How open-source technologies open new opportunities for fintech

It is safe to say that fintech technologies have been drastically impacted by open-source tech. A study from Research and Markets suggests that the open-source service market is set to grow by 24 percent by 2025, compounded by the adoption of the technology by larger institutions. Yet despite the rapid spike in growth, financial services and banking have been slower in bringing its potential. 

This is a missed opportunity. By integrating open-source platforms within the business, banks can gain from emerging technologies like artificial intelligence (AI,) blockchain, and container-based architectures that – combined – benefit everyone. Yet for the transformation to happen, businesses across financial services must address the technical challenges that come with open-source technologies, addressing concerns such as costs, security, and compliance. Once addressed, then open-source applications will unfold a myriad of benefits that everyone can gain from. 

To address these challenges, professionals need to take specific steps to drive the future of their industry – provided they take them soon. The time is now to capitalise on the promise of open-source, from improved security to the framework for trading cryptocurrencies. With the right implementation, fintech will continue to flourish. 

The benefits of open-source for the banking sector 

Despite the hesitancy, there are clear benefits to using open-source within the financial services and banking sectors. The collaborative ethos behind open-source, including the community-driven ability for it to be modified and shared, produces faster innovations alongside driving down costs of development and speeding up the time to market. This is important as a financial institution’s Kris long-term success and competitiveness will be largely determined by its ability to be more agile, responsive, and scalable than its competitors. Financial institutions will have to create a technology foundation that enables them to quickly bounce back from future contingencies and cloud technology is an essential ingredient of digital transformation. 

On the path of digital transformation, enterprises need frictionless cloud computing. They will need to leverage the right mix of cloud services to elevate their success  – a hybrid multi-cloud that provides a consistent experience and unified management across multiple public clouds, private clouds, and traditional infrastructure.

Embracing the open cloud

An emerging cloud computing trend is the open hybrid cloud that is built on an open-source platform, enabling the flexibility, portability, interoperability, and control professionals need to consistently deploy and jointly manage cloud applications and workloads.

The approach allows firms to manage not only their current public and private clouds but those they may add in the future. Open hybrid cloud will enable scaling and app deployment across public and private clouds for greater consistency and efficiency. Cloud agnostic services developed with open, common standards can push the standard of cloud proficiency and allow companies greater control over their enterprise cloud solutions. Then by reusing software stacks, libraries and components will also create more common ground between applications for interoperability.

A key component of Open Hybrid Cloud is a private cloud built with open source technologies. OpenStack is the most popular open source private cloud platform that provides a complete ecosystem for building private clouds. Built from multiple sub-projects as a modular system, OpenStack allows enterprises to build out a scalable private (or hybrid) cloud architecture that is based on open standards.

As a vehicle for innovation, open-source cloud is central to the financial services sectors’ plans for and experimentation with new and emerging technologies, with the rise of standardised open-source platforms such as Kubernetes, helping to enable the progression. Together, it provides a platform for developers to experiment with developing software applications for AI and blockchain, as well as the likely platforms on which financial businesses will ultimately execute the results of those experiments. This helps professionals to innovate faster and better, providing their services at the cutting edge of innovation and safety.  

Enabling Artificial Intelligence and Machine Learning  

Taken together, there is already strong demand from the financial services and banking sector in prioritising open-source cloud platforms to drive the development of these emerging technologies. In response to Canonical’s recent survey on Multi-Cloud Fundamental to Financial Services Transformation, financial services firms outpaced other sectors in their prioritisation of AI and Machine Learning (ML)  by 36 percent and containers and container management by 29 percent. Further, blockchain was surveyed by financial firms as being slightly less of a priority compared with other technologies, at 24 percent compared to just 12 percent. In comparison with the priorities of other industries, it was the technology to which financial services businesses showed the highest affinity. There are many financial technology startups working in AI or blockchain, and large incumbent financial services institutions are investing heavily in these areas as well. 

Many proven use cases have contributed to this positioning of AI and ML as key priorities for financial services businesses. This includes using AI to target labour reduction and automation of highly manual or time-consuming operations processes. By removing manual processes and associated costs, there is a clear path to ROI in automating compliance with Know-Your-Customer (KYC) onboarding standards, risk analytics, credit scoring, customer segmentation, anti-fraud and anti-money-laundering work. 

One major area is customer service. There are many such use cases for AI that are providing common areas of investment as well, including automated advice, service customisation, software-driven consumer investment tools and chatbots. There are also many additional emerging use cases for AI-powered infrastructure and open-source cloud management which have a strong potential to impact the cost and effectiveness of operating IT. By automating highly manual processes, AI has the potential to impact cost and effectiveness, as well as reducing the complexity of large-scale open-source cloud deployments and managed operations for internal systems.  

Cryptocurrencies as the real innovation  

As mentioned briefly, financial services use cases for blockchain, on the other hand, tend to be more experimental than those for AI and machine learning. Whilst blockchain is the technology that enables the existence of cryptocurrencies, many banks are currently hesitant to adopt it because they feel the associated risks outweigh the potential benefits. The caution from banks tends to focus upon cryptocurrency’s decentralised nature, KYC onboarding concerns, and volatility.  

Despite their concerns, however, financial services businesses recognise the potential for blockchain technology to be disruptive or transformative to the cryptocurrency transactions that are conducted, or the way interactions between financial institutions take place. Beyond cryptocurrencies, other emerging uses for blockchain that are relevant to the financial services and banking sector include trade finance, money lending and loan trading, gold trading, cross-border micropayments and establishing customer identity for KYC compliance. These emerging use cases, coupled with wider industry recognition of the potential for blockchain technology, will be essential in mitigating many of the associated risks seen by financial services firms, to help drive further uptake of the technology and advance the cryptocurrency sector. 

Improving security and payment processes 

As always, security is at the heart of financial services and their work. Coupled with many bank’s cautions around the associated risks of emerging technologies such as blockchain, the low security of open-source software can also be restrictive to its growth. A collaborative approach, however, can make open-source much more secure. For example, banks can provide custody services, for example, to bolster security and mitigate the security concerns of cryptocurrency holders. This approach provides easy onboarding and expert assistance, in addition to utilising smart contracts, to bolster trust between parties and use blockchain technology to speed up their own payment processes. 

Some examples of industry use-cases designed to improve security and payment processes include we.trade, a collaborative digital platform that enables banks across eleven European countries to build a transparent and secure environment for tracking and managing trade transactions between SMBs. The platform records interactions and guarantees payments across buyers, sellers, banks, and transportation companies and guarantees, to improve collaboration and trust. Finastra’s Fusion LenderComm also provides improved security, as it enables banks to collaborate across a secure marketplace for syndicated lending and loan trading. These case studies for improved collaboration across the IT infrastructure of financial institutions, which is often required by blockchain projects, is another contributing factor to the prioritisation of the sector in adopting multi-cloud open-source and hybrid IT architectures. 

The next steps for financial services businesses 

Financial services have a unique opportunity to tap into the benefits of open-source technologies. Driven by a common need to modernise existing IT operations, and to innovate and implement new functions based on emerging technologies such as AI and blockchain, the next few years will present a critical stage of transformation for financial services firms in moving the industry’s growth forward. The technology-driven innovation also signals a major shift to open-source cloud platforms as primary venues for executing workloads and improving processes. 

AI and blockchain technologies, whilst still considered experimental by the banking sector amongst many other industries, are quickly being attached to business outcomes via credible industry use cases. The associated low security and regulatory compliance of open-source software will, however, be restrictive to the market’s growth and widespread use of the public cloud. With little central authority currently available for quality control and maintenance through open-source, this presents a skills gap within many organisations and demands the cloud expertise that many financial services firms currently lack. A resolution could come from the use of modern, container-based application architectures such as Kubernetes, the use of hybrid and multi-cloud IT, and engagement with third-party managed service providers. 

The technology challenges that financial services businesses are facing and the effectiveness with which they meet those challenges will determine how well they are positioned to capture the new opportunities open-source cloud offers. The business of financial services is transforming quickly, and organisations that fail to capture these cloud-driven opportunities will struggle to compete. The time for innovation is now.