Admittedly, ‘FinTech’ is a generic term and even here at MirrorWeb we get asked if ‘we’re FinTech or not’ (we’re RegTech, by the way). The word often conjures up the idea of Facebook-esque startups, with teams of coders building an exciting and disruptive business from scratch (albeit with a financial twist).
Without getting bogged down in the semantics, what sets these tech firms aside from the rest of financial services is not the product/service offered, but rather how they utilise technology.
This brings us to the software as a service (SaaS) model which many experts, including those at PwC, claim is set to have big ramifications for the wider financial services space as we head into 2021.
The SaaS model
In a basic sense, the SaaS model takes advantage of cloud software and maximises its scalability to allow businesses to create an entire business offering. Traditional financial services businesses created before the advent of the internet had to rely on a headcount and conventional communication to launch products and services, grinding their way towards gaining assets and eventual profitability.
With SaaS, the journey between launch to profitability can be drastically shortened. We’ve seen an entire industry of RegTech and FinTech startups (some successful, some not so much) launch with the use of a SaaS framework.
We are now at a point where SaaS-based businesses are experiencing rapid expansion, and according to research from Gartner this is expected to have grown by 14.1% in 2019 and then by a further 17.7% in 2020. You don’t need to be a tech expert to understand the possibilities of online growth is considerable, financesonline.com predicts the SaaS space will grow to $623bn by 2023 (in terms of market capitalisation).
Looking specifically to next year, PwC have indicated ‘aggressive SaaS adoption’ as a route of growth for financial services where the challenge of effectively embracing new technology is ongoing. The opportunities are obvious: for larger incumbent financial services organisations, SaaS access (with the proliferation of network access points) can lead to a breakdown of current organisational structures and encourage greater innovation and creativity. This has significant ramifications to efficiency and profitability.
However, this is easier said than done and just because these incumbents can afford to take advantage of SaaS models doesn’t mean it will work for them. For one, there are numerous regulatory hurdles to encounter and due diligence of SaaS providers is a thorough and extensive task (as underlined by recent FCA guidance on this).
"I think there's huge potential... whilst we would never endorse a particular [RegTech compliance solution], we understand there's all sorts of technology that in theory will help with compliance. That enables us to help encourage firms to adopt these technologies and if you can convene people around these challenges you can transform the industry." Gordon Chapple, manager of RegTech, Financial Conduct Authority
Second, the risk of a data security breach is potentially heightened with a rushed SaaS adoption and – as with any tech – this will need to be carefully and securely integrated by checking the security standards the tech firm adhere to and how the data is managed between both parties.
Importantly, SaaS is not a panacea for success, with numerous tech firms still struggling for scalability and there have been several high profile failures from larger firms that haven’t been able to make SaaS work for digital product launches.
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However, as financial services continues its digital evolution the SaaS model may soon be unavoidable. We covered this recently in an article following a briefing at the Investment Association, identifying that platform centralisation and integration has been recognised as a global megatrend facing the sector in 2020.
There are numerous drivers here (the importance of data in personalisation of services and marketing, the heightened expectations of consumers etc) but for the industry to successfully move with the times, SaaS provides the only realistic solution to achieve this. This is not to say this is easy, in fact it will take considerable time and investment, but below are some immediate points to consider about how your firm can embrace SaaS
What can we do now?
SaaS provides a huge opportunity for financial services and the same can be said on the other side of the fence. The cloud native space underpinning SaaS models is incredibly competitive and it's accommodating the next generation of growth for financial services, this means there's a real drive to build the best solutions possible for the industry.
As it stands, due to M&A and barriers to entry, around 75% of the public cloud space is taken up by the four largest players. Competition is fierce, particularly in the server-less world, and with more providers investing to bring high-performance computing (HPC) to the public space, financial services firms can benefit.
Specifically, what pricing offers can they take advantage of? Could some of the larger vendors be willing to produce specific capabilities for them in a bid to win their valuable business?
In terms of what financial services firms can do, the most importantstep is to fully understand their requirements.
Asking questions such as, what business objectives can we solve through this technology? What compliance challenges can we solve? What are our technology requirements and how do they reflect growth plans? – would 1000 new clients in a quarter demand 'X' amount more storage for instance?
We advise firms to take the time to fully comprehend what your firm requires from a SaaS provider.
Due diligence is thorough for all third-party providers in financial services and the same should be true when it comes to potential SaaS implementation. Grill them on their security strengths, their existing financial services clients and understand what their contingency plans look like.
And finally, gauge what your SaaS provider will do in reality. What would the initial few weeks look like? Who will be actively using the technology and what will the onboarding process entail? What communications are required for clients in a cross over period? And how long would a cross over period last?
This is part two of our series covering the biggest trends and technology forces that will shape 2020, stay tuned for part three next week! In the meantime, if you’d like to learn more about the digital trends impacting financial services, take a look at our eGuide 'What now? The digital trends facing financial services in 2020' and make sure you subscribe to our blog (simply fill in the form on the right of the page).