The Vicious Cycle - Part 3 - The legacy drag
The single vendor policy legacy
Now you're an expert on the merits of single vendor policy, particularly when Saas is not an option. It is important now to understand why financial software stakeholders in the last 20 years have resisted the cloud.
A single vendor policy in a banking system can create an ecosystem where all participants (from vendors to banks) fall into the trap of allowing this singular software to grow in size and multiply in complexity.
Vendor's Perspective: Profit maximisation is the goal, here. If they can become the sole provider of a critical software component, they effectively "lock in" their customers. The more features they can provide within their software, the harder it is for the customer to switch to a different vendor, which means more stable revenue streams. In this way, there's a strong incentive to keep adding more capabilities, thereby increasing the size and complexity of the software.
System Integrators' Perspective: System integrators are entities that specialize in bringing together component subsystems into a whole and ensuring that those subsystems function together, a practice known as system integration. These system integrators also benefit from a single-vendor policy. More complexity in software systems often requires specialized knowledge to integrate and maintain, which means higher costs for their services. Furthermore, deep familiarity with a specific vendor's system can lead to more business opportunities from other organizations using the same system.
Banks' Perspective: From the perspective of the banks themselves, the more comprehensive and all-inclusive the software is, the more it appears to simplify operations by reducing the need to integrate multiple solutions from multiple vendors. Over time, however, this approach leads to high reliance on a single vendor for multiple needs, reducing competition, and potentially stifling innovation.
Banks: Becoming a hostage
Thus, this added complexity makes it complicated for banks to take back control of their operations. Increased reliance on the vendor allows software providers to dictate terms as their software becomes impossible to manage without the provider’s expertise. Bank staff may also become highly specialized and committed to the vendor’s product as a result.
Software Vendor and Monopoly
There are a couple of rules of thumb when it comes to software vendors: they love proprietary, they love opaque and their mantra is “bring it to the core”. This aversion to sharing makes it harder for clients or 3rd party developers to integrate the vendors software with any other systems, standing in the way of innovation and growth from the buyer’s perspective.
The problem here is that no one person can accurately predict where innovation will come from. Innovation can cross a bank through the traditional medium of new features, or in alternative instances such as approaches to design, flexibility and user experience. In this case, I don’t fancy the idea of betting on a large, closed software provider in a "walled garden" being the one that will provide everything I need versus an open alternative. The larger the single software company, the more homogeneity you can witness across the entire ecosystem from development to customer service. An innovation-allergic monopoly, if you will.
The more complete the software offering, the higher the risk that the vendor will exert monopolistic control over the client. If a feature or functionality is needed, there is no recourse but to wait for the company to develop and release it. This monopoly on functionality was mirrored in sales and pre-sales too. Sales teams could only sell the software developed in-house, and pre-sales could only demonstrate the company's products. Partners are useful only until software vendors develop the functionality to replace the partner.
Transitioning to open systems introduces competition at every level of this chain, creating a lot of friction
In an open system, third-party developers can add functionalities that the original software might not have, potentially outdoing the original software in certain aspects. This gives clients the flexibility to choose the best solution for their needs, rather than being tied to one vendor. Sales teams can sell not just based on exclusive features but also external solutions. Pre-sales can be open to other solutions. It creates a lot of friction as the stakeholders of the monopoly - engineers and product - do not want sales and pre-sales to engage with clients with anything that is not homegrown.
This disrupts established roles, processes, and power dynamics within the company. As always, it is wise to expect resistance to change, and in this case, this will come from product developers and engineers. It makes sense that these agents would defend their role in the supply chain, but this egocentrism is exactly what holds innovation back. Think Blackberry vs Apple.
I am very lucky to a have seen and experienced change in manufacturing, banks and software. In some cases, I helped and saw companies get to the inflexion point and see success. But in others I failed.
Open vs Closed...
An example: BlackBerry and Apple offer a telling example of how open vs closed can impact the trajectory of companies. BlackBerry, during its early years, was considered technologically advanced with many features targeted towards enterprise customers, like advanced email functionalities, strong encryption, BBM (BlackBerry Messenger), etc. It had a closed ecosystem, meaning that the software was primarily developed in-house, and third-party developers had limited ability to develop applications for the BlackBerry platform. For a while, this strategy served BlackBerry well as they dominated the market.
On the other hand, when Apple introduced the iPhone, it was seen more like a toy. Blackberry was the choice of businesses. There was no App Store, but maybe because iOS was not as robust as Blackberry, people would almost immediately jailbreak the phone - the first iPhone had its service tied up to one mobile operator only. Customers added Apps. Apple saw this as an opportunity and created an open ecosystem with the App Store, allowing third-party developers worldwide to create and sell apps on its platform, exponentially expanding the range of features available to iPhone users, far beyond what Apple could develop in-house. R&D was focused on design and user experience, making their devices easy to use, aesthetically pleasing, and deeply integrated across different applications. It tied the iPhone into an ecosystem of other products and services like iTunes, iCloud, iPad, and Mac computers, offering a cohesive experience.
At the same time Blackberry developed what could be considered the first real time messaging system, the Blackberry Messenger (BBM). BBM was exclusive to BlackBerry devices. As value of a messaging app increases with the number of users, WhatsApp quickly gained more users as it was multi-platform which in turn attracted even more users. Except if you were a Blackberry user. Then you had to use BBM. Apple made the same mistake with iMessage, but as it has the App store, it won in the end even if the solution was not its own. Blackberry was using BBM to protect its closed business model. BBM was eventually made available on other platforms in 2013, it was arguably too late. By that time, WhatsApp had already established a significant user base. Kodak invented digital photography but stayed away from it to protect its film business.
Bank stakeholders
The move toward SaaS and cloud-based models changes the dynamic inside the bank. Many tasks previously handled by internal IT teams - such as server maintenance, software updates, and some aspects of security management - are offloaded to the cloud service provider. This could potentially reduce the size and importance of internal IT departments and challenge their traditional role. Some might view this as a threat to their jobs and influence, leading to internal resistance to the adoption of SaaS and cloud-based solutions.
However, this transition offers an opportunity for internal IT to shift from a maintenance and support role to a more strategic one. Of course, this could be challenging for the team’s culture. IT members may not see the opportunity to focus more on areas like data analysis, digital innovation, strategic planning, and governance that add more value to the bank's operations and lose the ability to position the IT department as a key driver of digital transformation rather than a cost center. It would be ideal to see bank management overseeing this transition carefully, addressing concerns, retraining staff as needed, and redefining the role and value of the IT department within the organization.
And that is why...
Thanks for sticking with us until now. The point of all this background is to explain why it is so difficult for established behemoth banks to move to the cloud and embrace apps. Vendors push back, banks grow concerned and integrators envision multiple hurdles in the journey to open innovation.
If you have a background in financial technology, you have certainly seen how ingrained this resistance can be. Product teams would rather have 100% of nothing than a nice piece of a very large pie. Banks will voice their concerns of control and risk, even though their current application may be a black box with very little information surrounding it.
My experience has shown me applications that cover specific yet crucial functionalities in the most sophisticated way possible being ignored due to the resistance we have explored in this post. Nonetheless, competition and the survival of the fittest is pushing us to modular, open solutions which disrupt existing relationships and routines. Executives in the financial space that can understand, act on and execute this transition will be the winners of this change. The ones that don’t will be explaining to their stakeholders that they did nothing wrong, but it all went downhill anyway. (Ring any bells?)
That covers out background. In the next post, I’ll be looking at some fintech application case studies that really highlight the growing innovation not being taking advantage of in the financial sector.