🏦 Banking! How Does It Work?

And where does fintech fit in? • 4 min read

As someone with a design and engineering background, the world of banking often seemed like an enigma to me. For the longest time I knew banks managed our money and provided loans, but not much else. The internal workings of Wall Street never made themselves visible to me until I stumbled onto Angela Strange’s presentation on fintech, where she surmised that every company would become a fintech company.

In that presentation (or in the adapted article) she first touched on the challenges of both incumbents and startups in the financial space, before shedding light on the technological advances that allow disruptors to get a foothold. It’s well worth the read (or watch).

My attention was piqued by what she mentioned afterwards: what the banking stack looks like, and how startups have started packaging parts of it and providing them as a service to other disruptors so that they, in turn, could freely innovate without as much overhead.

What are the different facets of a bank?

For a bank to operate, the first thing it needs is a License. The responsibility and risk involved in operating a financial institution means it’s a heavily regulated industry, so a license is non-negotiable. That being said, since getting a License is an onerous process that can take years, many companies effectively “borrow“ an existing License from a willing sponsor bank.

A simplified illustration of the consumer banking stack / Andreesen Horowitz

After obtaining a License, Core Systems are the next must-have. It’s useful to think of them as large databases that record who has how much money and where it’s going. And speaking of where it’s going, Payments are an important part of the equation, since without them the money can’t move around in the first place.

Data is quite an involved layer in the stack: it concerns all of the information about a bank’s customers, usually used when evaluating loan requests. This information comes from a country’s Regulatory agencies and complying with them can mean having a deep understanding of a multitude of subfields, from Know Your Customer (KYC) to Anti Money Laundering (AML).

All of that is before getting to Fraud, which requires specialized software, so by the time we get to the User Interface it’s easy to understand that there are many gears turning in unison behind the user’s screen of which they are blissfully unaware.

Fintech or, The Great Unbundling

Focusing on an a single area (or areas) of the banking stack allows startups to focus on innovating in the spaces they know best. It allows them to build on those that came before them, and provide the springboard for those that will follow.

Strange goes into examples in a better way than I ever could, so I encourage everyone to give her article a read (or her presentation a watch). While this is but a very shallow dip into the vast ocean of the financial services industry, I hope it’s as good a start for you as it was for me.

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Three things I enjoyed this week

🎼 One song

Jack Jetson’s Wonderberry – Leaf Dog’s stellar production on the Nottingham rapper’s Adventures of Johnny Strange is on full display on this track, featuring his lyrical backflips filmed on a trippy Birmingham walk.

📹 One video

Marques Brownlee’s The Tesla Bot: Explained! – yet another great tech breakdown from MKBHD’s own. What I like most about Bronwlee’s explainer videos are the layers which he uncovers, hinting at more than just a cursory product understanding.

📖 One article

Harvard Business Review’s Many Strategies Fail Because They’re Not Actually Strategies – a nuanced understanding of strategy can take years to develop, and as an early career Product Manager I’m often reminded of the long road ahead. This article proved to be quite insightful for me.

One major reason for the lack of action is that “new strategies” are often not strategies at all. A real strategy involves a clear set of choices that define what the firm is going to do and what it’s not going to do. Many strategies fail to get implemented, despite the ample efforts of hard-working people, because they do not represent a set of clear choices.

Many so-called strategies are in fact goals. “We want to be the number one or number two in all the markets in which we operate” is one of those. It does not tell you what you are going to do; all it does is tell you what you hope the outcome will be. But you’ll still need a strategy to achieve it.

– Freek Vermeulen, writing for Harvard Business Review