Reflections on core banking infrastructure as a moat

Efi Pylarinou is the founder of Efi Pylarinou Advisory and a Fintech/Blockchain influencer – No.3 influencer in the finance sector by Refinitiv Global Social Media 2019. 

I admit that Twitter is an energy vampire. Don’t get me wrong, philosophically, there is no good or bad, black or white, ethical or unethical. All I want to say, is that I have become very much aware that more than 30min on Twitter at a time, drains my energy, clouds my mind, and takes me down a black whole (sometimes also gets our food burnt).

On the positive side, I get to e-meet and hear from people contributing insights and experiences and this excites me a lot. Maybe in 5yrs, I will have an AI that will support me in curating Twitter, Linkedin, News, and all my Fintech-Tech subscription threads.

This week I went back to check what Simon Taylor was serving in his latest Fintech Brain Food  which led me to a Twitter thread around fintech infrastructure, innovation in core banking systems from the VC angle but not only. I enjoyed meeting Will Quist and Camera Obscura.

Check out the tread here.

My reflections

2020 as an outlier year has provided us with lots of new experiences, valuable data, and solid learnings. One of those concern consumer banking trends that showed retail valuing significantly large financial institutions. They moved cash and opened new accounts in the likes of Bofa, Chase, or Wells Fargo massively which is strong evidence that TRUST is an asset owned by incumbents of a large size. I should actually say, TRUST has been earned by these institutions over time, despite their occasional misdemeanors. In the case of Wells Fargo the scandals are significant and they keep Wells Fargo still on the penalty list of the Fed (see here).

It shows that size is connected with `Too Big to Fail` in the mind of consumers and it works especially for licensed financial institutions.  Which is evidence that A BANKING LICENSE is the other Asset.

Cornerstone Advisors 2019 US consumer survey shows that 44% of millennials (21-37yrs old) bank at the three large incumbents – Bofa, Chase, or Wells Fargo – and these are their primary bank providers.

They also reported statistics for Q1 & Q2 2020 what showed that checking account applications for the 3 US megabanks, rose. From levels c. 55% in 2019, to 63% in Q1 and 69% in Q2.

We also see that the re-bundling unstoppable Fintech megatrend is coupled with several grown-up Fintechs seeking a costly and cumbersome banking license in the US. As Ajit Tripathi declares in the last sentence of his `Bitcoin is Good for Paypal, but is Paypal good for Bitcoin?`

You live only once! Become a bank.

by @Chainyoda

Just to name a few, Varo got a banking license in September, Sofi got approval in October, Revolut has applied for a US banking license.

Now if we had to name the third asset, that could create a sustainable moat along with TRUST & BANKING LICENSE, what would it be?

I bet that most would say, is DATA. Meaning having large sets of customer data and using technology to meet the customer at the point of sale (embedded finance), to contextually, advise, and cross-sell.

I won’t disagree, but after reflecting upon the Twitter thread above, I say it is REAL-TIME DATA.

Existing Core banking systems used by most mega incumbents are not even capable of sharing real-time transaction data with their clients, be it business clients or retail. The core banking systems do produce the data but it needs cleaning and pooling to be shared. This means time delays, devoting resources, no real-time computing capability or seamless API connectivity. This is a core bottleneck towards building an open banking ecosystem with connectivity to Tech & media companies or e-commerce, or unlicensed fintechs.

As long as incumbents running on traditional core banking systems, see the above bottleneck as a DATA problem and not as a CORE BANKING problem, they won’t be able to unlock the full potential of the third asset REAL-TIME DATA.

Camera Oscura`s analogy hits a nail. As long as incumbent banks that have the TRUST, and the BANKING LICENSE, refuse to change the plumbing and keep adding new showerheads with amazing capabilities like regulating water temperature and playing music or recording your thoughts in the shower, they will never be able to unlock the full potential of the data that they process.

This line of thinking makes me believe that Goldman Sachs` recent launch of a cloud-native transaction banking offer is vital to Goldman`s digital transformation game. They are late in a market that is dominated by megabanks like Citi and JPM but they have the plumbing right and it will pay off once the open banking, open collaboration, and open innovation way of doing business takes off. Stay tuned and watch this combo, TRUST, BANKING LICENSE, NEXT GEN core Banking.

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