Digital Transformation in Lending: Should I buy or build?

We all witnessed the digital transformation in the financial sector right about the time that mobile technology started reshaping consumer expectations. Everybody became a bit more aware and got a bit more needy, triggering a demand that paved the way for an array of technological innovations. Traditional banking did not go under this radar and has since been reshaped into a more dynamic and digitally driven industry.

Fast forward to today, and we find that banks are facing a dilemma, confronted with a crucial decision over whether to start building their own digital lending technologies or to buy in and integrate an existing solution. In making this choice, banks will need to weigh in a number of factors such as costs, time to market, and the need for tailored financial technology (Fintech) that aligns with their strategic objectives and customer expectations.

In this blog, we will touch on the key considerations surrounding this digital transformation in lending. We will also explore how technology has revolutionised lending practices, then discuss the implications of building vs buying, aiming to provide leaders with information that might help them make an informed decision on the subject.

The Evolution of Lending and Technology

Let’s start by looking at how lending practices have been transformed thanks to the innovative digital technologies that are coming through fintechs to develop the processes of financing and lending. It would once be the case that obtaining a loan was a paperwork-heavy process involving many face-to-face meetings and a slow manual review of applications. Nowadays, digital platforms like the plethora of Open Banking fintechs, or online lending and peer-to-peer systems, make it possible for customers to apply for loans online, get quick turnarounds on decisions through automated algorithms, and complete transactions securely. Technologies such as data analytics, artificial intelligence (AI) and blockchain have further improved these processes by enhancing credit scoring accuracy and transaction verification efficiency.

Importance of technology in staying competitive

Through the use of Fintech, the banks and other financial lenders such as Nucleus Commercial Finance, are now capable of processing loans almost instantly, and due to the data that Open Accounting and Open Banking software makes available, it also means the chances of fraud being committed is nullified. With the correct financial data on hand, typically aggregated from bank accounts and other cloud accounting sources, customers can access tailored facilities unique to their business needs, where their historical data can help determine a suitable financial product. It is quite easy to see why banks and other alternative lenders are focusing on fintech products that will make theirs and their client’s lives easier, however the question remains. A bank is still a business, and their aim is to make money, so figuring out whether to put time and resources into their own fintech product or purchasing access into an established framework is something that should be weighed up seriously.

The Case for Building

First we will cover the primary reasons why banks told us they prefer to develop their tech in-house, and after we will see some arguments from the others:

Advantages of Building In-House Technology

By building from scratch, financial institutions will have complete control over the features of their fintech, as well as the integration capabilities that they can tailor to their own needs, dependent on any other fintech software they already utilise. One key advantage for building ‘in-house’, is that with proprietary software – as opposed to open source bookkeeping software – banks can ensure bolstered security because the tech will be built around their systems.

Challenges

As we touched on previously, it is time and money that will typically deter an institution from taking on development themselves. Initial investment is substantial in both terms of financial outlay for the tech’s development, and also in acquiring the right talent with enough knowledge across the tech stack to design, develop, maintain and continue to update the technology after initial production is complete. Back to time – the build process of fintechs can be lengthy, ironing out software development issues and ensuring the product is sufficiently secure are typically issues that prolong completion, and once it is all finished, due to the pace at which technology is innovating, companies run the risk of their new fintech quickly falling into obsolescence.

The Case for Buying

Advantages of Buying or Partnering

Buying drastically reduces the time element, and is an immediate bonus in the case for purchasing premade fintech software. Banks and other lenders can instead pay their upfront cost to their chosen supplier; for example, Santander in the UK, uses Salesforce to provide SMEs with quicker access to their services. Banks can focus on software that is scalable to their needs, and one that will continue to offer updates beyond its initial development.

Partnerships with fintech providers can also grant prospective users with access to the expertise they need and the capability to complete data analytics. Using established and favoured brands mean banks can offer tried and tested services, ensuring their customers that the tech they are using is safe, while improving on their own abilities to complete their finances in tandem.

Considerations

Financial institutions should take the time to consider their strategic objectives and cost-to-benefit ratios before moving ahead with a choice; however, if a bank aims to offer highly specialised services that are different to their competitors, they might have no choice but to build their tech in-house. That said, if costs are correct and a firm needs a solution sooner rather than later, buying may be the right choice. Established techs like Salesforce are also proven to be useful and pass the stringent regulatory tests required by the Financial Conduct Authority (FCA), so it really comes down to time and accessibility, against cost and the need for a tailored solution.

By evaluating their own needs, banks can come to terms with the right solution for them, with both options being viable and useful in helping an institute transform their services digitally while positioning themselves to get ahead in the market.

Key Factors for Institutions to Consider

• Strategic Alignment: Lenders can start by considering what will support their long-term goals the best. As we previously mentioned, choices will be dependent on how the options align with these goals, however, banks looking to establish themselves as leaders in fintech innovation may still aim to start developing their own custom solutions, even if they opt to also work alongside an established third party. Banks looking only to achieve growth and digital expansion should opt for a proven brand, and at a later stage, if the necessity comes, can work on building their own framework in the future.
• Cost Analysis: Making thorough comparisons between the total cost of ownership between buying and building should help banks understand the full extent of costs, which aren’t necessarily cheaper going one way or the other. Yes, building in-house will cost a large up front fee, however, purchasing tech will require the payments of ongoing fees for updates and support. A detailed cost analysis should be made, with time spans for usage kept in mind, as well which will produce the most direct and indirect costs.
• Flexibility and Scalability: If a bank is certain its needs will change in the future with regards to how tailored a solution is and how flexible it can be to suit later needs, they might want to think twice before buying, but at the same time a ready made fintech might already have the flexibility they are seeking. Banks, like other businesses, need solutions that can grow with them and adapt to new regulations. This also means they will need the ability to incorporate emerging technologies, and again if an institute seeks to lead the way in these innovations then building will likely be the correct route for them.

In all, banks and other alternative lenders should assess a timeframe and a budget, then figure out whether their choice will be efficient enough to perform to their future needs.

Parting Thoughts

The decision between purchasing or constructing technology for lending should ultimately be influenced by the individual banking institution and its necessity for scalability and adaptability. Both building and buying will have their costs and benefits, and while the expenses for buying may not be such an up-front burden, building enables tailored solutions and control when it comes to long-term expenses and viability.

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