Mark P. Dangelo: Accelerating ‘as a Service’ (aaS) Displaces Finance and Lending Traditions
Mark P. Dangelo is Chief Innovation Consultant with BlackFin Group, Laguna Hills, Calif., responsible for leading and managing innovation-led business transformation and technology projects and innovation-based advisory services. He is also president of MPD Organizations LLC and an adjunct professor of graduate studies in innovation and entrepreneurship at John Carroll University. He is the author of four innovation books and numerous articles and a regular contributor to MBA NewsLink. He can be reached at mark@mpdangelo.com or at 440/725-9402.
Every few years, pundits and vendors beat the drum of a singular disruptive solution or technology. Like a game sword meant to deliver justice, if you subscribe to their offering, you will be ahead of the competition and exceed the demands of your prospects and customers. It was always a compelling marketing tactic until the reality that these one-off unicorns often fail to deliver ROI, the organizational culture lacked the rigor and discipline to sustain results and the solution purchased is only a small piece of the delivery puzzle—not exactly what customers or banking leaders were expecting.
Moreover, financial regulation for many bankers have been a pox on their business. They pushed for reduced regulation. Regulation is often referred to as a burden (i.e., a cost). Yet regulation also provides barriers to entry. What we are now seeing as regulation decreases, so do the number of non-traditional competitors leveraging FinTech offerings. The number of firms delivering discrete, container-based offerings are projected to be more than 13,000 firms at the end of 2021, up from under 400 in 2011 and 10,000 to start the year. Additionally, RegTech specific vendors during the same period rose from under 30 to more than 450.
And, when it comes to the phrase “the cloud” liberally spread in ads and presentations, I have to ask how many cloud computing acronyms with “as a Service” (aaS) can you identify? Here is a list from what I have read just this week—AIaaS, BPaaS, BRaaS, CaaS, DaaS, FaaS, IaaS, iPaaS, KPaaS, LaaS, MaaS, NaaS, PaaS, SaaS and SEaaS. With the mainstreaming and broadening of cloud computing solutions, every letter of the alphabet is concatenated onto “aaS” to create a distinctive market identifier. In fact, we have already run out of the 26 possible options and some innovative marketers have now moved into two letter prefixes. These are only the generic identifiers—vendors have hundreds more specific ones.
There are a lot of “disruptive” pieces pitched by established and startup providers. The venture capital and now private equity dollars chasing the “next” normal, and the technologies that power the Fourth Industrial Revolution is a x-factor for tens of billions of investments per year. Are all these “unicorn” and aaS solutions valuable, mitigating risks, delivering customer gains, and improving straight-through process times (and therefore profitability)? “aaS” has ushered in new offerings, but it will be IBBs that create the agile disruption (across supply chains and leadership) that many have been seeking.
The Arrival of IBB
The resulting successes of these aaS offerings is that financial industry excitement, and the urgency in creating layers of innovation some of which are disposable and a few disruptive, is increasing. The utilization of a building block mindset is ushering in new functionality across banking platforms—and it is promptly expanding as early results exceed internal organizational expectations.
These layers of innovations, sometimes called innovative building blocks (IBBs), are projected to disrupt numerous financial segments currently enjoying record profitability. The ability to disrupt by forming stacks of innovations to meet targeted demographics, while creating iterative customer offerings, are transforming future IT offerings and provisioning solutions when compared to traditional implementations.
Why is this of any importance? What happens when you merge public, private or hybrid cloud offerings, with container defined software, artificial and machine intelligence against rising big data, and customers who expect financial firms to be technology leaders? You get the realization that no one vendor, no one provider, no one firm controls all the channels, offerings, and markets to meet the constantly changing customer demands across digitally, interconnected ecosystems.
So again, why is this important? There is one segment that appears at the cusp of comprehensive disruption because of layers of financial building blocks that previously were not available to traditional and non-traditional lending competitors impact customers, lenders, investors, and non-bankers. This phase shift of container functionality has been years in the making. Many industry leaders are unprepared for the convergence of these IBBs and the pace-of-change already taking place. The segment in question is lending—consumer and mortgage—each at varying stages of acceptance, disbelief, and adaptation. It is a case of hype finally meeting the delivery realities, but many industry leaders have tuned out due to historically missed expectations.
For some, the idea of IBB may be completely new—until we examine current offerings outside of the focus area. For example, have you heard of cyber currencies? Are you familiar with software as a service (SaaS)? Does AWS ring a bell? How about the idea of FinTech, RegTech, and banking as a service (BaaS)? Additionally, have you previously employed business process outsourcing (BPO)? Have you ever utilized cloud solutions either public, private or hybrid? Has your LOS or software vendor advocated “replatforming?” Each of these represent discrete innovations assembled for markets and for customer “gains,” while attempting to minimize the “pains” associated with traditional approaches.
The delivery of IBB has been made possible by the varied and advanced “as a Service” offerings, with leading technology firms moving beyond standalone deployments once accepted as commonplace in our industry.
Setting the Stage—A LOT of Financial Disruption Ongoing and Converging
Our IBB journey advances, like most in a consumer driven world, with people—their behaviors, their habits and their pains and gains. Since 2005, e-commerce has steadily grown from 5% of the market deliveries to an explosion of more than 22% of the total retail sales driven by behavioral changes and innovation advances. Covid-19 steepened the adoption curve. Ok, is that all there is?
Before 2020, there were zero central bank digital currencies (CBDC), but today there are several already issued with more than 60 central banks actively moving towards delivery of CBDCs by 2025 including China and the EU. CBDCs are driven by the consumer for ease of use and safety in a world now fearful of virus transference using traditional paper and coin currencies. The consumer demand for cyber-delivered currencies has become mainstream using now common innovations such as distributed ledger technologies and blockchains. Even Mastercard is working with governments to understand and map out the “last mile” of consumer adoption. Why is this a concern, as we have already gone digital?
In a world of lending, the transformation from paper to digitization has taken a decade and is still evolving not just for the benefits of efficiencies and error reductions. However, as digitization turns data into the fuel of profitability and customer anticipation, the leveragability of this big data demands every banking organization establishes core competencies with the “V’s” of data in addition to its privacy, security, governance and curation. But isn’t all this just for the larger enterprises?
The idea that financial services and lending can be put into functional containers and assembled by non-financial firms prior to 2017 seemed like a technologist fantasy. The notion that financial transactions can be centrally cleared without a regulated entity was viewed as folly. The use of a “smart contract” to eliminate delays and de-risk the lending supply chains is viewed as a long-term future—and not a non-traditional competitor disruption of a commodity product. And finally, the provisioning of software using building blocks or “aaS” (as a Service) is important, but not viewed as a comprehensive reduction in the barriers to entry for those not possessing discrete industry knowledge.
Notably, it was only 15 years ago when Amazon brought to market their cloud platform, AWS—which now has an annual topline run rate of well over $50 billion. It addressed the problem of underutilization of computers and servers by offering unused capacity in the form of an on-demand service. Today, the size of these offerings is estimated to reach more than $450 billion in 2021 and more than $1 trillion in 2026.
There are hundreds of additional examples that could be mentioned. Your organization can discount any one of them saying that they have no impact on your operations, profitability, or even your customer. Yet, when examined holistically or across building blocks, these financial advancements take on new meaning, new impacts and new opportunities.
aaS, Its Impacts and Its Implications
Before aaS, software, hardware, data and networks were defined and often provisioned as segments using a linear definition, development and implementation approach to solving a customer demand. Today, with the plethora of aaS options just for financial services, innovative business designs and their leaders can assemble and disassemble customer options using cross-industry solutions previously out-of-the-reach of financial sensibility (e.g., avoiding LOS customization costs >$1-$3 million).
The rationale for aaS is becoming a mainstream reality—no one thinks twice. However, the implications or downstream impacts are just being addressed and the leverage and mitigation demands to ensure “no surprise” implementations are still opaque. As the aaS technology capabilities and granularity of offerings advances, the soft skills and delivery adjustments are often what reduces positive ROI into negative net ROI. For example, what does aaS do to support demands? Who owns the data? What security and privacy risks will need to be mitigated? How do we deal with dynamic rerouting in the event of failures or network restrictions? Do we have the forward looking and blended hard and soft skills needed to deliver and maintain a tightly coupled virtual solution?
To compete in the future, you must solve real problems or uncover disruptive ones which previously were not understood. The aaS digital revolution is impacting every traditional idea and commoditized product and if entrepreneurs do not seize on the digital transformations, then they will be left out of the sharing economy.
The economic models and the strategy used to arrive at a workable innovative solution have been altered especially when it comes to aaS worker skills and technology integration. Additionally, as 2021 unfolds, the rise of RegTech (regulatory technology) in the hands of recently minted regulators will encourage financial conformance versus innovation. Holistically, what is transpiring and directly impacting business profits are the advances in technologies and the sharing of information across not only computers, but partners, agencies, and advocates. For lenders, the world has gotten smaller, commodity of offerings increased, innovations become transitory and the ability to innovate linked to the organizational hard and soft skills.
In summary, aaS is the normal—it is not a “new” or “next” normal anymore. What is new is how these aaS solutions are assembled, disassembled, and disposed of with greater frequency and shortened lifecycles. The consumer expects as part of their customer user experience (UX) solutions that align with their lifestyle, their work habits (now increasingly work-from-home, WFH), and their cross-population of information not just from internal finance and lending solutions, but other platforms and data sources. Remember, finance and lending control less than 40% of the customers financial information—the rest is in the hands of not traditional entities all seeking to take a piece of the lending market.
Lending leaders must accept and plot their innovation journey using aaS as a core competency for IBB mindsets. The long-tail provisioning of traditional hardware, software and data are like the 250 banks lost every year, a sign of the past. To leverage digital advancements and to meet the customer user experiences demanded, aaS is where organizations will start their innovation journey—it is not the endpoint of the one-and-done culture.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)
