After a few quiet years, Thought Machine, the fintech behind a new core banking platform called Vault, is stealing the limelight, first with its announcement of a strategic partnership with Lloyds Banking Group, then with a similar partnership with the digital bank Atom. And today we’ve learned about another partnership, this time with IBM. We think this sudden activity reveals wider trends in three areas we have been following closely: fintech, banking transformation, and digital transformation services.

Fintech has been all the rage, and Thought Machine, with its ex-Google leaders, smart contracts, cloud, encryption, and continuous deployment, certainly fits the hype. But here’s the problem: Few CIOs are courageous (or mad) enough to select a startup to run their core operations. When evaluating emerging vendors — including fintech — we advise organizations to look at the business value that the solution will generate, the likelihood of failure, and the potential impact of that failure. Unfortunately for fintech startups aiming to disrupt the market of core banking systems, these are business-critical solutions. And the risk and cost of potential failure when replacing them is high. More importantly, not all banking leaders agree that the change will generate enough business value to justify that risk (we disagree).[i]

The ones that do agree subscribe to the vision of digital business and the transformation they need to get there. Lloyds Banking Group and Atom Bank fit that bill perfectly. Lloyds has just entered the third phase of its business transformation. As we have written in the case study detailing the Lloyds journey, the first phase focused on digital banking channels but was unable to tackle customer experience problems holistically and across channels. The solution was to embrace a new operating model. But, as is the case at most banks, the current application landscape limited what Lloyds could do. And so simplification and progressive modernization of Lloyds’ IT and data architecture are the key objectives of the third transformation phase (2018–2020). And Atom Bank is one of the UK’s digital challengers that is competing with other agile players such as Monzo, Revolut, and Starling Bank, with both Monzo and Starling having built their banking platform from scratch to enable them flexibility and experimentation with business models.

These two partnerships will bring the much-needed references to Thought Machine. But they aren’t enough to alleviate CIOs’ concerns. This is where IBM’s existing client footprint in financial services, global scale, and transformation experience could help. While some software vendors have strong business consultancy and integration capabilities, this isn’t the option for most fintech startups. Having a strong delivery partner and sales channel is vital, particularly if you’re selling business-critical solutions in which deployment is tied into wider changes to business and operating models.

IBM is setting up a whole practice around Thought Machine, a bold move that shows strong belief in a startup of just 110 people. IBM needs to upskill in areas such as smart contracts and Vault’s workflow engine. Why invest the resources and take that risk? IBM is keen to differentiate in the ever more crowded space of digital transformation services. Digital transformation is a complex beast, with the need to redesign customer experience, develop new operating models, and do heavy lifting on the technology front. IBM has been steadily building capabilities to cover all aspects of the transformation with its digital strategy and iX practice, cognitive process transformation, and cloud application innovation.

Will this be a success? We have some concerns. The Vault is yet to prove its value, and the combined proposition isn’t delivering enough innovation to steal the market; there are many similar partnerships in the marketplace. And of course, IBM comes with its own baggage of past attempts to tackle core banking challenges with a changing proposition of software development services, core banking software, core banking infrastructure, and transformation services. IBM will have to prove its long-term commitment to Thought Machine.

[i] Investment in the front end sacrifices operational agility on the back end, creating a “Potemkin effect.” Direct customer-facing solutions can’t fully deliver on the promise of true digital banking without state-of-the-art product solutions such as modern core banking. Source: “True Digital Banking Drives Interest In Core Banking” Forrester report