Ian Massingham is UK technical evangilst at Amazon Web Services
Over the past few years the financial industry has started to reinvent how it operates. Organisations are changing the way they serve their potential and existing customers, while maintaining the high levels of compliance and security that their customers and regulators require. The technologies available today mean that financial services organisations aren’t constrained in the way they once were. They can now access secure and compliant technology, on-demand, in the cloud which is helping them to create new ways to bring value to customers. But not all financial institutions have been able to take advantage of these technologies in the same way as newer entrants to the market have, writes Ian Massingham
Born in the cloud start-ups are unburdened by complex and costly legacy infrastructure. These fintech start-ups are using cloud technologies to focus on creating businesses based on convenience and personalisation and on perfecting the customer experience. They are also doing this in a fraction of the time and cost that it’s taken some of the more established institutions to build in-house infrastructure, to do the same thing, in the past. As a result, customers are starting to use these start-ups for products and services they would have routinely gone to the established institutes for only a couple of years ago.
Start-ups challenging the norm
Some incumbents in the financial services industry may think they have the market locked. This is because new entrants have found it too difficult and costly to be able to build a technology infrastructure to give customers the service they expect. With the cloud, fintech start-ups are able to access vast amounts of infrastructure and a broad range of services with a deep feature set on demand. Add the fact that the platform that they using has the same high levels of security as the bigger financial services players and this is forcing many of the incumbents to reconsider their position.
You only need to take a look at how cloud technology is driving a change throughout other traditional industries to understand the implications innovative start-ups can have on the finance sector. AirBnB is transforming hospitality, challenging the incumbent hotel chains, while Uber is reinventing logistics, taking on taxis as well as courier firms. In finance we are seeing similarly exciting new start-ups emerge that are challenging the way things are done.
A good example of this is credit scoring. This is a market that has been dominated by a core set of credit bureaus for many years. These bureaus have spent millions establishing themselves the suppliers of credit scores on which banks should base their lending decisions. The upfront investment required by businesses trying to enter into the market to challenge this small set of dominant players has been paralysing and near impossible to do. That is until now.
Aire is a London based start-up, built on the AWS cloud, that is enabling access to financial products by providing an alternate credit score for people who are incorrectly classified because they have no credit history. Aire, developed an algorithm that looks at deeper data-driven analysis to generate a score based on educational background, professional history, and knowledge of financial risk. This is very different from how the incumbent credit bureaus calculate credit scores which tend to be based solely on past repayment history and antiquated identity checks. The cloud is providing a platform on which Aire is able to guarantee a secure, scalable solution, and one that is helping them to reach an entirely untapped segment of the loan market. Addressing a segment previously ignored by the big banks. Aire’s new set-of criteria used to asses risk is forcing the traditional players to re-think their existing business models as banks begin to recognise the opportunity available to reach more customers.
The cloud opportunity isn’t going unnoticed
There is little doubt that the explosion in fintech innovation in start-ups is changing the financial services playing field, allowing savers and borrowers to bypass traditional banks with, for example new smartphone apps and website loans. Many of these new services are built in the cloud and the established institutions are not naive to the opportunity it presents for innovation. As a result we are starting to see more classic innovation activities, like hackathons, being undertaken by banks.
A good example of this is Bank Hapoalim, Israel’s largest bank, who have started running hackathons using anonymised retail banking data stored in the cloud. Working with AWS and the Israeli developer community, the bank is using their imagination to develop new financial applications that help them to better understand their customers and give them a better banking experience. In addition to hosting these types of cloud based hackathons, banks are also beginning to play a hands-on role in the incubation and growth of start-ups. In the UK, Barclays is running the Barclays Accelerator in conjunction with seed funding organisation TechStars. TechStars is also supported by AWS Activate, the AWS program for startups, startup accelerators and incubators’.
Rather than being surprised by new fintech start-ups, this is allowing financial institutions, such as banks, to partner with and benefit from the creativity within the start-up community. By having various departments engage with the start-up community, banks are creating mutual learning opportunities. Their teams are able to explore new ideas and trends early in their lifecycle which helps them to shape the development of future of financial services products within their own organisation. With successful ideas there is also the option for the bank to absorb the new start-up into their own organisation.
Security is no longer an excuse
Previously, regulatory compliance concerns may have prevented banks from taking advantage of cloud computing, however cloud technology has reached a state of maturity, and has high levels of security, privacy and control where even the most conservative of institutions aren’t able to ignore it any more. This is because they realise cloud providers invest in more security policing and countermeasures than almost any company can afford themselves.
Cloud providers, such as Amazon Web Services (AWS), are reducing the barriers to innovation by working closely with financial regulators to ensure its services are in line with their security requirements. AWS has achieved widely respected and relevant certifications such as PCI DSS Level 1, ISO 27001 and ISO 9001, which are recognised by financials services institutions around the world. As a result many banks in Europe and around the world are embracing cloud computing.
In the Netherlands banking regulator, De Nederlandsche Bank (DNB), is happy to support the use of Amazon Web Services in all facets of Dutch financial operations, meaning financial companies in the country are now able to take advantage of the same technology that the start-ups are using to transform the industry. Leveraging this change, Dutch retail bank Robeco Direct chose Ohpen’s ‘bank in the cloud’ software that runs on top of AWS to allow for more agility in product delivery to customers while lowering costs and complexity.
Cloud is having a far reaching effect on all businesses and the innovation being driven by start-ups is now encouraging financial institutions to think differently about the services they offer to customers. Where cloud innovation was once thought of as the remit of the start-up, this opportunity to change means major financial services players are no longer wed to the old way of doing things. They have recognised the opportunity of driving innovation and disruption from within and in the months to come we can expect to see new unique offerings for customers.