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Banking as a service, digital bank - an opportunity to change the ossified banking segment or a threat to traditional institutions in the market? "For established banks, this is an opportunity to gain new customers they cannot normally access. But on the other hand, customers will primarily interact with start-ups. At the same time, the traditional bank will stand more in the background as a transaction processor," says David Kozelka, Head of Finance at Adastra, which has been helping to build one European digital bank. However, he points out the main benefits when it comes to bringing fintech start-ups and traditional banks together.
Ivana Karhanová: Huge legacy systems, hundreds or thousands of employees, complex processes... The ability to change direction is limitingly close to zero. These are large, established banks that used to be the mainstay of the financial world. The financial crisis of 2008 has shattered that confidence and ever-accelerating digitization is now making it clear to banks who want to take the reins and set the direction.
Digital banks - banking and service. How does such a digital bank get built? That's what I'll be talking about with David Kozelka, head of the division that looks after banks and financial institutions at Adastra. Hi.
David Kozelka: Hi.
Ivana Karhanová: You and your whole team are currently building one digital bank. It's not going to be Czech; it's going to be European. How long does it take to build such a bank?
David Kozelka: I would say it takes an infinite amount of time from the first idea to the moment the bank starts offering its first products and reaching out to clients. In the case of our customer, it takes us half a year.
Ivana Karhanová: That means from the initial dig to the moment when the services are launched to customers, it only takes six months?
David Kozelka: The customer had good ideas at the beginning, had money, or got an investor, and already had some customers. He is in the financial products business in one of the Nordic countries, and he already has a foundation. But his products are not banking products, and he wanted to start offering these services to existing and new customers. This is where we met. First and foremost, the products needed to be thought out, the processes defined, and the overall setup of how it should work. We worked on this with colleagues from business consulting and started development in parallel.
Ivana Karhanová: We should add that you are building the bank as a software as a service. That means that everything will be run by Adastra for the customer.
David Kozelka: Yes. At the moment, the customer does not have its own infrastructure, or rather it has an infrastructure that is chargeable to its existing and relatively simple financial products. Adastra is the one that will develop the applications and run the whole thing. We can say that it is a software as a service bank.
Ivana Karhanová: How atypical is this solution in the financial world?
David Kozelka: It is very atypical. We are building on strong trust and, at the same time, on the fact that the customer does not want to run their own IT. They just want to come up with ideas, find customers and offer them interesting products.
Ivana Karhanová: Looking at it from a business perspective, what are the advantages and disadvantages of building the solution yourself and leaving it to a third party?
David Kozelka: The advantage is definitely speed and scalability. The customer has a limited team a relatively large budget, but it costs a lot of time and energy to build a whole new infrastructure. Whereas if they go to a supplier who already has teams in place, they can get started much faster.
Ivana Karhanová: It eliminates the problem that there are not enough people with the right skills available on the market.
David Kozelka: Exactly.
Ivana Karhanová: You mentioned that you were doing this, including business consulting. Does that mean that you defined the products how they should look and work?
David Kozelka: I would just correct the past tense. The project is still ongoing, and we are now two months away from launch. So there is still business consulting work going on as well, saying what the products should look like, how the defined markets should behave, how to set the risk parameters, and so on.
Ivana Karhanová: Shouldn't a client who wants to operate in these areas have all this already defined?
David Kozelka: The client has it. They have a risk specialist, a product specialist, and so on. Again, it's about scaling. If he wants to go to Denmark, Finland, or Sweden with products, for example, he needs to map all the markets and do a thorough analysis. It takes a team to do that.
Ivana Karhanová: Does that mean that in each of the countries where he wants to launch the product, different parameters can be set?
David Kozelka: Exactly. There are different customers there. Different customer groups behave differently. There are different legislation and systems. Applications connect to third-party systems. In short, it's different in every country.
Ivana Karhanová: If we mention that the application will be connected to third parties, we are talking about something called banking as a service. This means that a company that has a great idea can use the banking products of established banks and get them to other customers. How can this affect the big established banks? Is this an opportunity or a threat to them?
David Kozelka: I think it can be both. The opportunity is that banks will get new customers that they don't normally get. On the other hand, it is a threat because customers will primarily bank with the start-up, which will be the main face for them, while the bank stands in the background as a transaction processor. They will remain the one who has to do all the work, all the reporting to the national bank, consolidating clients, and other things. At the same time, the customer behavior data in the app will remain with the start-up.
Ivana Karhanová: On the other hand, isn't this exactly the future of big banks that have complex processes and the ability to change direction is borderline zero?
David Kozelka: It is one of the paths that is being described. Some of them will become service providers that have robust systems, fine-tuned reporting, and everything that is needed for a banking license. Or banks need to adapt - move more to the start-up side and offer modern dynamic products.
Ivana Karhanová: In both scenarios, it means that banks will remain the ones who will physically take care of the money. That means that the customer will not entrust their money to a start-up but to a trusted brick-and-mortar bank. The main difference seems to be the approach to customers. Are traditional banks even capable of following fintech developments?
David Kozelka: I know that they are at least trying to do so. Most banks have an agenda related to digitalization, to replacing their core systems, to new cool products. As well, they are doing various partnerships just with start-ups to keep up with the times.
Ivana Karhanová: Are traditional banks able to move away from their traditional viewpoints when dealing with customer experience in the digital plane?
David Kozelka: The purpose of a bank is primarily to serve customers, to take care of them and their money, and to offer them traditional banking products. This will definitely not change. From my point of view, banks will really be divided into two groups. One will do more of its core banking business and become a banking service provider that will be used by start-ups or other financial groups, for example. Indeed, we are already seeing this today. On the other hand, there will be banks that will adapt, digitize part of their business and be a modern bank that provides the client with what he needs so that he does not have to look for start-up gadgets.
Ivana Karhanová: Coming back to the digital bank project, what were the key stages you had to go through with the client?
David Kozelka: In the beginning, the client had a concept. He had some clients that he was able to lend money to. He knows whom to lend to. He knows who not to lend to. These are often clients that regular banks don't really want to lend to. He had the idea that these were the clients he wanted to offer banking services that they wouldn't otherwise get. If he has a well-mapped risk profile for such a group of clients, why not offer them other products. So it was a discovery phase at the beginning, analyzing what market to go into, what the competition is, what banks are there that will offer this product - because the client himself will be the intermediary who is not applying for his own banking license. Subsequently, the development of a mobile application that will offer the products to the clients started. The analysis combined with development started straight away so that we were able to deliver something as quickly as possible and the customer experience could be fine-tuned as quickly as possible.
Ivana Karhanová: How expensive is it to launch a digital bank? I suppose it's an order of magnitude cheaper than going to market with a license. Petr Borkovec (founder of Partners, ed.) once said that he could build a bank for a million crowns.
David Kozelka: Then I'm keeping my fingers crossed for him. :-) When some small banks started on the Czech market a few years ago, it took them a couple of years, and they had teams of dozens of people preparing the launch... So well worth a million - good luck. In our case, it's a team of about twelve people working on it. We're talking in the order of millions of crowns.
Ivana Karhanová: What is the advantage of digital banks over brick-and-mortar banks?
David Kozelka: From my point of view, the main advantage is the focus on the customer. They have to focus a lot on their product, and they have a huge drive to get somewhere because if they don't, they'll go out of business. If an existing brick-and-mortar bank with a portfolio of customers doesn't do anything for two or three years, nothing terrible will happen. If a start-up does nothing for two-three years, it will cease to exist. It doesn't have a strong customer base, and without exciting new products, customers will flee. From what we can see, customers are generally not fleeing the big banks en masse.
Ivana Karhanová: When a big bank decides that it wants to follow the digital evolution and wants to handle these things on its own, do you recommend building within the existing infrastructure or building greenfield, separate from existing systems?
David Kozelka: Until recently, it was more of an effort to get it into existing systems, and the products were bent in various ways to get there. Nowadays we see that more than one big bank in the Czech market is doing a really big project of changing some core system and plans to launch new products in them. This is a definite shift in the last two years.
Ivana Karhanová: What triggers the courage of banks to embark on such a big project that will cost a lot of work and money?
David Kozelka: It's money. They don't do it because they enjoy doing IT projects. They do it because they calculate that they will save money in the future. New systems make it easier, faster to create new products, easier and better integration.
Ivana Karhanová: So we don't have an actual business case, but it's more about some cost opportunities?
David Kozelka: They do have the business case, but it's a longer-term activity. Plus, we have seen a number of acquisitions in the Czech market in the last few years that are supportive of that. One bank will merge with another bank, and maybe they are considering not using the system of one or the other, but they will just get something new and sprinkle products into it.
Ivana Karhanová: That's perhaps the ideal opportunity because combining two systems would also cost them a significant amount of resources.
David Kozelka: It requires thorough analytical and architectural work, and you need to make a sensible decision when it makes sense - when it makes sense to use one bank's system, use some of the other bank's systems, and throw out some of the systems and redo them.
Ivana Karhanová: To what extent are banks counting on letting third parties into the systems? It is not banking as a service, but banking as a platform, where the bank establishes the products of these start-ups.
David Kozelka: I know this concept from the world, where it is spoken about in contradiction with banking as a service. I haven't come across it on the Czech market yet, or I don't know about it. However, it is already the approach where the bank offers its customers the products of some interesting financial start-ups that are not focused on having a super full application and pulling clients, but instead, want to have an interesting product that the bank will then start using.
Ivana Karhanová: Some banks are going the route of buying start-ups. The question is if a bank buys a start-up if it doesn't basically kill it. In that case, isn't it more strategic for it to let it exist side by side and just use its products?
David Kozelka: We see both ways. A bank can buy a start-up because the product has, for example, a good team and good ideas. It will look at it and start doing its banking with it. The opposite is when it leaves it standing by, as you say, and just funds it.
Ivana Karhanová: If we look at it from an infrastructure perspective, the cloud is being mentioned everywhere. How much do banks want to go to the cloud?
David Kozelka: I think they're quite keen. In the past few years, there has been a lot of tension and fears that they would rather not go there because they didn't want to give client data, they didn't know what the national bank had to say about it, and so on. However, the big cloud providers have done a tremendous amount of work to overcome these barriers. They communicated with institutions and authorities to make it work. Microsoft, Amazon, and others in the market have simply done their homework and then come to the banks with statements. Of course, security is still paramount. However, the shift is already happening, and I don't know of a bank in our market that is not doing something with the cloud. It's not that they just have some test environments there, but realistically they are moving some of their applications there to save money, or they are really already developing some applications or systems in the cloud.
Ivana Karhanová: Says David Kozelka, head of the division that handles banks and financial institutions at Adastra. Thanks for coming in, and see you sometime.
David Kozelka: Thanks for having me.