Guide to Building Disruptive BFSI Software Products in 2023

Muzammil Patel

March 13, 2023

The author of this article, Muzammil Patel is the co-founder and global head of strategy and corporate finance at Acies.

The BFSI sector is one of the most competitive for the software product business. Yet, year after year, many software providers flock to the industry with the hope of carving out a niche for themselves. What attracts people to this sector is the massive IT spending by financial institutions.

As per Gartner, spending by banking and investment firms on software and services is likely to exceed USD 623 billion annually. This, however, tells us only half the story. The main driver that attracts software providers to the BFSI sector is the evolution in the sector itself.

As banking disaggregates and follows a platform model and as distribution becomes increasingly digital, niches have been appearing in the sector that didn’t exist earlier. Niches that traditional dominant players have missed spotting or have been unable to adapt to.

The key to creating software products for the BFSI sector is spotting the niche and driving business model changes around that niche.

Domain trumps generalization

Building bigger is not necessarily better in the BSFI sector. Sticking to one’s domain and driving depth through experience, expertise, and understanding of the business challenge at hand is a more palatable formula than building something big.

Generalized software from other sectors retrofitted to BFSI is unlikely to see success because of significant specialization caused by increasingly intricate regulations and market practices. Building a successful software product in the BSFI sector is not about spending on customer acquisition and neither is it about building large platforms.

It is all about finding a specific problem and solving it.

The key to sustaining the growth is how one evolves a revenue model that grows with the solution as opposed to offering a flat fee revenue model that doesn’t participate in the upside. Creating one-shot wonders is perfectly all right as long as the one-shot wonder is participating in the customer upside.

The concept of an all-encompassing core is redundant

For a long time, the BFSI sector was obsessed with its core platforms – core banking, centralized treasury, centralized risk, and data warehouses. This sector has come to realize that these obsessions have drained resources and time without the promised ROI.

The weak alternatives offered as apps hosted on aging core solutions or APIs to consume data from the core have provided to be redundant or incomplete at best. The key to software in this sector today is the federation and democratization of data.

Solutions that are not dependent on legacy systems and work on the concept of data federation and statelessness are likely to find more favor with the sector than those that need massive data warehouses or have dependencies on the core.

As this sector disaggregates, each new revenue model will form its own core with federated data. Software providers should be less worried about displacing the core and more focused on the most efficient architecture.

The monoliths are getting replaced faster than you think

Monolith software and monolith expertise to configure or build on this software are becoming redundant faster than one would imagine.

While the demand for skills for the upkeep of these solutions is likely to stay steady for some more time, there is very little innovation or growth expected in these areas.

Software creators in the BFSI space should steer clear of the temptation to build on monoliths or link their success to legacy ageing software.

The key to success in the sector is being focused on agnostic software – software that is agnostic to a particular database does not depend on legacy software, is agnostic to a cloud provider, and is agnostic to proprietary technologies.

Agnostic software is the way to ensure the independence of the software provider and bring down the total cost of ownership (TCO) for the customer and end-user.

Very little patience of MVPs

Minimum viable products are good for demos but are unlikely to get purchase orders. Most software providers tend to be mistaken that encouragement about an MVP is the desire to invest money by the customer.

The sector has seen its fair share of innovation and has already invested in both successes and failures.

At this stage, there is little appetite for concepts and futuristic ideas. The focus on software providers should be on applications that can solve existing issues, create new revenue models, or bring in demonstrable operational efficiency.

The software needs to be ready to deploy, preferably fully managed and cloud-ready. Minimum viable products are a theory that is likely to find very little favor with the sector.

Legacy tech is getting squeezed out every day

With the advent of software-as-a-service (SaaS), no-code platforms, and federated data, legacy tech has lost its luster.

Legacy tech comprises any proprietary vendor technologies that increase the cost of ownership including proprietary database technology, web servers, and other software development frameworks.

As open-source software becomes the mainstay of the BFSI sector, reliance on legacy technology and platforms can make software uncompetitive. More importantly, the speed of development and deployment using cloud services and no-code platforms will most likely distinguish the winners from the losers.

Transaction-based revenue models provide a clearer win-win

Transaction-based revenue models provide an upside to the software provider as well as give the customer the assurance that there is enough skin in the game.

Software that works in the real world is critical to success and there has been plenty of legacy investment in the sector into software that simply didn’t work after promising a lot. Moving to transaction-based revenue models is an upside to both the provider and the customer.

Mutualization of infrastructure is key to driving operational efficiency

Digitalization for operational efficiency has most certainly helped the sector reduce operational risk and rationalize costs.

However, given that most operational overhead caused by regulation is repetitive, standard across the industry, and largely driven towards managing low-probability events, mutualization across the industry is the holy grail of software development in the sector.

Surviving and thriving in the BFSI sector is increasingly becoming less about capital and more about expertise and ingenuity.

Speed to market, eliminating dependence on IT teams, and focusing on specific problems and solutions is the way to break into a sector that is likely to always stay competitive for software providers.

About the author

Muzammil Patel is the co-founder and global head of strategy and corporate finance at Acies – a product development company that operates in the BFSI sector. He works closely with financial institutions and corporate clients, providing advisory and technology solutions to deliver transformational programs that address their regulatory and business challenges. In his previous roles, Muzammil has worked with Deloitte as a Partner and EY as an Associate Director