Bankers have entered what many view as a challenging year for financial institutions of all sizes. There is plenty of uncertainty surrounding the regulatory environment, credit quality, and the Fed’s plans for interest rates.
As one banker recently told us: “This year’s theme is survive until 2025.” With that quote in mind, our recently published trends report explores several things banks and credit union executives should consider as they navigate 2024’s twists and turns.
Previously, we highlighted three key considerations to improve FI outcomes: artificial intelligence, debit card routing, and auditing digital products.
Here are three more areas to contemplate as you prepare for the months ahead.
Assess Fintech Delivery Models
Flexibility is more important than ever as banks and credit unions look to meet consumer preferences. An ability to differentiate from competitors, particularly when offering essential self-service capabilities, has become increasingly fundamental to success.
Financial institutions should focus on offering best-in-breed customer-facing solutions, realizing that no processor has a solution that fully addresses all changing needs. A critical factor is whether you can readily access data from your core processing platform – extracting data to populate adjacent systems and feeding the enhanced data back into the core. Financial institutions need to ensure a proper level of flexibility to achieve their innovation goals.
As SRM’s Keith Ash pointed out in the report, delivery models have evolved so rapidly that seemingly innocuous language baked into contracts a decade ago may carry added meaning. For instance, core providers routinely included boilerplate language requiring clients to adopt their offerings rather than competing add-ons – even if the incumbent’s product was inferior or didn’t exist when the contract was executed.
Banks and credit unions need a nimbler approach; the evolution of APIs and pending open-banking mandates make such capabilities more attainable and essential.
Tackle Complex Core Processing Platform Decisions
Similarly, core processing platform modernization has been a longstanding concern. Replacing outdated systems is expensive and time-consuming, with a significant risk of customer disruption. Until recently, the alternative involved being hamstrung by an existing system with severe limits to the number and timing of new service rollouts.
In our report, SRM’s Mike Langenkamp explained that ongoing technology advancements have given rise to a third option, often referred to as a “sidecar core strategy.” A growing number of financial institutions are considering hollowing out their legacy core – leaving it in place for basic functionality like calculating interest and applying loan payments while implementing a middleware layer to enable an evolving suite of new capabilities.
This new approach requires half the time and cost of a traditional “rip and replace,” with virtually no customer impact. Ironically, middleware may wind up extending the lives of legacy core systems long seen as impediments to modernization.
Continuously Monitor Tech and Operational Expenses
We’d be remiss not to mention the basic blocking and tackling of vendor expense management, which offers savings opportunities for every institution. Cost protection requires an expert to review contract clauses. Lawyers are skilled in drafting vendor agreements, but few are equipped to identify which clauses reflect common practices or current market pricing dynamics.
A case in point is inflation’s sudden reemergence. According to our colleague Mark Mrva, third-party agreements often have overlooked clauses that can increase fees based on the Consumer Price Index. Over that same period, overall technology price points have trended downward. Banks and credit unions must prepare for these adjustments – or explore ways to eliminate them.
Any contract within three years of its expiration date merits a thorough review. Entrenched vendors, particularly in IT and customer-interfacing roles, realize their solutions are time-consuming to replace. Financial institutions must preserve viable alternatives to maintain negotiating leverage.
The Bottom Line
Our latest trends report offers greater detail on the considerations shared here and other opportunities for banks and credit unions in what is shaping up to be a challenging year. Budget surprises are inevitable; effective leaders are prepared with levers to offset them. Our expert team is available to you, ready to help clients navigate a challenging and unpredictable path ahead.