Why banking infrastructure is broken blog #2: why banking infrastructure must change

As technology has evolved and opened up new possibilities for the way businesses and consumers interact with their financial service provider, neo banks, fintechs and increasingly non-financial brands have paved the way for innovation.

However, much of this technology rests on traditional banking infrastructure, which is largely outdated and not fit-for-purpose.

In this blog series, I aim to unpack the issues of traditional infrastructure, how it fails to meet the needs of those who rely on it and what needs to be done to fix it.

This time, we’ll look into the reasons why banking infrastructure must change, exploring the ways in which it hinders businesses.

How is banking infrastructure a sea anchor for fintech 

All financial services offerings, no matter how innovative or ground-breaking, need to run on the world’s banking systems – a combination of traditional institutions, their bank accounts and the settlement of payments between them. This foundational layer of infrastructure underpins everything in the financial sector – and it is now very old.   

The result is the technology equivalent of a Sea Anchor, that throws up a wide range of inhibitors to good service, innovation and bank efficiency. Examples include traditional business-day-hours and weekends still preventing a true 24x7 service; information about payments being cut back to the bare bones because old infrastructure can’t cope with more than tiny amounts of data; opaqueness and risk in cross-border banking; and general delays everywhere. This outdated infrastructure obstructs business innovation and growth in a variety of ways:

• Risk: traditional banks are primarily lenders. They provide banking infrastructure almost as a biproduct. Because they are vulnerable to economic shocks and down-turns – such as The Financial Crisis back in 2008 – they can create challenges for the processing of basic banking services which has nothing to do with lending. For example, operational funds held with these institutions are exposed to market-events and business risks. A completely unnecessary risk to introduce to the practice of providing financial services infrastructure.

• Competitive: traditional banks often foster competition with new banks, fintechs and emerging players for their end-users, whilst also serving them. This competition will never create a true, reliable partnership.

• Rigid: often change-adverse, traditional bank rigidity prevents innovators from offering new technologies and services to their customers.  Old technology designs make change enormously risky, resulting in market-wide change often taking decades to roll-out: the very antithesis of the fintech creed.

• Expensive: banking infrastructure has many layers to it, which are often incredibly expensive to adapt or amend for other financial service providers looking to offer a new technology which uses banking infrastructure as its foundation.

• Resistant: traditional banking has historically had a conservative and resistant response to disruptive yet innovative change in the financial landscape, such as DeFi, working against these innovations rather than to support them. The drivers are both cultural, and practical: a traditionally slow-evolving industry running on very old technology that is expensive and risky to change.

• Disjointed: for cross-border payments, there is often significant difficulty through either long wait times for transfers or expensive exchange processes. This is a result of each country having a differing banking infrastructure in place.  To compound this, traditional banking technology is challenged by compliance cost in many emerging markets. This has led to a global retrenchment in international bank networks as incumbent banks opt to de-risk their networks rather than strengthen them.

These obstructions can create significant problems not just for existing providers, but for emerging providers too. Though, for emerging providers in particular, traditional banking infrastructure has a number of unique downfalls:

• Slow: due to traditional methods locked in by old technology, new end-users and business accounts can often take weeks to set up, with lengthy verification and registration processes. For example, credit scoring is slow and cumbersome, and API integration particularly challenging for many banks.

• Constrained: legacy technology carries with it the DNA of 20th – and even 19th – century banking, which is enormously expensive and risky to adapt and maintain. The original developers of many bank systems are dead or long-retired; their 1960s code still in place, layered and patched year-on-year. As a result, many banks spend most of their technology budget just patching up and managing this old technology, and don’t have resource to keep pace with customer needs and serve them creatively.

• Disconnected: when businesses expand internationally, slow, limited and opaque cross-border banking services makes it much harder to create a seamless and timely service to customers - something people worldwide have come to expect from advances in information and telecoms.  

Fundamentally, banking infrastructure must change to better support fintechs, new banks and financial service providers, rather than acting as a sea anchor and creating barriers to innovation. This change will allow for the emergence of new technologies and pave the way for the next generation of financial services.

In this blog series, we’ll discuss…

Throughout the coming months, we will explore the biggest areas impacted by banking infrastructure, with the next instalment focusing on payment rails and why improving this part of banking infrastructure must go to the top of the list.

The aim of this series is to help businesses better understand how to overcome the restraints of core systems and how they can deliver the financial services of tomorrow.