Banking has been slow to modernize. Most incumbent banks struggle to incorporate contemporary IT stacks. Fintechs use cutting-edge technology to streamline or automate financial services. Thus, a fintech’s platform and cutting-edge tech determine its worth.
Technical debt (age of systems, mainframe, and data centers) is assessed in a typical integration approach. Technical debt is essential to synergy in this strategy’s pyramid of technology cost take-out. Infrastructure and end-user computing are where acquirers start, then application rationalization.
Leverage depends on maturity and finance, but fintech startups seldom have technical debt. Accenture’s Banking Cloud Altimeter found that the typical North American bank has just 12% of its workload on the cloud, despite most fintech being cloud-only. Modern technology stacks and operational models allow fintech to quickly launch new products and services, which drives deal economics. A transaction thesis that emphasizes growth above cost reduction is needed. Due to fintechs’ fast-paced, ever-changing technological ecosystem, they must complete this thesis before it expires. Integration isn’t always linear and increasing the merging of the fintech and acquirer’s systems and technology stacks may not realize the intended benefit.
Thus, creating the correct IT integration plan is as difficult as it is crucial. Two main elements affect tech integration strategies, in our experience.
Core system upgrade timing
Most banks are updating their fundamental systems. Thus, the purchased tech stack’s goal is shifting. No target may exist.
“Nearly every bank has started off on its trek to cloud, but few have gone more than a few feet off the ground.”
Accenture Senior Managing Director, Global Banking Lead Michael Abbott.
Before the purchase, the acquiring bank must assess how well the fintech’s tools and processes fit within the bank’s nature, scope, and complexity. Remediation may cost or delay integration plans. Integration technology firms may plan by detecting tech stack variances. Governance, architecture, and delivery processes affect the technology operating model. Due to their effect on timeframes and efficiency, operating policies regarding decision ratification, contract execution, and product improvements may also affect value realization.
Cloud migration maturity
As of 10 years ago, the cloud provides more than simply on-demand computation, storage, and network. According to Accenture’s Cloud Continuum research, the cloud also spurs innovation and new processes. This may boost inventiveness. The cloud continuum meets evolving business demands with seamless technology and capacity.
Complex legacy systems, changing business and operational models, evolving architecture, applications, and data, reskilling your employees, and complying with laws make migration tough. Cyber-risk is a danger. However, cyber-security management is increasing, so cloud providers can offer hardened security better than most firms can on-premise. Many companies worry about data loss or compromise. Migrating employee and client data to the cloud is considerably more delicate.
How should you integrate financial technology?
Accenture recommends two concurrent technology integration streams.
The first is a classic integration approach that emphasizes IT consolidation and refining current infrastructure to make it repeatable. Banks handle change to retain and expand. Email, collaboration, and storage follow the pattern effectively. Banks should perform these areas swiftly and effectively. Technology should not hinder functional integration of finance, HR, and legal. Integration requires balancing acquisitions against ongoing structural activities.
The second thread integrates the financial platform or product. Technology integration cannot inhibit growth-driven development here. With a revenue-centered transaction thesis and the inability to justify the purchase on cost savings, strategic and in-depth market and growth potential research is essential to due diligence. Product engineering and roadmaps help scale technology by connecting current systems and applications and generating growth. The vision and roadmaps should be set collectively to accomplish this and retain the fintech’s distinctive expertise.
Fintech acquisitions will boost banking reforms
Valuations may flatten, making fintech targets more appealing. Integrating fintech is difficult: Unlike conventional M&A deals, 80% of tech acquisitions fail. Setting the transaction thesis, completing due diligence, and planning and implementing integrations are all art and science of merger success.
Investment/Deal Thesis: Fintech acquisitions vary from bank acquisitions. Economies of scale and global growth are less important. Instead, acquirers should evaluate target markets, client demands, ecosystem participants, and technological advances. Acquiring banks must also be realistic about their growth rate, which is typically associated with technological modernization when estimating value potential. Banks judge acquisition performance by internal rate of return, whereas fintech concentrates on market share, product, and customer growth. To retain value, banks should connect their KPIs to the transaction thesis.
Pre-deal diligence should concentrate on “new” investment thesis features. These include IT and platform consequences, client segment preferences, size, and growth, competitive dynamics, risk, and possible tax and legal responsibilities.
Fintech acquisitions depend on the technology platform for technical scrutiny. Platform-centric investigation that evaluates business fit, future roadmap, development capabilities, technological maturity and flexibility, stability and performance, scalability, data security, supportability, and ecosystem integration can help make the transaction choice. This helps to acquire banks and determine the technological value and market direction. Technology fluidity necessitates market analysis.
An acquirer should also consider how consumers are changing and embracing new goods and services, and how rivals are investing in technology, channels, services, and more to match changing customer expectations. Teams must also grasp and explain the talent strategy to acquire and retain essential talents and promote culture.
Technology advances quickly, making once-attractive targets outdated. To choose the optimum integration plan, banks must understand how the fintech acquisition can benefit their long-term growth goal. Is it an acquisition to expand into new markets or to create new capabilities? This determines the form of integration: purchasing the IP, tuck-in, stand-alone, joint venture, the culture of cultures (holding company), or completely integrating while maintaining value, growth potential, and culture.
Fintechs must retain and hire Top-Notch fintech software development companies. Banks must preserve or enhance the employee value proposition and carefully describe the culture of their new acquisition to retain talent. Assessing both cultures helps uncover the united entity’s important traits (e.g., entrepreneurial, fun, risk-taking vs. averse, etc.). The merged business must also identify the major skill shortages and devise a plan to address them via internal development, recruitment, or outsourcing (“create, buy, borrow, or bot”).
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