Fintech and Schrödinger’s Agile Dilemma
The core principle of Agile is the focus on fast value creation, and the fintech industry has benefited from that in the past decade and more. Customer focus, fast responses to market developments, fill the gaps left behind by conventional banking. Fintech and Agile are a perfect match! Until fintech goes beyond tech for finance and enters the regulated business sphere.
For example, when a banking license is required to further penetrate the financial market with new functions and platforms, and with that eat away more of the cake that conventional banks serve. Pace of value creation might still be the core message of scrum masters and development teams, but the auditors and regulators have other priorities.
Risk evaluations and duly documented change procedures and changes are of significant higher importance than pace in the eyes of those who hold the powers over obtaining and even over losing a banking license. In fact, in the eyes of many auditors and regulators, pace is not relevant at all. A fully documented auditable trail of all actions and compliance is relevant, and hardly anything else.
To be armed for the big banking world, fintech companies that enter the field tend to install board members with a track record in the financial industries the clout to make things happen. These veterans in regulated markets are very aware of the risks of bending rules for the sake of pace and push the “compliance first narrative” from within the organization.
All this leads to a preprogrammed conflict with the essence of the Agile Manifesto for software development:
1. Individuals and interactions over processes and tools — Conflict: regulations and compliance highly depend on processes and tool. Agile teams can still internally continue to prefer individuals and interactions but will have to execute inline with processes and use the required tools to document and validate every step.
2. Working software over comprehensive documentation — Conflict: auditors and regulators demand comprehensive documentation and fully documented change processes.
3. Customer collaboration over contract negotiation — Conflict: contracts document liabilities and responsibilities and there is no way around that in regulated business fields. The autonomy of change and process, which is a key element of Agile teams and mode of operations, is highly restricted if not entirely eliminated by the compliance requirements.
4. Responding to change over following a plan — Conflict: the biggest conflict of all conflicts lays within the waterfall-based methodology of creating auditable changes for licensed financial services. None of the autonomous freedoms like for example spontaneous A/B testing or postponing compliance related functionality are acceptable in the “new old world” of regulated financial services, not even for the most successful fintech unicorns.
This doesn’t mean that Agile is no longer the way to go for those fintech giants that take the steps into regulated finance. But it certainly means that Agile is no longer the way to go for every corner of their development. Some will opt for a toned-down variation of Agile and might take some risks they will pay for later, for example during their first audit.
Others might opt to separate regulated and non-regulated processes and abandon Agile for the regulated parts. Although this might appear to be the safest solution from a compliance perspective, it will over time create cultural conflicts within the organization. We have learned those expensive lessons in the past where only a part of the organization embraces the Agile principles, and the rest doesn’t.
Some Agile advocates have suggested that regulators should adopt and embrace the Agile principles to allow the rapid value creation to continue. Anyone with experience in regulated industries, especially in the financial industry, is aware that this is very unlikely to happen. It does make much more sense to start developing an adopted Agile framework, that enables the hybrid marriage between regulated and unregulated functions.
Fintech is an example where this would make a significant difference for those who have built their success based on combining Agile with Customer Experience and Market Demand. The automotive industry is another example where this hybrid is necessary with for example high pace improvements of entertainment systems and control panels, and very rigid regulations for safety systems, also known by insiders as “the mother of all waterfalls”.