Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
Mahi Sall is the CEO & Founder of FinXpair, a Berlin-based strategic advisory boutique firm focu[...]
Lenders’ Challenge: Custom vs Off-the-Shelf Software
The performance of technology has become critical to business success in the new COVIDnomics. Digital lending requires speed and simplicity and forces financial organizations to rethink front-to-back office processes.
The pandemic acted as a catalyst for digital transformation. According to research by London and Partners, the UK Fintech sector has attracted $3.6bn in VC investment, putting it in second place globally behind San Francisco, estimated at $5.1bn. With the increased interest in fintech and digital transformation, a lot of founders and lenders are looking for reliable tech solutions.
“Since the pandemic started, we see lenders have accelerated their digital transformation plans,” says Ivan Kovalenko, CEO of HES FinTech. “Sticking to the old ways with traditional technology under the hood is no longer an option. Consumers are addicted to speed and convenience, which makes automation and technology the number one priority for lenders worldwide.”
Rephrasing Shakespeare: Custom software or out-of-the-box (OOTB)? That is the question.
Option 1: Off-the-Shelf Lending Software
According to Wikipedia: “OOTB software works immediately after or even without any special installation without any configuration or modification.”
When looking at Capterra and its list of loan software providers (over 190), business owners develop a certain idea of the platform’s desired functionality. To get it right away, lenders opt for software paid on a monthly basis, the so-called SaaS model. And this option works well if a lending entrepreneur is seeking to launch an MVP and test the product-market fit quickly.
However, buyers need to be aware that OOTB tools have little space for customization and are limited in their abilities to develop alongside a unique business model. Moreover, SaaS providers won’t make a functionality update to align with your new business requirements unless the rest of its users make the same request. This is where you have to pay extra for customization.
| Advantages of OOTB software | Disadvantages of OOTB software |
| A quick start: SaaS lending software is often a component-based, integrated and end-to-end platform that is already installed and configured. | Vendor lock-in: The customer is ceding control to the SaaS provider. Moreover, there can be per-user charges and penalties for growth. |
| Scalability: SaaS software is flexible enough to accommodate a client's unique growth plan. | Typically a customer has no access to the source code of the platform. |
| Low initial costs: No upfront hardware costs and flexible payment methods, such as pay-as-you-go models. | Extra costs: Depending on the business model, the customer may require to customize the decision-making process, calculations, document management, reporting, 3rd party integrations, etc. |
| POC: Founders can easily and quickly do proof-of-concept (POC) and test the software functionality together with the business or product idea. | TCO: While the initial costs of SaaS solutions might be significantly lower, the YOY costs, in conjunction with customizations, can add up to a large amount of money in the long-run. |
“From our experience, it’s one size fits none scenario. If you are starting as a small team of ten and planning to scale to the enterprise level, make sure your software can do the same,” adds Ivan Kovalenko, CEO of HES Fintech.
Option 2: Custom Lending Software
The competitive advantage of any financial institution lies in its ability to respond to changing market conditions and, at speed, to meet the specific needs of its target audience quickly.
In the current climate, many lenders see SaaS as a way to launch fast and reduce costs, but there’s one thing they need to know first. As with any investment decision, businesses need to understand the total cost of ownership, including YOY customization and integration costs, data migration costs, premium support, etc., and potential risks.
The lending business is not cheap. Yes, with SaaS, a lender can start an MVP quickly and relatively inexpensively. However, scaling and customizing, according to unique business needs, can easily cost over $500,000. And the client does not own the solution.
| Advantages of custom software | Disadvantages of custom software |
| Tailor-made software follows specific business needs and requirements. It is fully compatible with the legal environment and strictly follows the client’s specifications. | High investment: While it may pay in the long run, the initial investment may be a little overwhelming for some companies. |
| No vendor lock-in: The client controls everything and owns the source code. | Time to market: While OOTB software can be implemented within a couple of days, bespoke solutions require typically half a year to go live. |
| TCO: In the long run investing in custom software is far more profitable than purchasing a ready-made product. | |
| Flexibility: With bespoke software, lenders can adapt to market trends and introduce new products faster. |
Despite its initial costs, lending software development can be a good investment if you are growing and anticipate your company to scale. Before choosing between custom software and SaaS, a lender should take a close look at the available resources and compare them with the core functionality they want to see on their new platform.
Wrap Up
To “build or buy” is a never-ending question. Some companies start with off-the-shelf software because it’s fast and cheap but ultimately switch to custom products, while other lenders are ready to stay and scale with SaaS providers.
There’s an old Wayne Gretzky quote: “I skate to where the puck is going to be, not to where it has been.” This is what you need to consider when choosing a solution.
The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org
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