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Quarter of banks will use startups to replace legacy IT

A quarter of banks will go to financial technology suppliers for their online and mobile banking requirements by 2020

Traditional IT suppliers have not responded quickly enough to the demands from banks, 25% of which will go to startup IT suppliers for their online and mobile requirements by the end of 2019.

The prediction from Gartner comes as increasing numbers of startup firms – known as financial technology (fintech) companies – are developing online and mobile products and services for financial services companies, while traditional suppliers are lagging behind.  

Consumers want services via apps that are easy to use and accessible online and via mobile devices, but banks do not want to develop these themselves.

Banks are actively encouraging startups to innovate through capital, knowledge and experience, through startup programmes.

Gartner said the gap in the market opened because legacy IT suppliers have been slow to meet the demands of banks, which are trying to cater for the demands of their existing and potential customers.

Stessa Cohen, research director at Gartner, said incumbent suppliers do not support open architectures that separate the interface with the actual service.  

If these are separate, banks can offer customers a wide choice of service through a single interface. These open platforms can offer a broad range of services, such as financial management, payments, marketing, loyalty and analytics, all through the same interface.

Read more about fintech

  • Consumers are quickly adopting fintech products and services, with young high-earners leading the charge.
  • UK retail banks are under pressure from regulation, costs and increasing competition – here are six challenger banks using IT to shake up UK retail banking.
  • The retail banking sector is going through a period of regulation-driven change and IT is playing a key role.
  • The UK could be on the cusp of dramatic changes in retail banking following the launch of a current account comparison service.

For example, digital startup bank Fidor has an open-technology platform it developed itself, which can be plugged into by other suppliers through application programming interfaces (APIs).

As a result of open APIs, Fidor’s current account customers can access 25 different services and can deal in foreign currencies and precious metals with the same current account, for example.

“This is why many banks developing digital banking strategies to meet customer demands have sought out new providers to replace their existing online and mobile banking systems with digital banking platforms,” said Cohen.

But this new world prediction comes with a CIO warning, as selecting the right suppliers to work with is a challenge, according to Cohen.

“CIOs must prepare to manage the challenges of evaluating and selecting suppliers that may not have proven track records in the financial services vertical, or may simply be new and untried without an extensive customer base,” said Cohen.

“It can be difficult for CIOs to justify investment in their products to their boards and regulatory agencies, but don’t use that as a reason to exclude new suppliers.”

A recent EIU study, which involved more than 200 senior retail bank executives, showed bankers expect the banking environment to be shaped strongly by technology and non-traditional competitors by 2020.

Nearly two-thirds (65%) said retail peer-to-peer lending would be available via banking platforms, and 64% said retail banking would be fully automated.

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