When Commonwealth Bank decided it needed a new app to teach kids about money, it took a radically different approach to product development than a bank of old.

Rather than getting its own teams to build the app – which includes a virtual bank account and prepaid debit card – it turned to Shaype, a Sydney-based fintech specialising in “embedded finance”.

The decision points to a dramatic transformation in major bank thinking about technology and innovation.

Shaype founder Andrew Laycock, a former hedge fund manager, helped CBA build its Kit app in record time. Steven Siewert

“Financial services is in a technology revolution,” says Andrew Laycock, CEO of Shaype, which he founded (originally as Hay Group) in 2018. “Banks have wanted to do things but have been constrained – but legacy systems are no longer a constraint.”

It’s not only CommBank rethinking their approach to IT: other major banks are also racing to develop “application programming interfaces” (APIs) and “microservices”, a flexible computing architecture, as they shift workloads into the cloud. Indeed, National Australia Bank is the most advanced on the journey.

This “hollowing out” of core banking systems is a core ingredient for becoming more agile and nimble, and creating more engaging experiences for customers. It will allow banks to reduce tech project costs while bringing new products to market much faster, helping to fend off the fintech threat.

It was in the first half of last year that CBA realised it wanted a kids’ money app and card. National Australia Bank announced one in partnership with a fintech called Spriggy in July last year – the same month CBA kicked off a “request for proposal” to build its new product.

Despite the risk – CBA’s Dollarmites program, which had taught school kids about money since 1931, was closed down last year after coming under fire from state governments – CBA got comfortable that Shaype could deliver the product faster and in a compliant way.

Shaype began writing code in December. The start-up has assembled a system of building blocks, which allow different parts of a bank to be stacked to create whatever a customer wants. It can take care of licensing, payments, fraud detection and dozens of other services.

To get to market quickly, Kit Visa cards are being issued using Shaype’s financial services license (they could move to CBA’s in the future). The process is flexible, reliable and relatively cheap. Kit is understood to have cost single digit millions of dollars to develop.

In Shaype’s warehouse office in Surry Hills, which used to be a design studio for Collette Dinnigan, Laycock explains how bank IT architecture is constrictive.

Toby Norton-Smith, managing director of x15 ventures: “There is an increased aspiration to leverage best in breed technology.” Jessica Hromas

“It is insular, monolithic design. Banks’ problem is they have tried to use the core [system] as an orchestration layer. But we can give banks control, and they don’t need to build everything themselves,” he says.

Laycock is a former hedge fund manager who backed early London-based fintechs including Revolut and Monzo. Then he saw the future of banking would be about components.

After just five months of development, Kit was launched in beta form in May and revealed at the bank’s May 17 strategy day by CBA CEO Matt Comyn.

“That is exceptionally fast work,” says Toby Norton-Smith, who runs x15 ventures, which develops start-ups for CBA.

“There is an increased aspiration to leverage best in breed technology, wherever it makes sense.”

When x15 decided two years ago it needed to build a digital home loan – Unloan, also revealed in May – it also turned to new technology techniques.

A key capability was xStack, which CBA created last year, a platform that allows a venture (one of its own or an outside one) to ingest CBA group services, such as compliance checks. It’s another example of the Lego block approach, where various services – transaction monitoring or card issuing or payment settlement – can be plugged in somewhere else.

Unloan also tapped outsiders: it is running on Mambu, one of a new breed of specialist fintechs that have built new core banking ledgers in the cloud. Other companies in the space include 10x Banking and Thought Machine.

“Banks are looking for technology that is highly componentised: various components are built, so the bank is not stuck with an ageing architecture,” says Paul Apolony, Mambu’s general manager in Australia and NZ.

“We provide a product ledger that is quick and scalable. It is an API-rich environment, which allows banks to develop using their own platforms and applications and key to it is the ease for the business to consume the products.”

Competition is not about banking products but rather consumer experiences, he says. “Banking is basic, a lending product is simple, interest is calculated a certain way. You don’t differentiate from that. You differentiate from your customer experience.”

This new world of rapid product innovation was made possible when the Australian Prudential Regulation Authority gave its thumbs up to banks using more cloud services in a revised cloud computing policy published in September 2018. Laycock says he advised APRA during 2017 to help change its thinking.

National Australia Bank is even more advanced than CBA and not just experimenting with start-ups but embedding this new tech philosophy into the core of its bank.

At its interim results in May, CEO Ross McEwan presented its Simple Home Loans to the market for the first time, bringing to life more than four years of development of cloud-based microservices and investment in APIs.

NAB is putting 90 per cent of its home lending through its new platform, which is approving around one-third of customers unconditionally in less than an hour. This is possible because it plugs in individual services from NAB, including credit decisioning and optical character recognition to read statements.

“We have these building blocks, we adopted the cloud, we built a set of microservices that leverage that utility, and now we have assembled those microservices to create end to end experiences,” says Ana Cammaroto, NAB’s chief information officer in the retail bank.

Westpac and ANZ are also jumping on the same dynamics. Westpac is using 10x Banking, a cloud platform founded by former Barclays chief executive Antony Jenkins, to create a new core banking system for its institutional bank and could extend this to simplify its retail banking systems.

The ANZ Plus project is also creating a modular tech stack, which ANZ CEO Shayne Elliot said in March will move the bank from technology “that was frankly inflexible, slow, and extremely costly to maintain to our new Plus platform that is nimble, adaptable, and cheaper to run”.

For banking engineers, it’s an exciting new world. Brendan Hopper, CIO for technology at CBA, says running core banking as software-as-a-service “has huge potential in the future”.

As well as experimenting with Mambu, CBA is also playing with Thought Machine, which he describes as an “engineers dream” by allowing smart contracts, written in Python, to solve complex problems.

“We are experimenting with both companies because they both have a role to play,” Hopper says. “As you hollow out your core, you use core banking as the main ledger but do as little on that as you have to, and you have other tiers to manufacture products and design things rapidly.”

It is not only banks who will be able to tap these emerging “embedded finance” dynamics. Shaype has 45 clients – half of which are non banks.

So, it can help bring financial services to sporting clubs, retailers or airlines, to help them lift customer loyalty and engagement. “It is about providing control – a best-in-class toolbox,” says Laycock.

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