Vaidik Trivedi
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Victor Swezey
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Joey Pizzolato
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The banking landscape is in a state of flux. Emerging financial technology companies have built new services and offerings that place the customer experience front and center, providing a flexibility and speed that traditional banking institutions struggle to match.
Fintechs are carving into the essence of what regional and community banks have done for generations, and they’re doing so by thinking more like software vendors than financial institutions. These disruptors have none of the history, infrastructure and trust of regional and community banks. But equally, they do not have the burden of antiquated legacy technology.
This powerful combination of agility and technological know-how has seen the fintech segment more than double its value in the space of four years, and there’s no sign of this growth stopping any time soon. Analysts are predicting almost 20% annual growth through 2028.
In the face of such success, how can regional and community banks — institutions that do not have the large IT budgets of national bank brands — hope to compete?
The answer is that community financial institutions must be bold. That means rethinking established and possibly ingrained processes and beliefs while embracing input from existing customers, partners and other business stakeholders. They must build a modern IT infrastructure that enables them to quickly develop, iterate and deploy digital banking applications that are on par with fintech offerings, or risk losing additional market share.
Resist half-measures. Embrace new technologies. Don’t be afraid to envision a new landscape. Inevitably, the landscape is changing.
Precisely what the new landscape of financial services looks like will be unique to each bank. However, there are several vital technology infrastructure elements that virtually every regional and community bank must consider as they aim to modernize and compete.
First, it’s essential to recognize that fintechs don’t necessarily hold all the chips. In fact, traditional banks hold several key advantages over their fintech rivals. Chief among these is their reliability and continuation of service — qualities that customers still value highly.
This lineage is an edge that regional financial institutions should carefully maintain. Therefore, it is essential that they continue to offer their existing services throughout any digitization process. Ripping out reliable and trusted offerings and systems to pursue exciting new technologies should be avoided at all costs.
Rather than throwing out the banking baby with the legacy bathwater, any digital platform should iterate and expand upon existing capabilities. In other words, banks and credit unions should seek to add value for customers rather than slashing services in pursuit of something new.
Implementing a new digital banking platform, a new mobile app or even launching a new digital-only product are all initiatives with discrete start and end points. Developing an IT infrastructure is very different. It will incorporate the aforementioned individual projects and more, and it will need constant oversight and maintenance. A modern IT infrastructure is something that remains in service and must be slowly expanded upon and improved for years — perhaps more than a decade — at a time.
For this reason, any banking deployed platform must offer two things: high extensibility and open integration. Extensibility focuses on the ability to add new capabilities or functionality to any existing platform quickly and easily. Integration extends this capability by enabling connectivity to other IT platforms and systems within (or outside of) the financial institution. McKinsey describes this as a move from “closed systems to ecosystems,” a core shift in mentality from the multiple application silo approach commonly deployed in recent years.
Indeed, it’s possible for this extensibility to include partnerships with the very fintechs that traditional financial institutions are worried about. As noted, small banks hold many advantages that fintechs would love to access, such as a bank charter and recognized compliance capabilities. These can be leveraged into partnerships that allow banks to offer new services, tap new markets and expand both businesses.
Remember, extensibility and openness do not just mean that a platform is easy to modify or integrate from a purely technical standpoint. It must also be resilient in the face of new business demands and market shifts. If the past few years have taught us anything, it’s that we can never entirely prepare for tomorrow’s challenges. Therefore, from the very first planning stages, banks and credit unions need to measure how easily they can build upon a prospective platform and how much effort it will take to achieve desired outcomes.
In some industries, lagging slightly behind the curve in terms of offering a modern experience from any device is a mere annoyance that can result in a few bad online reviews. When it comes to banking, however, stalling out on upgrades and security improvements can spell impending doom for both the platform and the business.
Business-critical IT systems and platforms must accommodate rapid iteration and development to avoid creating digital monoliths that are unable to adapt and evolve. Legacy systems do not help this situation. Coded in dying languages such as COBOL (now over 60 years old), IT applications are difficult to extend, require specific programming skills and do not integrate well with other applications.
Modern banking technology platforms counter these challenges in several ways: They are developed in modern programming languages using cloud-native concepts that enable scalability, modularity, integration and overall flexibility. In addition, no-code and low-code development tools give everyday business users the ability to quickly configure just the solution they need, without the need for training or special knowledge. No-code/low-code tools extend IT platforms and expand the pool of employees who can enhance the systems beyond just highly skilled software engineers. This capability allows financial institutions to experiment and adapt faster and with greater agility — if they choose to.
For many banks and credit unions, improvement isn’t just a technology question but a question of wider business philosophy. The speed at which an institution needs to innovate is faster than ever, meaning that the IT team cannot solely be responsible for owning and enhancing the IT platform. The bank’s overall team must be able to expand existing offerings quickly, easily and with the minimum technical requirements.
Without this ability to iterate, any banking or IT platform risks becoming a severe drag on operation. That can have a costly impact on banks that need to invest significant human and financial capital into their digital transformation efforts.
It’s also trying for customers who have started to rely on new offerings and services. With brand loyalty continuing to drop off, it’s safe to assume that those customers won’t hesitate to look to other banks that provide up-to-date products and a better user experience.
Banks are, by nature, cautious institutions. Indeed, for some customers, a reluctance to take risks can be a benefit. But this caution can sometimes manifest as resistance to change and an unwillingness to invest in new technologies and ideas.
For those banks and credit unions still using systems designed in the 1980s and 1990s, moving to a new IT infrastructure can be daunting. However, the move is arguably more important for these institutions than ever.
As more financial institutions begin to lean into digital services, the real danger lies in being left behind. Research and consulting firm Gartner estimates that banks spent $623 billion on technology in 2022 alone. If you’re not in the raft of organizations investing in new technology, you can be sure that your competitors are.
Jason Burian is vice president of product at KnowledgeLake. He has 15 years of experience helping customers solve automation and document problems, and manages the complete product lifecycle, including research, design, requirements, execution, enablement and launch.
Jason Burian
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Whitney McDonald
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Riley Wolfbauer
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Whitney McDonald
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In 1975, Businessweek ran a story identifying the ways that technology would reshape the workplace. Leaders from Xerox and IBM correctly predicted that by 1995, offices would have an integrated network of personal computers at each desk and electronic filing systems. The article now regularly circulates on the internet as an entertaining time capsule of office technology in the 1970s, when automation had just started to emerge.
Really, however, the piece was an in-depth analysis of new technologies, aimed at helping large office-using businesses navigate the “onrushing of new hardware and procedures,” and it investigated real-world challenges like speed of adoption, cost control, transition and employee training. Although technology has advanced well beyond the desktop computer (not even IBM could predict the technology of 2023), these same complexities and challenges are just as relevant for businesses today as they were in the 1970s.
Take payments, for example. This industry is currently experiencing that same onrush of new systems. Financial institutions (FIs) are grappling with how to modernize and meet customers’ ever-evolving expectations, and many are finding the process to be arduous and complex.
Nearly five decades later, FIs are looking for a new guide. While there are many options, progressive modernization is a pathway financial institutions should seriously consider to upgrade their tech stack and meet their goals.
Technological modernization and the cloud are synonymous — especially in 2023. Cloud-based technology processes payments, opens artificial-intelligence and machine-learning capabilities and improves flexibility, giving businesses the opportunity to pursue partnerships, expand market share or simply dedicate resources to more strategic business functions. Migrating systems to the cloud is the pathway to digital maturity, and it is an important step if companies want to adopt current innovations and prepare systems for future demands.
FIs already seem to understand the tremendous benefits of the cloud, with a report from IBM showing that 91% are using or planning to use cloud-based services in some capacity. The same report, however, found that a stark 9% of organizations have transitioned mission-critical workloads, and IDC’s Worldwide Industry Cloudpath Survey found that only 25% of organizations had a cloud-optimized payments strategy.
Although there’s a consensus among FIs that cloud infrastructure is part of the way forward, many are still struggling with how to get there.
Ultimately, there are three strategies to get started. The most aggressive, what we like to call “the heart transplant,” is a complete replacement of legacy technology with cloud software. This is a risky and disruptive process and should only be done with careful planning. The next option is to create a standalone tech stack built from the ground up on a cloud platform. This is a clean-slate approach that allows FIs to test a parallel program and partners before integrating it into the organization. Although this is less risky and disruptive, it is also more expensive and not a viable option for most banks. The third method is “progressive modernization,” where technology is moved onto the cloud in a phased process.
Though perhaps a misperception, FIs don’t need to have an immediate and reflexive response to innovation, like “the heart transplant.” Rather, a strategy of measured calculation to transition legacy technology to a cloud-based platform should be considered. Through progressive modernization, FIs can combine trusted processes with new functionalities, limiting risk exposure and disruption as the organization transitions.
Research from McKinsey shows that progressive modernization is the best option for mid-cap banks, in particular. This process upgrades the core system and unlocks advanced capabilities, all in a condensed timeline and at a substantial discount. By McKinsey’s estimate, progressive modernization needs a financial investment of only 20% to 30% the cost of a full core-modernization plan. This is a tremendous benefit. In the past, FIs have overwhelmingly identified cost as the top challenge for modernizing IT infrastructure.
A recent study from IDC exposed a similar set of benefits. Financial institutions that implemented a phased transition to a cloud platform reduced disruption to business function and extended the life of the legacy system, and they reduced the financial impact by spreading the cost across smaller phases. Further, research from IBM shows that a progressive modernization approach supports internal trust by creating a secure platform and meeting regulatory requirements without disrupting core processes.
As we consider the competitive landscape in 2023, there is no doubt cloud-based infrastructure is vital to modernizing payment technology, future-proofing the tech stack and gaining competitive ground in an increasingly crowded payments market. At the end of the day, adopting new technologies will always seem like a daunting process, whether you are operating a company in 1975 or 2023. But with progressive modernization, there’s a painless and straightforward pathway for FIs.
John Mitchell is CEO and co-founder of global payments and banking infrastructure provider Episode Six and an expert in the payments industry with decades of experience in leading and growing startups. Prior to Episode Six, he served as CEO of Rev Worldwide, as well as the primary architect and strategist of Netspend Corp.’s early sales and distribution strategy.
John Mitchell
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Brian Stone
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Whitney McDonald and Brian Stone
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Brian Stone
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Whitney McDonald
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Many banks and financial institutions have invested heavily on Robotic Process Automation (RPA) to streamline workflows around account opening, onboarding and customer service. Leading automation software solutions like Pega, Appian or IBM, as well as core systems like Salesforce, provide functionality designed to eliminate manual work and speed up response time.
However, these solutions often have key gaps when it comes to delivering a fast and seamless customer experience. Here are three ways banks are using the power of open APIs and cloud-native platforms to get more from their current RPA and core systems and connect the dots to remove friction along the customer journey.
1. Rethink Forms and Process Automation
Many banking processes still today start with a form. And even if you’ve moved those forms online, chances are that you still have some sort of “swivel chair” work happening, where financial advisor or loan officer is rekeying data from one place into another system to kick off automated workflows. This human element creates data quality and integrity issues, and incomplete forms or manual processes usually mean delays that affect revenue and customer satisfaction.
Instead, think of that first touchpoint as a digital domino—where you use collected information to kick off workflows, bring in stakeholders and ultimately determine the next step in the customer’s path.
This means re-imagining forms-based data collection as a two-way, guided, digital interview, personalized with data you already have in your core system. Using any new or confirmed data, you can trigger straight-through processes like approvals and manage exceptions. And by connecting these smart forms and workflows, you can collaborate in real time with multiple stakeholders in the process and accelerate any business process.
2. Deliver Compliant, Personalized Customer Communications On Demand
Customer communications are at the heart of banking customer engagement, from loan agreements and account opening documentation, to notifications and statements, to ad-hoc customer service correspondence. For many banks, here’s the challenge: the tools they use to produce these are managed by IT and exist in a silo, producing documents in batch to go out in the mail. This is not only slow, it it’s inefficient. Instead, look at how you can integrate document generation capabilities inside the systems your business already uses.
SmartCOMM for Pega, for example, works directly within Pega’s Customer Decision Hub and Customer Service applications, enabling users to create documents and other communication types from within the same interface. This includes communications with interactive capabilities – meaning customer service agents and business users can efficiently personalize every engagement with the customer to deliver an optimal customer experience – regardless of the channel – being sure that the right disclosures and language is applied for compliance.
For organizations looking to modernize and shift more of their tech stack to the cloud, the opportunity is to think about embedding an enterprise-class customer communications platform inside your chosen system (such as Pega, Salesforce or CGI Credit Studio) rather than thinking of communications or document generation as a completely different step in the business process.
3. Connect Agreements to eSignature and Archiving Automatically
Does your straight-through process actually stop when someone needs to upload a document or agreement to your e-signature platform? Are agreements then stored automatically in Box, Sharepoint or your chosen content archive, or does that also require a human element?
Some e-signature platforms like DocuSign or OneSpan feature lightweight workflows, but for banks that want to build an efficient end-to-end process that leverages best-of-breed technologies, the best approach might be to focus on integrating that tool into enterprise-class platforms that tie in data collection and communications management.
Smart Communications offers prebuilt, proven connectors with the major e-signature and content management solutions, as well as many core banking and other systems, which can mean real cost savings and faster deployment. Learn how Smart Communications enables banks and lenders to reduce costs and improve customer experience, and check out our partner integrations, designed to help you get the most out of your technology investments.
Smart Communications
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Ally Financial is turning to the fintech layoff pool to hire for multiple high-level positions within its technology solutions department, including a new director of software engineering and fellow site reliability engineer. During the $196 billion bank’s Q4 earnings presentation, Chief Executive Jeffrey Brown said Ally would look to recruit from the layoff pool, now […]
Brian Stone
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Whitney McDonald
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Whitney McDonald
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Brian Stone
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Core provider Jack Henry is looking to technology to address changes in today’s payments landscape and client concerns following the collapse of Silicon Valley Bank while preparing to launch new solutions to address cyberthreats in the financial services industry.
Bank Automation News sat down with Lee Wetherington, senior director of corporate strategy at Jack Henry to discuss the tech provider’s clients’ needs, prepping clients for FedNow and new products in 2023. What follows is an edited version of that conversation.
Bank Automation News: What are bank clients focused on following the collapse of SVB?
Lee Wetherington: The collapse of SVB accelerated deposit churn that started in December of 2022, leading to a demand for stronger deposit relationships post-SVB. According to Jack Henry’s 2023 benchmark survey of chief executive officers, growing deposits is now the top strategic priority for banks.
The best deposit strategies are targeted, tiered, segmented and strategic. Smart banks know which segments of their deposit base are most at-risk for churn and flight. They’ve been proactive in reaching out to depositors who are disproportionately significant to the bank’s liquidity. Progressive banks also offer automated savings and investment options that make deposit relationships sticky and accretive.
The most successful banks are those who not only price deposits strategically but also get creative with the old tools of CDs and savings accounts and, for example, offer re-financing of CDs mid-term or create hybrid bundles that balance the bank’s need for liquidity and low cost of funds with the customer’s desire for better rates.
Even before SVB, banks looking to shore up deposit gaps among Gen Y and Gen Z were offering mobile-only account opening that doesn’t force account funding upfront, as well as early-paycheck access that has become a staple among neobanks like Chime. More banks are now following suit.
BAN: What tools should banks have in place to enable seamless integration with necessary fintech partners, including those in payments?
LW: Banks have to be effective matchmakers between their customers and the most relevant fintechs. They have to be really good and efficient at identifying, vetting, integrating and embedding fintechs of choice into their digital experiences in meaningful time frames. That means banks must have open digital platforms with well-documented, self-serve APIs that fintechs can consume easily.
According to the 2023 Strategic Priorities Benchmark survey, 90% of financial institutions plan to embed fintechs into their digital experiences over the next two years, and 63% of banks plan to embed payments fintechs specifically.
Given the growing headwinds that payments fintechs face in terms of tightened access to venture capital, slowing growth rates in ecommerce and growing regulatory scrutiny, Forrester predicts that one in every four payments fintechs will fail this year. This means banks must take extra care in vetting payments-related fintech partners in 2023.
Broadly speaking, payments are growing in complexity and fragmenting the number of ways in which people pay and get paid. Small- and medium-size businesses must be able to accept payments across a growing and complex array of payment rails, tender types and digital wallets. Many businesses must now accept between nine and 12 different payment types.
Successful banks will abstract away the growing complexity of payments and make it really simple and easy for businesses of any size to accept payments from anybody anywhere in the world. Universal payments acceptance will be critical for businesses’ cash flow, especially if an economic downturn materializes this year. Open-loop approaches to payments, especially P2P, will also gain traction.
BAN: How does FedNow change the payments game?
LW: For the first time in 50 years, you have a new public instant payments rail coming online. FedNow is going to inaugurate a new era of innovation around new payment use cases and reimagined older use cases on those FedNow rails. If you are a bank and you are not looking intently at signing up and being at least a receiver of FedNow payments, you must think about how that will affect your ability to accept deposits. This year, payments strategy is also deposit strategy. According to our latest research, 60% of banks plan to add FedNow as a payments service.
BAN: How can banks lean into a changing payments system?
LW: The average smartphone in the U.S. has 14 financial apps on it, including payments apps like CashApp, PayPal and Venmo. Changes in the tech stack underneath banking over the last 15 years brought us things like banking-as-a-service (BaaS) and payments-as-a-service (PaaS). PaaS is why you can get payments services from all kinds of different entities, with and without bank charters. This ecosystem disruption has created widespread financial fragmentation for consumers and makes it difficult for them to understand where they are with their money. The average American now uses between 15 and 20 different financial service providers.
While it’s delusional to think banks can stop customers from using all of those other apps and providers, banks can use open-banking APIs and rails to aggregate a complete picture of the customer’s finances back at the bank. This secures first-app status for the bank and gives customers the financial confidence to act on next-best product and service recommendations. This is one of the most powerful ways banks can use technology to capitalize on a systemic challenge and turn a headwind into a tailwind this year.
Nearly 30% of banks are also planning to offer PaaS over the next two years. They’re planning to embed their payments capabilities into non-bank third parties. This is another way banks can lean in and monetize their charter and expand their payments franchise.
BAN: What is Jack Henry working on launching in 2023?
LW: We’re really excited about the launch of two new next-gen, cloud-native solutions: Banno Business, our new cash management solution designed to eliminate business email compromise (BEC); and Financial Crimes Defender, a real-time AI and machine learning-fortified platform that provides visibility into fraud across all channels.
Every bank and fintech in the country has experienced more fraud in the last 12 months than they’ve ever experienced historically. A big part of the problem is the prevalence of screen scraping in our industry — which makes it very difficult for banks to distinguish valid login attempts from fraudulent ones, leaving systems vulnerable to credential-stuffing attacks and other cyberthreats that continue to plague the industry at large.
This is why the CFPB [Consumer Financial Protection Bureau] is scrutinizing screen scraping and proposing new open banking rules later this year. The good news is that banks can replace inbound screen scraping with API-based open banking rails and ultimately eliminate credential sharing altogether.
At Jack Henry, we continue to phase out inbound screen scraping on our Banno Digital Platform and replace it with direct API connections to five of the biggest financial data exchange platforms. In fact, we’ve already eliminated screen scraping from hundreds of thousands of apps across millions of accountholders, and we will complete that process on Banno by the end of this summer.
Eliminating credential sharing is an important milestone for the industry and will inaugurate a new and more secure era of financial data exchange. Unlike the indiscriminate data extraction performed by screen scraping, open-API aggregation allows accountholders to specify, minimize and fully control their data and how it’s shared with third-party providers — including the ability to grant or revoke data permissions within their primary bank’s digital banking experience. It bolsters trust in the bank and improves financial security for the customer. It’s the right thing to do, and we’re excited to be leading that effort.
Whitney McDonald
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Whitney McDonald
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Brian Stone
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