Other parts of this series:
As promised in our last post, today we are diving deeply into why a technology integration strategy is a critical enabler for a successful fintech acquisition and for fostering (and, ideally, for accelerating) the growth of the fintech.
Historically, the banking industry has been slow to modernize. This makes it challenging for most incumbent banks to integrate a modern tech stack. Fintechs, by definition, are organized around new, innovative technology built specifically to improve or automate the delivery of financial services. Thus, the core value of a fintech is closely tied to its platform and cutting-edge tech.
The typical integration strategy assesses the target’s technical debt (age of systems, mainframe and data centers), among other considerations. This strategy also focuses on the pyramid of technology cost take-out, with technical debt being key to achieving synergy. Acquirers typically start at the base of the pyramid—infrastructure and end-user computing—and eventually redirect their efforts to the monumental task of application rationalization.
However, fintech companies do not typically carry significant technical debt, and leverage depends on their maturity and level of funding. While most fintechs are built to operate exclusively in the cloud, research from Accenture’s Banking Cloud Altimeter shows that the average North American bank has only 12% of its workload in the cloud. Fintech deal economics are often tied to their ability to go to market fast with new products or features, enabled by a modern technology stack and operating model. This requires a deal thesis that prioritizes future growth over cost savings. Additionally, due to the nature of fintechs and the fast-paced, ever-changing technology landscape, their speed to achieve this thesis before it expires is vital. Integration is also not always a linear path, and simply accelerating the consolidation of the fintech and the acquirer’s systems and technology stacks may not lead to realization of the projected value.
All of which is to say that crafting the right tech integration strategy is likely to be as challenging as it is important. In our experience, there are two key factors that exert the most influence on a tech integration strategy.
1. Timing of core system upgrades
Currently, most banks are in the process of modernizing their core platforms. This means the target for the acquired tech stack is, at best, a moving one. There may even be no target at all.
“Nearly every bank has taken off on their journey to cloud, but very few have gotten more than a few feet off the ground.”
– Michael Abbott, Accenture’s Senior Managing Director – Global Banking Lead.
It is vitally important that, before the acquisition goes through, the acquiring bank conducts a thorough evaluation of how well the fintech’s tools and systems fit within the nature, scope, and complexity of the bank’s systems. Remediation can prove costly or hamper the planning for the integration. By identifying differences in the tech stacks, the technology organizations tasked with the integration can plan effectively. Additional considerations for the technology operating model include governance, architecture, and delivery practices. Operating practices around how quickly decisions are ratified and contracts executed, along with product enhancements, are also pivotal and could impact value realization due to their influence on timelines and efficiency in execution.
2. Maturity of the cloud migration
The cloud offers a lot more than just on-demand compute, storage and network, as was the case 10 years ago. As Accenture’s Cloud Continuum report explains, cloud is also a launchpad for innovation and new ways of operating. Realizing this can accelerate innovation. The cloud continuum is a seamless technology and a capability foundation that supports the ever-changing needs of the business.
Migration can be difficult and cumbersome, as it is challenging to navigate complex legacy systems; change business and operating models; evolve architecture, applications and data; reskill your workforce; and comply with regulations. Cyber-risk is also a threat. However, cyber-security management is improving constantly, to the extent that cloud providers are much better at ensuring hardened security than most companies can achieve on-premise. But many organizations still worry about lost or compromised data. And they are even more sensitive when it comes to migrating employee and customer data to the cloud.
So, what should your fintech technology integration strategy look like?
Accenture believes that two technology integration threads should run in parallel.
The first is a traditional integration strategy where IT consolidation considerations retain their importance, and the principal dynamic is optimizing the existing infrastructure to make it repeatable. Here, banks lead with change management to ensure retention and growth. The standard playbook works very well for the non-differentiating components such as email, collaboration, and storage. Banks should be able to execute these areas quickly and efficiently. For functional integration of areas like finance, HR, and legal, the goal should be to ensure that technology is not the roadblock. Integration doesn’t happen in a vacuum; there is always a need to balance the acquisition against in-flight structural programs.
The second thread is the integration of the actual fintech platform or product. Here, the technology integration strategy cannot impede the development that is necessary to drive growth. With a revenue-centered deal thesis and the inability to justify the acquisition on the basis of cost savings, a strategic and in-depth examination of growth potential and the market is a vital supplement to the analysis conducted during due diligence. Product engineering and the product roadmaps are critical levers in scaling the technology, acting as connection points and connectivity between existing systems and applications, and delivering the required growth. To achieve this—and to ensure the differentiated talent that came with the fintech remains engaged—the vision and roadmaps should be developed collaboratively.
If you have any questions about fintech integration in today’s marketplace we would love to hear from you. We can be reached here.
Thanks to Sebastien Galtier, Samantha Ngu and Brantley Austin for their contributions to this post. In our next post, we will explore considerations for the overall integration strategy for a fintech.