FinTech and the make-or-buy decision: a valuation model for retail banks facing disruptive innovation

Ruiz del Portal Tranche, José Luis (2023) FinTech and the make-or-buy decision: a valuation model for retail banks facing disruptive innovation. Doctoral thesis, Northumbria University.

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Abstract

This thesis addresses a research gap in the use of financial metrics as enablers of disruption to adapt to newly emerging technologies in the financial services industry (FinTech).

By disrupting the Information Technology (IT) vendor model, the banking value chain, and the value network, FinTech firms have taken the lead in the race to reshape a new banking taxonomy. Incumbents, though willing to step forward and embrace innovation, let their decision-making on investments be subordinated to the idea of preserving their legacy above the idea of embracing innovation. To keep patching back the fallen pieces of their monolithic IT systems instead of combining those pieces into new platform-based architectures.

Internal technology development has become a challenge for incumbents. The complexity of the IT legacy, associated with the systemic role incumbents still play, the lack of people and management in numbers and skills, and the complexity of the regulatory framework do not encourage a likely choice for the ‘make-it’ option in the title of this research.

The findings confirm that not every technological innovation that unchains a shock in a market is disruptive. In fact, most of the technology applied is not. In addition, valuation models were developed to serve decision-making discussions about investments in technology of a different nature than FinTech innovation. Literature on decision-making shows that flexibility in the approach improves the quality of this process. Valuation models and metrics that ensure flexibility are not used, however, but are simply disregarded as too complex.

A decision tree integrating multiple real options incorporates the flexibility required to inform decision-makers about the right opportunity costs associated with investments in FinTech innovation. The latter would help incumbents make a fairer make-or-buy decision in their pursuit of new dominant designs that can ensure their survival.

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