• Sound IT operation - essential for FinTechs

    • e-shelter innovation lab
Dominik Friedel & Dr. Jochen Biedermann
Sound IT operation - essential for FinTechs

Digital has become mainstream in the financial industry and FinTech companies have become a source for innovative solutions and new services on a global scale. On the one hand, FinTech startups disrupt traditional financial institutions such as banks, insurance companies, payment providers, or asset managers. On the other hand, FinTechs, such as mobile-only banks like N26 in Germany, just offer banking services for the digital natives. And some players like Chinese Ant Financial or Tencent have developed massive platforms for all kinds of financial services.

Some FinTechs collaborate with incumbents and provide white-label solutions for their clients. In Germany, almost all banks[1] use several FinTechs as service providers for banking apps, onboarding, payments, lending, compliance, and risk management – to name the most popular offerings. Furthermore, open banking is on the rise in Germany, supported by the EU Payment Services Directive (PSD II)[2], which provides access to account data via APIs.

In the years 2014 to 2016, most FinTech companies were founded in Germany, with a total of 206[3]. A large proportion of the survivors of this period are now in their growth phase. Sound IT operations are essential for them. All their stakeholders have high standards of service quality, whether retail or institutional clients, companies, or the incumbents themselves with their legal, compliance, and IT departments acting as gatekeepers.

Additional, regulatory authorities pay close attention to these issues, given the importance of financial services. In Germany, the Federal Financial Supervisory Authority BaFin published the “Supervisory Requirements for IT in Financial Institutions” (BAIT)[4] in September 2018, providing a framework for technical and organizational resources based on section 25a (1) of the German Banking Act. It also specifies the requirements laid down in section 25b of the Banking Act for the outsourcing of activities and processes, e.g., in a partnership between banks and FinTechs. Additionally, the European Banking Authority (EBA) released its revised Guidelines on outsourcing arrangements[5] in February 2019, with a particular focus on such partnerships. The legal basis is the EU Capital Requirements Directive (CRD), which requires robust governance arrangements in article 74 (1), including a clear organizational structure. Both B2C FinTechs and also banks using services of B2B FinTechs risk special audits, public warnings, and penalties in case of non-compliance.

Many FinTech companies also heavily rely on cloud services in their seed phase. Cloud solutions are easy to use, relatively cheap in the early stages of development, and scale well with the growing business. In many cases, the focus of the startups is initially more on agile software development and less on IT operations. Their first clients love their products and are willing to compromise on service levels for a new exciting solution with a fancy user interface.  However, that quickly changes in subsequent stages of growth.

B2C FinTechs have to deal with more demanding customers, who can easily complain in public or to regulators about failures and service deficiencies. Soaring numbers of clients and transactions push IT services to their limits. The more a FinTech is in the limelight, the more they become the target of cybersecurity attacks.

B2B FinTechs regularly cater to banks as clients, which do not always use cloud services and require installations in their data centers. This is often associated with the need to maintain interfaces to incumbents’ legacy systems – a costly, risky, and time-consuming process. Furthermore, it takes much time, negotiation, and paperwork before they can deploy the first test versions of their software in the banks’ data centers.

For success in these environments, it is essential to have a sound IT operating model in place, closely linked to the business strategy, the ability to scale quickly, but also have the flexiblility to interface with outside infrastructure - beyond the cloud. Being able “to connect to anything, anywhere” is critical. The overall IT needs to be reliable and secure, following standards like ISO 27001 and 38500. Furthermore, it is relevant to hire and retain talent with in-depth knowledge of IT operations. Any related risks need to be identified, documented, monitored and managed - as an essential part of the overall risk management process.

FinTechs should define a target operating model early for their IT to avoid dead-end roads, which delay further growth and hinder the acquisition of new customers.

A new service helps FinTechs to prepare early enough for these challenges.

NTT Ltd.’s Technology Experience Lab

Technology Experience Lab aims to accelerate, nurture, and evolve an organization’s technical capabilities in order to attain greater efficiencies and business value. The Lab provides organizations with the proper environment to test and validate technologies while mitigating costly mistakes and delays. All these learnings occur within our data center ecosystem, with the Technology Experience Lab client now aware of all capabilities and benefits of working next to a broad set of existing enterprise clients, IT service providers, and publicly available cloud suppliers.

The Technology Experience Lab provides access to leading financial centers across continents, allowing FinTechs the ability to develop and test international operations while in the process of expanding globally.

This new offering complements existing business-focused acceleration and incubation programs for FinTechs. It combines best practice in IT operations with new innovative solutions for the finance industry.

About FinTech Consult

We are an international team of FinTech founders, experts & investors from the cities of Amsterdam, Frankfurt, Hong Kong, Seoul, Singapore, Tel Aviv, and Vienna. We support FinTech companies in raising capital and expanding globally. And we assist corporates in scouting for innovation and managing their digital transformation processes.

[1] https://paymentandbanking.com/cooperations-between-banks-and-fintechs-in...

[2] https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2...

[3] Source: FinTech Consult

[4] https://www.bafin.de/SharedDocs/Downloads/EN/Rundschreiben/dl_rs_1710_ba...

[5] https://eba.europa.eu/regulation-and-policy/internal-governance/guidelin...