Financial technology (FinTech) start-ups are fast disrupting the very core of traditional financial institutions by offering the same or similar services but in cheaper, more innovative, and more transparent ways. In this article we explain how cloud computing and Amazon Web Services (AWS) are enabling FinTech startups to disrupt these long standing financial institutions. We also examine the types of actions that banks are taking in response to this rapid technological change.
How are cloud computing and AWS enabling FinTech start-ups to disrupt financial institutions?
Amazon Web Services gives any company almost unlimited virtual computing power and storage, which can be scaled up or down to meet demand. Moreover, the AWS payment structure means you only have to pay for what you use. In Amazon's words, AWS "turns capital infrastructure expenses into variable costs”. Contrast this with the physical legacy infrastructure that banks typically utilise - expensive, inelastic and difficult to scale - and it becomes clear how FinTech start-ups are getting ahead.
In the following examples, we review the specific AWS advantages that are helping FinTech companies get ahead of the game.
Featured in one of Amazon's case studies, rplan is a FinTech company, which develops a range of online tools to help clients make superior investment decisions and gives them feedback on their investments. Briefly, the company helps clients invest more successfully. Because rplan needs to provide actionable insights from large data sets, the company has to crunch a lot of data. The two main ways that AWS is helping this FinTech start-up get ahead is by increasing the company's processing speed and flexibility.
In terms of speed, rplan states that by utilising AWS they can "work in a virtualised infrastructure (which) allows the team to create new environments in less than one hour, versus one day in the previous environment". As a result, they can take on new business at a "speed that would otherwise have been impossible".
Additionally, the flexibility that AWS enables lets the business react to unpredictability without risk or worry. Rplan’s Gavin Baird states that "the AWS solution is flexible enough to support a varying number of users". This is especially important for rplan as their user numbers fluctuate quite unpredictably over the course of a day and over the course of months (their offering is largely seasonal). So it is no surprise that rplan states the flexibility of AWS is "a critical part of our business operating model."
Nubank, São Paulo
Nubank is a young Brazilian financial services company offering up a unique "no-fee, low-interest credit card" that can be accessed and managed from any smart-phone. It also recently raised a sizeable amount of funding in a round led by Sequoia Capital.
AWS was crucial to Nubank in the build stage, enabling them to go from idea to market in 7 months. It is also just as important to them in the running of the company as it enables them to efficiently run their credit card processing platform on which customers can track and control purchases. In a video exclusively for Amazon, Nubank's Lead Operations Manager, Marcus Ferreira explains how essential the cloud is to the company, primarily due to the "agility, scalability (and) security" that it offers.
The agility and scalability benefits of AWS were mentioned above when discussing rplan. However, in the video, Ferreira also points to the other element that makes AWS so essential to FinTech start-ups ability to scale and compete, and that is security. He states "it is easier to conceive a secure app on AWS than start with an open application and then try to improve its security".
FinTech start-ups built on AWS have the cost saving benefits of immediately utilising the deep security expertise and technologies Amazon has taken years to develop. Further, by using AWS they are able to borrow Amazon's strong reputation to instil confidence and trust in their young companies among consumers. The benefit of this is not to be underestimated, as FinTech start-ups operate in an industry built on the back of trust. Without this element, they would have likely found it harder to amass such large customer bases in such short time.
Xignite, San Mateo, CA
Xignite is in the business of providing timely and reliable financial market data to hundreds of corporations worldwide. This includes some of the world's biggest enterprise apps, portals and sites. Much like Nubank, for Xignite the benefits of AWS were at the build as well as the run stage.
At the build stage, they shaved off two months of time and thousands of dollars in costs by not needing to hire specialist staff to set up and optimise in-house servers. These types of large time and cost savings at the build stage significantly lower the entry barrier for young, cash-light FinTech companies.
As Amazon reports, at the run stage AWS enables Xignite to have immense flexibility as "capacity is added during peak times and reduced off-peak". This means they can add or subtract computing power and/or storage instantly in response to varying demand levels, whilst still only paying for what they use. Something of this nature would have been "cost-prohibitive to achieve with fixed capacity and traditional computing models", which is how they were doing things before switching to AWS.
Simple Bank, Portland, OR (acquired by Banco Bilbao Vizcaya Argentaria in 2014)
Whereas all of the examples above are of FinTech start-ups that are focusing on one specific type of service or set of services, Simple Bank is closer to a full banking suite of products running on AWS. According to Amazon, Simple utilises AWS to run its "virtual banking platform" as well as to enable important security compliances, including the Payment Card Industry (PCI) Data Security Standard (DSS). The benefits are clear. With the aid of AWS, Simple can automate what are traditionally time-consuming processes, using that saved time to instead focus further on "customer service rather than managing IT infrastructure".
Delving deeper, in a video exclusively for Amazon, the founder states how Simple is completely cloud native, to the extent that it has no "physical bank branches". He goes on to explain that as AWS allows Simple to keep their "infrastructure as code," it allows them to focus on higher order tasks like thinking about the type of product and service they want to provide.
He explains how behind the scenes, the AWS cloud formation takes care of all "the dirty work of actually connect(ing) the pipes together". By taking this burden away, AWS saves the FinTech start-up from the complexity of the back-end infrastructure that traditional banks have to deal with. This is being accomplished with such remarkable success, that Simple can create an almost fully fledged commercial bank whilst just focusing on the product and service side of things.
A testament to the power of the cloud is that Simple was founded in 2009 and by January 2013 already had 20,000 customers and had processed over 200 million in transactions. More interestingly, by July, a mere 7 months later, they had increased customer size to 40,000 and transaction volume to $1 Billion, all on top of AWS. In February 2014, Simple was acquired by Banco Bilbao Vizcaya Argentaria.
What have we learned?
As can be seen from the above examples, FinTech start-ups are using AWS to both build and run their companies. In doing so they are gaining a real competitive advantage over big traditional financial institutions. AWS removes most of the initial infrastructural barriers, saving the FinTech start-up immense cost and time when they are building their product. It is also making scaling up and down of the launched product simple and effective, which largely eliminates the risk and worry regarding the management and cost of dealing with the varying demand of their start-ups product.
Technology-embracing hedge funds are using on-demand compute optimised cloud services to run computationally expensive big-data analytics tasks on powerful multi-core virtual machines. This kind of technology is extremely expensive to maintain in-house, as the pricey CPUs would be sitting idle most of the time. Collectively, all of this means that FinTech start-ups can launch and scale more confidently than ever before.
The proliferation of cloud computing has helped FinTech start-ups greatly in launching and growing. However, there are also other elements at play that have helped to provide fertile ground for this level of disruptive innovation.
Since the 2008 financial crisis, confidence in traditional banks has waned. This has provided the necessary environment required for FinTech start-ups to launch and grow, as consumers are now more willing to listen to an alternative. At the same time, there has been an environment of more easily obtained venture capital funding. This has enabled promising FinTech start-ups to gain the necessary money needed to launch, grow and fend off competition. Fortune reports that "venture investment in global FinTech tripled between 2008 and 2013 to $2.97 billion and is expected to reach $8 billion by 2018". Finally, many FinTech start-ups are being founded by people with previous experience working in traditional financial institutions. They are able to apply their relevant knowledge to a new way of doing things, without being hindered, tied down or restricted by any legacy IT systems, processes and practices.
Cloud technology offers an almost unlimited amount of virtual computing power and storage space. It requires no heavy upfront investment as you pay only for what you use. Furthermore, it can be elastically scaled up or down rapidly according to demand levels. A new breed of financial start-ups, FinTech start-ups, are placing this cloud technology at their core and really cashing on the benefits.
As a result, these small cloud-native businesses are able to build and scale their product offerings very quickly. This helps them to compete with larger financial organisations, which are often tied down by their in-house legacy IT systems. On-premises IT infrastructure is much more expensive to maintain and cannot react to rapid changes as easily as the cloud can. Add to this the regulatory, security and related infrastructural rules the banks are required to adhere to. Mix in the genuine challenges of manoeuvring a large corporation and it quickly becomes apparent, that the traditional institutions have quite a challenging job on their hands, if they want to successfully compete with FinTech start-ups.
If you would like to build your FinTech platform on AWS or are wondering how your start-up can best take advantage of cloud technology, do not hesitate to contact us!