Cloud Is King for Fintech Startups, but On-Premise Remains Relevant
Fintech startups are sprouting up like dandelions. From 2005 to 2016, the number of companies in the space grew by 800 percent from 1,000 to over 8,000, according to Entrepreneur, and most of these new entrants were startups. Investments in fintech have also been rising at a rapid pace. According to a report by Accenture, fintech ventures in the first quarter of 2016 reached $5.3 billion, a 67 percent increase from the previous year.
This growth has been driven primarily by startups’ ability to add agility and innovation to financial services such as banking, investment and payments. While many in the fintech ecosystem are tied to legacy on-premise infrastructure, startups don’t have these same constraints. Instead, they leverage the cloud to build their applications and services — and for the most part, it’s worked in their favor.
The Value of the Cloud in Fintech Startups
Cloud has spurred innovation in the financial services sector. Cloud-based applications that integrate point-of-sale systems, person-to-person interactions, stock trading and cross-border transfers are offering consumers more convenient and personalized experiences. Sometimes, these applications provide opportunities for traditional financial institutions, such as encouraging more mobile transactions. However, these apps can also threaten many financial services core competencies, making established players wary of up-and-comers.
But fintech startups are also using the cloud to directly target financial services organizations as well. In many cases, new financial technology offers banks and other financial companies better ways to manage costly compliance and regulation issues or streamline internal processes. For example, cloud-based microservices are allowing banks to integrate with their existing system through APIs to meet compliance requirements when a new regulation is issued. Because these services are targeted precisely at a new rule and can be easily incorporated into the larger system, they can significantly reduce the compliance burden on a bank or other financial institution.
Other examples of cloud innovation range from back-of-office services for smaller financial institutions to artificial intelligence, machine learning or blockchain technology that can allow financial institutions to improve customer engagement and modernize business processes.
On-Premise Remains Critical to the Equation
Despite the myriad of benefits cloud-hosted applications offer fintech startups, banks and other legacy financial institutions still hold some leverage. As trusted institutions, consumers remain far more likely to keep their money in a traditional bank than with a startup. So for now, banks aren’t going anywhere.
Additionally, having a mature, full technology stack is not something most startups can manage. Such an undertaking requires an enormous amount of time and capital. Instead, most startups are developing their services on top of existing infrastructure, much of which is still hosted on-premise.
Converging Old-School and New-School Tech
For the fintech ecosystem, access to an open platform that makes it easy to build and deploy applications quickly while leaving flexibility to scale in the future is at the core of rapid innovation. And while cloud is already prevalent and growing, for now, being able to bridge the on-premise and off-premise worlds with a hybrid IT environment remains important. This means fintech startups need to look for a platform that can easily and securely integrate cloud and on-site systems.