Sometimes it seems as if all there is to be said about financial institutions and their response to the digital age is that they are woefully behind and show little sign of “getting it” in the near term when making strategic sourcing decisions. Certainly, banks and credit unions have struggled with the unique challenges of serving consumer that increasing live their lives through the ubiquitous devices that are available to them.
However, there is another side of the story. It is not as if financial institutions, especially the largest of their ilk, have done nothing. Various approaches have been tried, many have failed and others have proven to be very successful. There have been mobile only initiatives, mobile first efforts, neo banks able to start from scratch avoiding the back office infrastructure drag established institutions face and, amongst as well as sometimes a part, of all this are digital only financial institutions, some as stand alones, others as part of brick and mortar institutions though usually with their own brands.
The Bigger You Are, The Blinder You May Be
Therefore, it is not true that banks and credit unions have been sitting on their hands, but the subplot that should be highlighted is that most of the proactive initiatives in response to our digital society have been undertaken by the very largest of those institutions. Too often these developments have left mid-tier and community financial institutions looking like deer in the headlights, wondering how they can compete against such well-funded development and marketing efforts.
I have spent time with professionals working at the largest banks and credit unions. Serving on a panel with three of them about a year ago I shared with the audience my assertion that technology would ultimately reshape the competitive landscape allowing banks and credit unions of all sizes to compete effectively with any other organization. After the panel discussion, two of the “big-bank” bankers asked how I thought technology could ever allow the “small” institutions to overcome the massive advantage their institutions had in terms of scale.
In other words, while these big players could invest in innovation then leverage its advantages across its vast footprint, it was not possible for small banks and credit unions meaning innovation was out of reach for them due to cost. My response clearly received little consideration. That answer was basically two-fold: 1) The scale their employers enjoy is not the kind of scale that is advantageous (more on that another time) and 2) the innovations being introduced into the digital environment was only the beginning of a series of rapid steps toward a digital experience that shared little with what was currently envisioned. What I wanted to say was, “You boys sure know how to drink your own Kool-Aid.”
SDK, API, Agile…Oh My!
Though the technology that may be most disruptive in terms of leveling the competitive landscape is yet to come, there are already a number of innovations already making a difference for the institutions that are embracing them. Application Programming Interfaces (APIs) are being introduced into software development allowing for smoother integration, easier extensibility and more control over the user experience (UX) as well as the data generated when the user engages.
Software Development Kits (SDKs) are being leveraged by some vendors to allow banks and credit unions who wish to add additional functionality that can satisfy a unique need at an institution or give it additional competitive leverage in its market. In the best cases, the SDKs being offered are the same ones the vendor uses in their own development environment. This eliminates some of the noise that can be created when a vendor’s SDK differs from what the bank or credit union uses.
Microservices are another trend in software development that can lower the cost of maintenance, testing and innovation. Instead of a monolithic piece of software code stretching across an entire product or service, microservices are discreet building blocks representing a specific function or feature. This component-based approach simplifies (i.e., reduces time, resources, time to market) when a fix, upgrade or innovation is introduced into the system. No more dealing with a code base inextricably woven together such that a single, small action in one part of it creates undesired and unintended consequences somewhere else.
While we’re throwing around acronyms, let’s not overlook Robotic Process Automation (RPA). It’s a close cousin to the artificial intelligence (AI) and the robo-agents that are getting a lot of attention. However, RPA does not require as much overhead (hiring AI experts), is easier to implement, and deliver quantifiable near term benefits (not waiting three years for an AI investment to reach its ROI). In our experience, virtually every bank or credit union back office has a process that’s ripe for RPA, offering double-digit savings that could then be redirected toward more strategic initiatives.
Is the IT Cupboard Half Full or Half Empty?
Many leaders of small and mid-sized financial institutions look at the vast sums being spent on modernization by their behemoth competitors and question how they can possibly keep pace. I’d suggest embracing a “glass half full” attitude. The new generation of banking technology does more to level the playing field than it does to widen the gap between the haves and have-nots. Most importantly, this generation is only one of many.
The mainstream use of APIs, SDKs and microservices reduce time-to-market for all financial institutions, not just the big ones and, it could be argued, are even more beneficial to those institutions that have avoided the vast and complex IT landscapes that grow with the asset size of a bank or credit union. For institutions who are not facing this level of complexity, these innovations stand to alleviate constraints imposed by the legacy products and services that feature less sophisticated, more dated approaches to product development. These technology tools are also reducing the cost of development and over time will reduce the cost for mid-tier and community institutions to take advantage of some options that seem out of their price range today; e.g., AI, though remember RPA is the short term step that should be taken first at any rate.
What mystifies me most is the fact that few of those in leadership levels at mid-tier and community banks and credit unions seem to have little understanding of the technical advances going on around them. They seem, well, allergic to the topic. They instead depend on someone else in their organization or with their vendors to handle this. It does not take a computer science degree to understand “how software is eating the world” or what that can mean in terms of delivering value to stakeholders. Industry expert Chris Skinner threw down the gauntlet on this topic in a recent blog. I’ll reiterate one of his key messages: it’s time to stop whining and start competing. The facts of the marketplace are clear; we have the tools at our disposal to address them. Chris is right about a lot of things and doubly so on this.