Skip to main content

Banks are finally embracing the Open Source movement


Historically banks have been hesitant to adopt open source software (i.e. software where source code is shared and made freely available). With traditional vendors like IBM, TIBCO, Oracle…​ strongly positioned in this industry, the move to open source has been slow. In recent years, forced by a rapidly changing business, banks are transforming their IT organizations considerably, adopting new technologies and methodologies like Cloud, microservices, Open APIs, DevOps, Agile and also Open Source (often these different adoptions enforce each other).
The Open Source movement has already reached a certain level of maturity. While 5-10 years ago, Open Source was still considered something of computer-nerds, idealists and small start-ups, today it has become mainstream. The recent acquisitions of open-source companies by large established corporate tech-vendors is the best proof of this evolution:
  • SalesForce bought MuleSoft for $6.5 billion in March 2018
  • Microsoft bought GitHub for $7.5 billion in October 2018.
  • IBM purchased Red Hat for $34 billion in 2019
At the same time these incumbent tech players are adopting a true open source strategy themselves. E.g. Microsoft, initially one of the most has adopted an open source strategy, since Satya Nadella became CEO in 2014, e.g.
  • Edge: the Edge browser is switching to the Google based open source Chromium platform
  • .NET framework: the full .NET framework was open-sourced on Git-Hub
  • Windows 10: built on open-source Progressive Web App technology
  • Windows 11: analysts speculate that the NT kernel would be (gradually) replaced by the Linux kernel
  • Azure platform: the most used operating system on Microsoft Azure is not Windows Server, but rather Linux
  • Open-source contribution: Microsoft has become the largest contributor to open source in the world (considerably more active that the second most active contributor, Google), with 20,000 Microsoft employees on GitHub and over 2,000 open-source projects
Nonetheless a consolidation movement in the open source space is still required. With thousands of different projects, usually only maintained by 1 company, it is difficult to speak of a real open-source community or ecosystem. A larger adoption of open-source software (both in usage and is contributing back) by large corporates together with a consolidation, will result in a smaller number of projects, but with larger communities.
Even though bank leaders are becoming convinced that leveraging open source technology is the future, banks will not transform over night to open source adepts. Just like introducing all other new technologies and methodologies, embracing open source software requires a cultural shift in the whole organization, which takes time and intensive change management.
The adoption will evolve according to two axes:
  • The involvement of the bank in the open source ecosystem
  • The type of open source products it is adopting
According to the first axe, the organization should evolve from Using open source up to Opening its own proprietary software:
  • Use: banks should adopt a strategy to give preference to open source software, where possible. This can be full solutions or open source components, which the bank glues together into the target custom-built application.
  • Contribute: the intensive usage of open source will surely lead to the identification of bugs and the implementation of valuable features on top of the open source software. Instead of building a quick-and-dirty patch, banks should learn to build a more generic and well-designed solution, which can be contributed back to the open source community. This will not only improve the bank’s corporate image, but will also allow the bank to profit from the testing and future extensions applied by the community on this implementation, ultimately improving future maintenance.
  • Open: the final step is to open the existing proprietary software of the bank. This is the most complex, as it is the most time intensive (all tentacles to other systems of the bank need to be nicely decoupled), most risky for the bank (banks fear that their code will be scrutinized in public, thus resulting in a brand risk and fear that potential security issues become exposed) and most difficult to convince all bank leaders (fear of giving away competitive advantage, i.e. the secret sauce).
The second axe is the type of open source product, which overlaps with the level of abstraction. Banks should first gain experience with low-level abstraction open source software, like databases (e.g. MySQL, Mongo DB, Cassandra and Postgres), middleware (e.g. WSO2, Kafka, Apache Camel, Envoy, Istio…​), operating systems (e.g. Linux and Kubernetes)…​ Gradually they should move up the stack to higher level of abstractions, like business process (e.g. jBPM) and task management tools, to finally use also open source for the financial core processes themselves (e.g. Cyclos, Mifos X / Apache Fineract, MyBanco, Jainam Software, OpenCBS, OpenBankProject, Cobis, OpenBankIT, Mojaloop). Ultimately all software of a bank should have at its core open-source software, with the exception of solutions exclusively offered via SaaS.
This evolution has definitely started already. Almost all banks are already using multiple open-source software solutions. Many banks are furthermore preferring open-source software over proprietary software, in vendor selection processes for new software. Especially the argument of avoiding vendor lock-in is used to defend this choice. Additionally, a growing number of banks is already contributing to existing open source projects or even open sourcing their own software, e.g.
  • Open source has been one of the core elements in Capital One’s (one of the largest credit card companies in the US) digital transformation journey over the past 6 years.
  • Goldman Sachs recently decided to open source its proprietary data modeling program Alloy
  • J.P. Morgan Chase released code on GitHub for multiple initiatives, e.g. its Quorum blockchain project.
  • Deutsche Bank open-sourced multiple projects, like Plexus Interop (from its electronic trading platform Autobahn) or Waltz (IT estate management)
  • …​
The move of some banks to open-source proprietary software seems strange at first sight, as software has become more and more a competitive edge of a bank. Nonetheless banks have a lot to gain in using (adopting) open source and contributing to it:
  • Using open source software:
    • Lower costs: avoid the exuberant annual software license costs paid to software vendors.
    • Reduce time-to-market: allowing developers to bolt together pre-existing modules rather than having to create them all from scratch, allows to considerably reduce development time.
    • Easily customizable: open-source software can be customized, allowing to provide the golden mean between buying a software package from a vendor (quick time-to-market, but limited customization possibilities) and internally custom-built software.
    • No vendor lock-in
    • Lower learning curve for new joiners
  • Contributing and opening open source software:
    • Good for corporate image (giving back to the community)
    • Transparency: open-source software is intrinsically more secure than proprietary software, where the code is kept a secret.
    • Easier hiring of resources, as IT resources like to work on open-source and good potential candidates can be identified by looking at public commits of externals to the bank’s open-source projects
    • Motivation: often IT resources at banks feel a lack of social commitment. Contributing back to open source can give them a feeling of proud and giving back to community.
    • Cultural accelerator: open source communities promote collaboration, almost always remote and often across different time zones and cultures. Collaborating in such an environment will make bank IT’ers better and more adapted for future evolutions.
    • Gain from testing and extensions built by contributors outside the bank
    • Facilitates collaboration between different banks on shared concerns like KYC (Know Your Customer) and AML (Anti-Money Laundering)
Even though these advantages are hard to ignore, it’s not all rosy. It is therefore no wonder, there is still a lot of reluctance against open source, specifically against contributing and opening proprietary software.
  • Contractual and legal: a variety of different open-source software license models exist. Using open source can therefore be a serious challenge to ensure compliance with all terms and conditions of the license model. Such uncertainty can be a huge constraint for a large bank. Luckily more and more tools appear on the market (e.g. FOSSA, DejaCode, WhiteSource, Code Janitor), which allow to monitor and follow-up the compliance on open-source licenses.
  • Support: banks fear a lack of support in case of issues when using open source. For many open-source tools, commercial firms are offering corporate support, resolving this limitation. If not, the bank IT teams should engage with the open-source community to resolve an issue. Although this is more complex than raising an incident to the support desk of an IT vendor, such engagement will often lead to a faster and better resolution of the issue.
  • Compliance and security: while ultimately open-sourcing code will lead to more secure software, when first publishing your source code on the internet, there is a risk that criminals can find loopholes in the code.
  • Give away competitive advantage: although this is definitely true for differentiating services, the majority of internal banking software is commodity software, which doesn’t provide any differentiation. Open sourcing these applications can free up resources to work on real value-added services.
  • Brand risk: banks fear that open-sourcing bad software can do more harm than well, with regards to corporate branding.
If banks massively adopt open-source, one can wonder if Fintechs offering innovative software services to banks are not doomed to fail. Luckily Fintechs have already evolved from an annual license model to more modern models of partnerships. With the adoption of the cloud and elastically-scalable hardware and the notion of "a user" becoming more and more vague (due to multi-channel architectures and the rise of Open APIs), the concept of paying an annual license for corporate software has become difficult to defend and negotiate (licenses based on number of servers/CPUs or number of named/concurrent users have become obsolete). Instead software licenses costs are being replaced by different partnership models, like:
  • PaaS (Platform as a Service), SaaS (Software as a Service) and Baas (Business as a Service) models
  • "Open core" models (also called Dual-licensing), where the core of the software is delivered for free and open-source, while tooling specifically for large corporations are license based
  • Support model: pay a party for access to a support desk and providing updates on when new versions should be installed
  • Realize profits from a service model, e.g. training services, implementation services, customizations to the open source software at request of the bank…​
Fostering such an open ecosystem of Fintechs and banks will ultimately lead to better products and services for everyone. Banks must realize that technology is at the heart of their business. They should therefore try to copy the success formulas of the large tech-giants, i.e. attracting the best people, leveraging existing software, flat organizational structures and methodologies supporting rapid change (like DevOps, Agile…​). Adopting an open source strategy can be a strong lever to reach this goal.
Labels:

Comments

Post a Comment

Popular posts from this blog

Transforming the insurance sector to an Open API Ecosystem

1. Introduction "Open" has recently become a new buzzword in the financial services industry, i.e.   open data, open APIs, Open Banking, Open Insurance …​, but what does this new buzzword really mean? "Open" refers to the capability of companies to expose their services to the outside world, so that   external partners or even competitors   can use these services to bring added value to their customers. This trend is made possible by the technological evolution of   open APIs (Application Programming Interfaces), which are the   digital ports making this communication possible. Together companies, interconnected through open APIs, form a true   API ecosystem , offering best-of-breed customer experience, by combining the digital services offered by multiple companies. In the   technology sector   this evolution has been ongoing for multiple years (think about the travelling sector, allowing you to book any hotel online). An excellent example of this
45 comments
Read more

Are product silos in a bank inevitable?

Silo thinking   is often frowned upon in the industry. It is often a synonym for bureaucratic processes and politics and in almost every article describing the threats of new innovative Fintech players on the banking industry, the strong bank product silos are put forward as one of the main blockages why incumbent banks are not able to (quickly) react to the changing customer expectations. Customers want solutions to their problems   and do not want to be bothered about the internal organisation of their bank. Most banks are however organized by product domain (daily banking, investments and lending) and by customer segmentation (retail banking, private banking, SMEs and corporates). This division is reflected both at business and IT side and almost automatically leads to the creation of silos. It is however difficult to reorganize a bank without creating new silos or introducing other types of issues and inefficiencies. An organization is never ideal and needs to take a number of cons
6 comments
Read more

RPA - The miracle solution for incumbent banks to bridge the automation gap with neo-banks?

Hypes and marketing buzz words are strongly present in the IT landscape. Often these are existing concepts, which have evolved technologically and are then renamed to a new term, as if it were a brand new technology or concept. If you want to understand and assess these new trends, it is important to   reduce the concepts to their essence and compare them with existing technologies , e.g. Integration (middleware) software   ensures that 2 separate applications or components can be integrated in an easy way. Of course, there is a huge evolution in the protocols, volumes of exchanged data, scalability, performance…​, but in essence the problem remains the same. Nonetheless, there have been multiple terms for integration software such as ETL, ESB, EAI, SOA, Service Mesh…​ Data storage software   ensures that data is stored in such a way that data is not lost and that there is some kind guaranteed consistency, maximum availability and scalability, easy retrieval and searching
26 comments
Read more

IoT - Revolution or Evolution in the Financial Services Industry

1. The IoT hype We have all heard about the   "Internet of Things" (IoT)   as this revolutionary new technology, which will radically change our lives. But is it really such a revolution and will it really have an impact on the Financial Services Industry? To refresh our memory, the Internet of Things (IoT) refers to any   object , which is able to   collect data and communicate and share this information (like condition, geolocation…​)   over the internet . This communication will often occur between 2 objects (i.e. not involving any human), which is often referred to as Machine-to-Machine (M2M) communication. Well known examples are home thermostats, home security systems, fitness and health monitors, wearables…​ This all seems futuristic, but   smartphones, tablets and smartwatches   can also be considered as IoT devices. More importantly, beside these futuristic visions of IoT, the smartphone will most likely continue to be the center of the connected devi
16 comments
Read more

Neobanks should find their niche to improve their profitability

The last 5 years dozens of so-called   neo- or challenger banks  (according to Exton Consulting 256 neobanks are in circulation today) have disrupted the banking landscape, by offering a fully digitized (cfr. "tech companies with a banking license"), very customer-centric, simple and fluent (e.g. possibility to become client and open an account in a few clicks) and low-cost product and service offering. While several of them are already valued at billions of euros (like Revolut, Monzo, Chime, N26, NuBank…​), very few of them are expected to be profitable in the coming years and even less are already profitable today (Accenture research shows that the average UK neobank loses $11 per user yearly). These challenger banks are typically confronted with increasing costs, while the margins generated per customer remain low (e.g. due to the offering of free products and services or above market-level saving account interest rates). While it’s obvious that disrupting the financial ma
7 comments
Read more

PFM, BFM, Financial Butler, Financial Cockpit, Account Aggregator…​ - Will the cumbersome administrative tasks on your financials finally be taken over by your financial institution?

1. Introduction Personal Financial Management   (PFM) refers to the software that helps users manage their money (budget, save and spend money). Therefore, it is often also called   Digital Money Management . In other words, PFM tools   help customers make sense of their money , i.e. they help customers follow, classify, remain informed and manage their Personal Finances. Personal Finance   used to be (or still is) a time-consuming effort , where people would manually input all their income and expenses in a self-developed spreadsheet, which would gradually be extended with additional calculations. Already for more than 20 years,   several software vendors aim to give a solution to this , by providing applications, websites and/or apps. These tools were never massively adopted, since they still required a lot of manual interventions (manual input of income and expense transaction, manual mapping transactions to categories…​) and lacked an integration in the day-to-da
5 comments
Read more

Beyond Imagination: The Rise and Evolution of Generative AI Tools

Generative AI   has revolutionized the way we create and interact with digital content. Since the launch of Dall-E in July 2022 and ChatGPT in November 2022, the field has seen unprecedented growth. This technology, initially popularized by OpenAI’s ChatGPT, has now been embraced by major tech players like Microsoft and Google, as well as a plethora of innovative startups. These advancements offer solutions for generating a diverse range of outputs including text, images, video, audio, and other media from simple prompts. The consumer now has a vast array of options based on their specific   output needs and use cases . From generic, large-scale, multi-modal models like OpenAI’s ChatGPT and Google’s Bard to specialized solutions tailored for specific use cases and sectors like finance and legal advice, the choices are vast and varied. For instance, in the financial sector, tools like BloombergGPT ( https://www.bloomberg.com/ ), FinGPT ( https://fin-gpt.org/ ), StockGPT ( https://www.as
2 comments
Read more

Eco-systems - Welcome to a new cooperating world

Last week I attended the Digital Finance Summit conference in Brussels, organized by Fintech Belgium, B-Hive, Febelfin and EBF. A central theme of the summit was the cooperation between banks and Fintechs and more in general the rise of ecosystems. In the past I have written already about this topic in my blogs about "Transforming the bank to an Open API Ecosystem ( https://www.linkedin.com/pulse/transforming-bank-open-api-ecosystem-joris-lochy/ ) and "The war for direct customer contact - Banks should fight along!" ( https://www.linkedin.com/pulse/war-direct-customer-contact-banks-should-fight-along-joris-lochy/ ), but still I was surprised about the number of initiatives taken in this domain. In my last job at The Glue, I already had the pleasure to work on several interesting cases: TOCO   ( https://www.toco.eu ): bringing entrepreneurs, accountants and banks closer together, by supporting entrepreneurs and accountants in their daily admin (and in the f
9 comments
Read more

Low- and No-code platforms - Will IT developers soon be out of a job?

“ The future of coding is no coding at all ” - Chris Wanstrath (CEO at GitHub). Mid May I posted a blog on RPA (Robotic Process Automation -   https://bankloch.blogspot.com/2020/05/rpa-miracle-solution-for-incumbent.html ) on how this technology, promises the world to companies. A very similar story is found with low- and no-code platforms, which also promise that business people, with limited to no knowledge of IT, can create complex business applications. These   platforms originate , just as RPA tools,   from the growing demand for IT developments , while IT cannot keep up with the available capacity. As a result, an enormous gap between IT teams and business demands is created, which is often filled by shadow-IT departments, which extend the IT workforce and create business tools in Excel, Access, WordPress…​ Unfortunately these tools built in shadow-IT departments arrive very soon at their limits, as they don’t support the required non-functional requirements (like high availabili
15 comments
Read more

Can Augmented Reality make daily banking a more pleasant experience?

With the   increased competition in the financial services landscape (between banks/insurers, but also of new entrants like FinTechs and Telcos), customers are demanding and expecting a more innovative and fluent digital user experience. Unfortunately, most banks and insurers, with their product-oriented online and mobile platforms, are not known for their pleasant and fluent user experience. The   trend towards customer oriented services , like personal financial management (with functions like budget management, expense categorization, saving goals…​) and robo-advise, is already a big step in the right direction, but even then, managing financials is still considered to be a boring intangible and complex task for most people. Virtual (VR) and augmented reality (AR)   could bring a solution. These technologies provide a user experience which is   more intuitive, personalised and pleasant , as they introduce an element of   gamification   to the experience. Both VR and AR
9 comments
Read more