Introduction
Financial services and fintech companies find themselves in one of the most competitive industries for building software products. For nearly a century, the banking industry was predominantly a brick-and-mortar environment that functioned smoothly without much need for innovation.
Beginning in the 90s, the monolithic and outdated state of banking software was exposed with the internet boom, culminating with the now-comical “Y2K bug” scare.
Financial services organizations have come a long way since then. They now operate in a primarily digital world where customers skip the teller line and instead opt for mobile banking, cryptocurrency, digital payments, credit monitoring, and much more from their phones.
But modernizing old banking systems quickly still remains a challenge for the financial services industry, which now encompasses far more than personal checking accounts and CDs. As financial institutions have raced to reinvent themselves throughout a technology revolution in the industry, organizations are under enormous pressure to quickly adapt to new customer expectations.
With speed-to-market front of mind, there’s often a choice: Build, or buy? Do we buy an off-the-shelf product, acquire a startup to bolt onto our systems, or do we build the software ourselves?
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Build vs. buy for Financial Services
Editor’s note: There’s no one-size-fits-all answer to the build vs. buy question. However, in this article, Alex Lukashevich, our director of managed services, will guide you through the nuances of making a build vs. buy decision. Alex is a technologist with leadership experience in fintech software development and offers some key points you should consider when weighing which option works best for your organization.
When I work with organizations mulling the ‘should we build it or buy it?” question, I like to first ask about their goals and the motivation behind the question to begin. Usually, you can place an organization in one of the following three categories:
- I want to catch up to my competitors: This is the most straightforward driver for many banks and financial institutions that work directly with the general public. These organizations are often weighed down with dated legacy systems that are difficult to maintain and modernize. They’re lagging behind the competition and need to catch up—and they needed it yesterday.
- I’m worried about compliance: As financial institutions expand to new markets and regions, dealing with the changing geo-specific regulations and legislation becomes increasingly difficult. As a result, these companies often need to streamline disparate systems that aren’t communicating with one another to ensure they don’t fall out of compliance or become exposed to security issues.
- I want to get ahead of the innovation curve: A more preferable position, these companies are looking to stand out by acquiring new audiences through new products, features, and services.
Sure, many organizations may see themselves as falling into more than one of these (if not all three) categories, but usually, one bucket best describes their current state. So next, let’s take a deeper dive into each of these goal categories and assess when it makes sense to build or buy and when it doesn’t.
1. Do you want to catch up?
It may seem an obvious point, but there’s immense competition in banking and fintech today. Since banks are advancing rapidly with online services such as insurance and investments, falling behind in the tech department will simply not work in the financial industry. At this stage, deciding between building and buying is as relevant as ever. In my experience, companies are often trying to build from scratch, which is not always wise, both from a time and resource perspective.
Considering building out?
If your competition is ahead of you and building out seems like the best option, the logical approach is to ask is,
- “Do I have the right leaders/people from both product and technology perspectives in-house?”
If you do, you might be able to build out quickly enough, but unintentionally cause disruption in other business-critical areas. This is why: Even though it might seem like you have the team to build out, you might be picking invaluable resources — such as thought and tech leaders — out of other projects. Is it worth it? It doesn’t necessarily mean that building is out of the question, but an important resource allocation decision and the opportunity cost that comes with it, should be a part of your assessment.
- If you’re already behind: Ask the right questions.
Why? Do you have the right impression of the user persona? Do you have the right people from the leadership and product development sides? Even if it’s not a perfect match, your internal talent can be still used to build and extend.
Considering buying?
For this phase, buying seems like a more logical approach if you intend to catch up, only because it’s bridging the gap between where you are and where you want to be. However, depending on your particular situation, the pros and cons ratio may shift drastically. I would recommend going through an approximate questionnaire:
- What it is that you’re buying?
Are your expectations of the software product clear? Will it take you to the stage/level you want to be at, will its functionality be just enough? Or vice versa, an overkill and not worth spending too many resources if your needs are moderate?
- What are you catching up to?
It’s important to remember that there’s no final destination in the competition — when you’re caught up, it’s time to move forward again to remain ahead.
2. Do you want/need to comply?
In fintech, compliance is the most prominent factor when it comes to any modernization. Lots of companies, therefore, want to build and own software products because it makes it easier to comply. With out-of-box solutions that are being offered on the market, it gets tricky because the product has to check several boxes at once, including:
- Legal regulations
- Financial regulations
- Labor standards
I’ve seen many financial services companies make impulse build-versus-buy decisions without first engaging in a market analysis. Any decision on the subject is more likely to be successful when backed by data. Below are a few scenarios to consider.
Considering building out?
- Does being compliant gives you a competitive advantage?
If not, buying is justified — to automate mundane internal operations like HR processes, task management, and payment processing in bulk. There are plenty of products available like HR suites, time-tracking software, and back-office software. With these tools, you’re instantly compliant with industry standards without having to make extra investments.
- If you can get a competitive edge out of it, build internally.
Let’s say your business thrives off of business continuity processes, you can’t afford downtime, and you need to be in absolute control of your system. Buying might not be enough.
Sometimes, firms decide either to build or enhance solely because decision-making speed is crucial in their niche, down to a few seconds. In this case, adopting an internal compliance engine that is more efficient and faster than competitors’ is core to the business.
Finally, a fine-tuned compliance system that you build internally (and correctly) can serve you better in this case, compared to a purchased piece of software that can be readjusted as needed.
Considering buying?
If the sector you’re operating in implies audits, heavy regulation, and approval requirements, buying almost completely covers those issues. I’m seeing a lot of examples of this in industries like pharmaceuticals, and a similar logic applies to finance. So here are a few more points to consider if you’re in two minds about buying:
- One of the benefits of buying is that there’s no need to certify the product.
The trading industry is a good example. Since back-office processes can be supported through third-party solutions while adhering to all necessary fair trade practices, purchasing SaaS products saves time and money.
- Your competitors have access to the same software purchasing options as you.
Would this be a reasonable investment then, and where will it put you in the competitive market?
Let’s say you would like to spend more now but build a product that will ensure you a place ahead of the competition. As I’ve mentioned before, some financial agencies and institutions think they know what their customer wants, but the rolled-out product does not hit the mark. To advance or stand out significantly, you need both a good delivery team and an accurate business analysis.
Poor planning causes the projects to stagnate, become underestimated, and underbudgeted. Even if the project reaches completion, you’re already late and not standing out compared to your competitors. Here’s how to minimize the chances of disappointment.
Considering building out?
If building out is your choice, you should only begin work when a good team and solid leadership are in place, especially when that team is a mix of external and internal resources. If the product has to be proprietary and you need to attract internal resources only, be prepared for the costs to be high. Also, with the number of products already on the market, you’ll have to make decisions quickly to succeed.
Great examples of building out according to your needs would be trading firms creating trading engines and algorithms, or insurance providers building easier ways for submitting protocols and simplifying application and payment processes.
Considering buying?
Why reinvent the wheel if you can enhance/extend your offering with what’s already on the market? See what’s out there and integrate. For example, there’s no need for another payment processing system.
If you identify such a ready-made opportunity, or there’s a competitor already using a tool successfully, go for this option as well. With buying, your only concern will be functional integration. You can see a great example of a recently emerging technology that can be integrated and built upon to create a new product in cryptocurrency markets. Crypto markets went from being boutique endeavors to a mainstream investment landscape, where many banks now put their investments.
Final thoughts
This list of “build vs. buy” for financial institutions is by no means an exhaustive one. These assessments are drawn from common themes I’ve seen in my professional experience, but each decision differs based on your organization’s goals. Remember that each build-vs-buy decision is unique and should be made based on an analysis of the current situation in your market, your enterprise capabilities, and resource allocation.
Still trying to decide which option works best for your organization? Sometimes, having an outside resource can be helpful in this evaluation. You can get in touch with our financial services technology architects to have a conversation about your goals and whether building or buying makes more sense for your team.
