your new or captive clients, the route to market can be an order of magnitude more straightforward than it was even just five years ago,” Kidbrooke writes.
Nevertheless, the WealthTech company acknowledges that there are potential pitfalls with this approach too.
“Cost can be a double-edged sword,” Kidbrooke writes. “On one hand, spinning up server capacity on-demand should always prove to be more cost-efficient than building in-house for most corporates. On the other, controlling cost with respect to enterprise service providers, particularly regarding implementation and maintenance can quickly become toxic.”
Another risk is that many tech firms offer one-size-fits-all solutions, which makes it difficult for companies that operate in more niche segments of the market. “For these firms, trying to fit square pegs into round holes is rarely worth the marginal effort,” Kidbrooke writes. “Linked to this, and perhaps the weightiest criticism of cloud offerings, is vendor lock-in. How do firms ensure that strategic decisions they make today don’t tie their hands in the future?”
Turning to the third option, Kidbrooke suggests that a middle path could prove to be the best approach. “Whilst we can see the benefits and shortcomings of both building entirely in-house and full outsourcing, a more nuanced approach could offer the best of both worlds,” the blogger states.
For instance, Kidbrooke argues that FinTechs providing powered by application programming interfaces (API) provide a good middle ground.
“API first is currently the engine for digital value creation in open banking where enablers like Tink, TrueLayer and Yapily are helping to create new customer journeys for incumbent firms based on powerful data aggregation,” Kidbrooke suggests.
“The business mode is clear: allow the infrastructure provider to do what they do best – build world class enablement tech – and let the business do what it does best – serve its customers with the most relevant solutions.”
A benefit of this option is that APIs can transpose to other segments to drive end customer utility. “For example, direct investment has seen strong growth in 2020 as financial consumers found more time and focus to dedicate to building their own wealth,” Kidbrooke writes. “So far, platforms and service providers have focussed on cost mitigation and the digital parsimony of their solutions, front-to-back.
“We strongly believe that value creation can be driven by additional levers: delivering better and more relevant analytics to customers in order to optimise financial outcomes and overall health is now achievable. Equipped with growing data unity, there are boundless opportunities to create new wealth journeys for all customer segments. The future of wealth will need a new, truly holistic, solution layer which requires cutting edge analytics and total customer focus. Tech vendor and channel owner can work seamlessly to build this new reality.”
The blog concludes, “We believe for most incumbent financial services firms, adopting an API first approach will be optimal. Open banking integrations are proving the value of this model and it will only be a matter of time before organisations adopt API first to power the other critical pieces of their IT infrastructure.”
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