This article is authored by John Stead, Director of Sales Enablement & Marketing at smartTrade
Imagine two banks, similar resources, facing the same technology choice. One favours building more in-house, the other opts to leverage more out of the box vendor solutions. Years later, their market share and profitability have diverged dramatically. What might explain the difference in outcomes if their strategic choices were made purely on ROI? Often, the unseen currents of past experiences, cultural biases, and psychological traps play a far greater role that we acknowledge impacting the ability to make optimal decisions. This piece explores those hidden influences that shape technology strategy decisions in financial institutions and how an experienced vendor like smartTrade will help a bank to make the most appropriate choices to meet their business goals.
The “build vs. buy” decision is a common challenge for banks regarding their technology stack, getting significant airtime because it impacts how finite resources are used to win market share and deliver value. Larger banks have big budgets and headcount, offering choice, while smaller banks are more constrained. Yet, ample money doesn’t always mean optimal choices, and smaller banks often compete well by using their limited resources wisely.
My involvement in running PreSales and Sales Enablement teams over the years has given me significant exposure to banks’ varied decision-making processes. This exploration focuses on the choice between vendors and the underlying build, buy, or hybrid strategy, examining the qualitative influences that often accompany traditional ROI analysis.
“We think, each of us, that we’re much more rational than we are. And we think that we make our decisions because we have good reasons to make them.” – Daniel Kahneman
When Past Experience Trumps Logic
The actual idea for this article came about after meeting with a couple of senior people in FX technology who shared how their companies had switched strategy in the past – one from more build to buy, the other from more buy to build. Crucially, a purely quantitative analysis didn’t fully explain these shifts, as vendor offerings and bank resources were largely similar. Understanding these changes required a more holistic look at qualitative factors and the past “lived experiences” of the banks and decision-makers.
In a nutshell, one bank had been burnt by a large development project that failed to meet expectations, costing significant money and opportunity due to delayed deployments. This experience created a powerful availability bias – the vivid memory of failure disproportionately influenced future decisions, overshadowing objective assessments of new build opportunities. The other bank got locked into a vendor whose support and roadmap dried up, leaving them with an outdated platform. The feeling of being ‘locked in’ triggered strong loss aversion and a deep-seated fear of dependency, pushing the bank towards internal control even if the quantitative case wasn’t clear-cut.
These weren’t just isolated incidents; they became organizational traumas. As Charlie Munger might describe it, multiple psychological tendencies can combine to create a “lollapalooza effect,” (where influences can combine to create suboptimal decision-making) dramatically shifting the banks’ strategic compass. While the logical ROI analysis might not have changed, the personal and corporate trauma was the main driver. It’s analogous to visiting a restaurant, having a bad experience, and vowing never to return, potentially missing out despite the incident not actually being inherent to the place itself.
Clearly, ROI and value for money should be key drivers. While good partners help demonstrate measurable benefits quantitatively, to be truly effective, we need to know the underlying goals and drivers, as decisions aren’t made in a vacuum. As we’ll see, it’s not just past experience; many other non-tangible factors are at play. True vendor partners such as smartTrade ask the correct questions to understand the influences and challenges beyond feature lists.
Beyond Pure Rationality: Psychological Influences
Though banks strive for rational, data-driven choices, human factors, history, and culture play a significant role beyond pure logic. This aligns with the insight of Daniel Kahneman (1934-2024), a Nobel Prize-winning psychologist and a pioneer in behavioral economics, who famously stated, “We can be blind to the obvious, and we are also blind to our blindness.” Recognizing these inherent human factors is the first step towards more robust decision-making. Understanding these influences is key for banks to make informed decisions and for vendors to provide relevant support.
Key Psychological Influences
- Risk Aversion
Banks are inherently risk-aware, often shaped by past failures—whether internal or vendor-related. These experiences influence perception: some institutions fear project failure and lean towards established vendors; others fear dependency and favour in-house builds. The weighting of risk—be it latency, cybersecurity, or cost—is often subjective. As Daniel Kahneman noted, optimism bias is a key distortion in decision-making, impacting both internal assessments and external partnerships. This can manifest as overconfidence in achieving ambitious timelines or underestimating potential complexities, regardless of the chosen approach. Therefore, fostering a culture of realistic assessment and thorough due diligence on both sides is crucial for successful outcomes. - Anchoring Bias
While Anchoring Bias might lead to an initial focus on upfront cost, true value lies in the long-term return on investment. Considering factors like seamless integration, reduced operational complexity, and faster time-to-market can reveal that solutions with a slightly higher initial investment may ultimately deliver significantly lower total cost of ownership and greater strategic advantages. Mature vendors will focus on demonstrating this long-term value, ensuring that the initial investment translates into tangible and measurable benefits for the bank. - Organisational Culture
A bank’s history—whether predominantly engineering-led or more partnership-oriented—profoundly influences its technology strategy. Recognizing this fundamental aspect from the outset is key to a successful collaboration. True technology partners like smartTrade understand that there’s no one-size-fits-all solution and should be adept at offering a range of approaches that align with the existing resources and capabilities a bank can bring to bear. Furthermore, it necessitates an honest internal conversation within the bank: are internal resources best deployed for this specific task, and if so, how can a vendor partner be integrated as a true collaborator, rather than being perceived as a threat to the internal IT teams? Smart vendors prioritize this early cultural understanding and strive to build partnerships based on mutual respect and a clear articulation of how the collaboration will augment, not undermine, internal expertise. - Industry Trends
As mentioned before, none of these decisions operate in a vacuum; the banking industry’s approach to build vs. buy has historically been cyclical. The early 2000s saw a preference for buying packaged software, followed by a period where large banks invested heavily in proprietary systems. The 2008 financial crisis triggered a renewed focus on cost-cutting and vendor solutions. More recently, digital transformation initiatives have led to a resurgence in in-house development, with banks seeking greater control and differentiation. However, amidst these shifting tides, it’s paramount for each institution to critically evaluate its unique strategic objectives and the specific needs of its clients, rather than simply following the prevailing industry wisdom. The optimal path should be driven by a clear understanding of what truly delivers the best value and outcomes for the bank and its customers, ensuring that technology decisions are aligned with their distinct goals.
Guiding Principles for Sounder Decisions
To optimize the build vs. buy choice, consider these principles:
Interrogate Your Biases
Don’t just accept past narratives. Ask why previous projects truly succeeded or failed. Are those reasons still valid, or are they emotional echoes? Challenge assumptions rooted in past ‘trauma’.
The goal, as Charlie Munger suggests, is often not about achieving perfect rationality but about “trying to be consistently not stupid” by recognizing and mitigating these common pitfalls.
Employ Bias Mitigation Frameworks
Use structured evaluation processes designed to counteract known pitfalls like anchoring, confirmation bias, and groupthink. Ensure diverse perspectives are included and weighted fairly, not just dominated by one aspect like cost. “Clearly, the decision-making that we rely on in society is fallible. It’s highly fallible, and we should know that.” – Daniel Kahneman.
Distinguish Core from Context Ruthlessly
What truly provides competitive advantage versus what is necessary but non-differentiating? Apply this analysis granularly, not just at the system level. For financial institutions, this granular approach is crucial. Good vendors like smartTrade will offer truly modular solutions, so banks must also in turn critically assess their internal strengths and weaknesses at the same detailed level. This means identifying core competencies that genuinely set them apart – perhaps a unique algos, customer relationships, or market expertise – and differentiating them from contextual elements that are essential for operation but do not provide a competitive edge. By understanding their internal landscape with this level of granularity, banks can strategically leverage external partnerships for non-core functions while focusing their internal resources on cultivating their true differentiators.
Plan for Evolving Strategy
Recognizing that your build/buy strategy will likely evolve, and considering the substantial costs and risks of switching technology providers, selecting flexible vendors like smartTrade is paramount. Their diverse offerings, from ultra-low latency engines to modular and no-code platforms, enable firms to build a resilient and future-ready architecture through modular design, robust APIs, customization, and transparent data handling. This proactive approach minimizes the risk of vendor lock-in, allowing for seamless adaptation to evolving market dynamics and technological advancements, thereby significantly mitigating the costly and disruptive consequences of future vendor changes.
Continuous Reassessment
Reviewing post-decision outcomes should be mandatory. Extract lessons learned and incorporate them into future choices by analyzing performance, gathering feedback, and re-evaluating assumptions. Identifying what worked and why, and what didn’t and why, will then inform updates to frameworks and strategies, improve risk assessment, and ultimately foster better future decisions.
Key Takeaways
- Acknowledge and understand potential biases in your thinking to make optimal decisions.
- Focus on the underlying goals (the “why”) you want to achieve, not just features (the “what”).
- Analyze core vs. context at a granular level.
- Your strategy may evolve; choose partners supporting flexible hybrid options.
- Don’t reject an approach (build or buy) entirely based on a single past failure; evaluate potential partners individually.
- A strong cultural alignment with any potential partner is crucial, not just for smooth operations, but because shared values and communication styles can mitigate misunderstandings and build the psychological safety needed for a successful long-term relationship.
Ready for truly informed fintech decisions?
Contact us today so we can discuss your specific business goals, underlying drivers, key pain points, and the history shaping your challenges. We’ll share relevant experiences and client use cases to explore how smartTrade’s flexible solutions can help you achieve your strategic objectives. Let’s have a conversation about your future success.