Digitalisation - Build or Buy

Client-facing digital capabilities have become a cornerstone investment priority for wealth managers in Asia. Rising digital expectations from both existing and next-generation clients, as well as the emergence of competitive digital offerings for affluent and high-net-worth clients, have created a perfect storm of pressure for private banks.

The launch of virtual banks in Singapore and Hong Kong, coupled with the impacts of the COVID-19 pandemic, will only increase the pressure further. The pressure exists not only to digitise, but to do so quickly.

One of the first key questions that private banks have to consider when charting a digital roadmap is whether to build their own in-house solutions or buy software from a third-party vendor.

As is often the case, there is no simple answer about whether to build or buy. The decision is largely driven by a bank's circumstances and priorities. Figure 1 provides an overview of the typical trade-offs.

The business case for building your digital solutions in-house requires several key ingredients:

• A high appetite for customisation
• A strong, long-term commitment to the digital infrastructure and capabilities
• A track record or access to specialist resources that can deliver and maintain the solution
• A change of organisational model and culture rather than just the technology (i.e., long business planning and development cycles are replaced by continuous improvement and development)

Private banks investing in solutions that will act as the core for long-term digitisation may prefer to build in-house. Doing so offers stronger customisation benefits and greater control over the platform and solutions involved. There are, however, important considerations for banks choosing to build:

• Will you be able to customise sufficiently to generate a meaningful competitive advantage? If not, is the benefit of building in-house as great as you originally envisaged?
• Are your requirements as unique as they seem? Has a proper analysis of solutions available in the market been made to determine whether a third-party solution exists to fulfil these needs (at a lower cost and effort)?
• How much appetite do you have for the maintenance and upgrade costs required for an in-house solution? Do you have the research and development capabilities to futureproof your solution? If you are not innovating to keep your product relevant, then someone else probably is.

Embarking on a “build” strategy is a long-term commitment. Be prepared for the upfront investment, the ongoing support costs, and the longer-term return on investment. In exchange, you will have a platform you can call your own, with full control for future development and an opportunity to potentially create meaningful differentiation from your competition.

Private banks buying digital solutions from a third party often have a set of common characteristics:

• A need or desire to catch up. Buying market-ready solutions is an accelerant for doing so.
• Limited access to in-house resources to execute and maintain digital solutions.
• An appetite for staying relevant or in line with the market as new solutions emerge.

Many private banks have either underinvested in digital solutions or lack the scale and infrastructure to make an in-house solution work meaningfully without crippling their cost base.

Buying third-party solutions is an effective entry strategy for banks who need or want to catch up but are unable to commit the entire organisation to delivering and maintaining digital solutions. Such a strategy is particularly useful for features that absorb significant internal resources but bring little differentiation for the clients, such as security tools, token management, authentication capabilities, etc.

A bank that recognises these characteristics should consider the following questions:

• Is "digital" going away? Instead of buying third-party solutions, do we want to invest long-term and re-organise our operating model to allow us to deliver more in-house?
• Are we as committed to buying out-of-the-box as we say we are? Third-party vendors often have robust methods for allowing clients to tweak aspects of their product but are (understandably) less equipped to support major feature adjustments without compromising timelines.

All banks, regardless of whether they want to build or buy, should start with a careful assessment of their back-end digitisation maturity.

Putting "lipstick on a pig" (a cosmetic front-end with low straight-through processing in the back end) is costly, will create delays in implementing your client-facing service, and can serve to increase operational and reputational risk rather than decrease it.

In our experience, this step of assessing the back-end digitisation effort is essential when estimating the total cost of launching client-facing digital capabilities. Figure 2 provides an illustration of the different back-end and front-end models, tailored for the size and scale of banks best suited to deploy them. We also provide an assessment of whether build or buy is the optimal strategy together with the associated costs.

To build or to buy is not a straightforward question with a straightforward answer. It requires a careful assessment of organisational priorities, resources, and appetite.

Banks with scale, budget, and infrastructure (traditionally Tier 1 banks who have other business lines that can benefit from these shared resources) may prefer a long-term investment centred around a core platform built in-house with third-party applications connected as ancillary services.

More often than not, many banks do not have the time, money, or appetite to add the fixed costs involved with doing this to their operating model. For these banks, a third-party-led approach that allows the bank to participate in digital solutions for their clients in an accelerated way, while minimising the cost and ongoing development efforts that come with an in-house solution, is more cost-effective.