The following analysis is drawn from the latest edition of consultant Art Gillis’ long-running annual Automation in Banking study.
The future for banking technology, as expressed by pundits, researchers, consultants, the press, and advocates, contains too much hype, and as yet, not enough delivery.
I suggest they all take a trip to most bank branches for a taste of reality, because reality will be here for several years. Some examples of what they’ll likely find, based recent experience—and I’ll tell you where in a moment:
• It takes 15 minutes to handle a mortgage payment at a drive-up, where no one else is waiting, and you must ring a bell for service.
• Another branch doesn't take transactions during lunch so the employee can eat.
• Housed in a museum-like facility, another branch has unoccupied lobby offices, one greeter, two tellers (one doing back office work)—and a long line of grumbling customers.
Seems to me that if Digital banking were real and deployed, these less-used branches would have been owned by Starbucks or been listed as OREOs by now.
I didn’t do my Nikes-on-the-streets survey in rural Iowa or New Hampshire, but instead, in metropolitan Atlanta in the last few months.
I “get” that banking technology and how it is used is changing. But in my experience there’s a distance between hot and hype and where most banks reside on the curve of progress. Banks need to pay attention to what’s going on, within the scope of their markets and their own reality.
Buy in, but buy in all the way
Maybe banks have to get the sequence right.
Step 1. Incent bank customers to adopt digital banking completely by sharing the savings with them. Money—in their pockets, not yours—is the best way to make a business case.
Step 2. Shutter completely the branches that are creating unhappy customers while banks are preparing to transform.
Step 3. Don't wait too long to connect with customers that took the leap.
Step 4. Make sure the transformation worked.
Understand that digital banking will not add much to near term revenue for vendors. Core vendors produce 74% to 82% of their revenue from core solutions and payments solutions.
14 trends, concepts, and realities to consider
Here's what I see in banking and technology based on my annual research among vendors and bankers, and my trusty Nikes.
1. For bank tech companies, size of banks and credit unions, matters.
At yearend 2014, there were 12,911 financial institutions in the U.S., declining consistently at the rate of 4.4% per year. Of the total population, only about 3,500 financial institutions in the U.S. make strong targets for growth-seeking tech companies.
Long term, tech vendors own growth will be influenced by market conditions that are not so favorable. Many parts of the industry have not returned to pre-crisis success, and they aren’t going out of their way to spend gobs of money on tech where they can avoid it.
2. Small financial institutions don't spend a lot on technology simply because they don't have to.
This is related to my first point. Small banks use their technology primarily to do bookkeeping. They acquire enough of the ancillary apps to please their customers, but they bypass the more sophisticated apps, such as risk management, big data, CRM, profitability analysis, high value commercial lending, cash management, analytics, business intelligence, and database exercises.
Such sophisticated apps are sweet revenue items for bank tech vendors, but overwhelmingly complicated for country banks.
3. Small banks also suffer from the survival factor.
They are the ones that account for most of the 4.4% decline. There will always be an acceptable business model for small banks and small clients. Their model dictates a stingy spending culture because post-2008 regulatory demands took away discretionary dollars that managements wanted to spend on technology. That means about 9,000 institutions are nice to have as customers, but revenue for their tech companies will increase only modestly in sync.
There are exceptions, of course, as to how small institutions behave, and I don't know them all personally. So tech firms that concentrate among community banks will argue this point with me.
4. The idea of open architecture core systems is a good one, but at this time, only at banking conferences.
Implementation is still low (33% of new core sales) given the 25 years of availability. It took a major market influence, the recent rescue of Open Solutions Inc. by Fiserv, to move open architecture systems into a safe enough haven for banks and credit unions to take the leap.
In my opinion, it takes two strong influences to impact a mature bank tech market:
• A strong product that has provable appeal and real benefits.
• A strong vendor who knows how to manage that product based on excellent past and present performance.
Fiserv has both, but they also had the smarts to salvage Open Solutions Inc. and turn it into a sales success story of 50 core systems per year. I have met lots of Fiserv sales reps over the years, and they know how to sell good stuff.
5. Whereas technology, in general, has a reputation of changing every 18 months, that is not true in banking.
For example, bankers acquire a core system solution after a careful examination of alternatives. And they stick with it for a very long time.
Why? First, the providers continue to keep the system up-to-date with three releases per year, typically. Second, bank employees grow better at using the system as a result of years of experience. The result is quite a bit of stickiness for core systems.
Usually a major change has to occur in the strategy of a bank for it to consider a replacement of the core. The decline rate for new core sales began in 2001, and is now at 2.04% of the total population of financial institutions. The norm prior to 2001 was 8%. Because 98% of the institutions are pretty happy with their core system and vendors, and because they have more demanding priorities to worry about, I don’t foresee much change in this picture.
6. Digital banking is a nice term as a productivity tool for banks to increase earnings.
But after one removes the packaging, digital banking is really a collection of every technology that banks already own but have not aggressively implemented within the ranks of their customers. As banks evolve with this concept, they will typically apply their own in-house resources to achieve their goals.
The main vendor beneficiaries of the digital banking movement will be marketing companies for getting the word out to bank customers; real estate companies to sell off shuttered branches; employment counselors to handle laid-off bank employees; and tech contractors to make sure the tech pieces deliver more than the whole.
Digital banking is a process, not one product.
7. The threat of outside vendors, both offshore and off-mainstream, will indeed have impact, some positive, some not.
In the case of "foreign" companies, Temenos, Infosys, Oracle Financial Services Software, SAP, Misys, Accenture, Nucleus Software, Polaris, CSC, and others have targeted the U.S. as a ripe market because most have open architectures, while 85% of the U.S. banks run on 55-year-old legacy systems. So far, offshores do best in their own back yards
With regard to off-mainstream vendors, banking, the largest vertical tech user, has always been a sweet target for big generic tech firms. But now this target has blossomed because banking is looking more like a Google, Apple, Amazon, Facebook, and a bunch of others working feverishly to produce software that will make them the next "anylender," "anypayer," "anygrouper," "any-money-custodian." Also known as disrupters.
But be aware that the millennials are creating their own history—and it began yesterday.
8. Banking technology is no longer owns the “sizzle.”
What do I mean? In 1970, the ATM was sizzle. Today, the ATM is a greatly expanded version of the cash dispenser. It will accept a check (sans deposit slip), digitize it, send back a receipt, and let the customer go away in seconds. It's nice, but it still doesn't do what millennials want.
Here's what they are saying: "Look at my face on your screen. Put $1k in my account now to cover my OD, and call me in the morning."
If millennials are now the new normal, it might mean that every bank CEO over the age of 45 should receive his (and I mean his) pink slip and let a 35-year-old man or woman run the bank. Call it peer-to-peer banking.
At least, they will understand each other.
9. How much potential is there for bank technology to sell new ideas and products?
In the 1960s I would have said, "We have converted solid accounting systems from good punched card systems into true automation that digital computers can handle with the right software." Back then it was only about accounting systems. No one even mentioned the word "information."
For a long time in banking, innovation equaled “replace employees with technology. But in 2010, it's as if Rip Van Winkle took over. No new innovations. And by "new" I don't mean makeovers.
Here are my ideas on what was new in the previous four decades. ATM, internet, imaging, personal computer, mini computer, credit cards, customer relationship management, data communications, integration of systems, Check 21, cash management, mobile banking, risk management, data mining.
The absence of something entirely new these days may mean the bank tech companies will exist in a perpetual makeover business. But I don’t think the industry is clamoring for a new DDA system.
10. At bottom, how new is “the cloud,” really?
I put out a call for Cloud Solutions, and eleven companies submitted. Coincident with this is the fact that outsourcing is becoming the method of choice among banks. I present this comparison because I find strong similarities between outsourcing and cloud. Several key vendors must agree, because they didn’t respond to that research request.
11. Don’t bother looking for a section in my latest report on “Big Data,” even though much is written on the topic.
I believe in data. But I'd rather use "meaningful" as an adjective rather than size. That's why there are 58 solutions in my report under headings like Analytics, Business Intelligence, Risk Management, Compliance, Fraud Control, and Data Security. Smart vendors know the banking business and how meaningful data can help bankers manage for success.
12. If you believe everything you read about IT disasters in banking, and you are a banker, I want to comfort you.
Open Architecture (aka Modern Architecture) is very good for today's processing needs. No one will argue that fact. This argument has been going on for more than 25 years. If you remember Y2K, then you can sleep well knowing that the legacy systems are not going to explode, just like Y2K didn't blow up banking.
There isn't enough manpower in the world to conduct a massive transformation from legacy systems architectures to open architecture. So please recognize that the existing architectures still work every day and produce solid results.
13. Don’t buy based on buzzwords about things you may not understand.
As long as I'm playing psychologist, I should also cover some other anxieties, at least, by mentioning the labels: digital banking, disruptors, fintechs, startups, bitcoin, blockchain, cloud computing, and newbies nipping at the heels of old-normal banks.
Please be careful you don't spend money on labels, propaganda, false expectations, and inflated promises. Examine carefully what honorable vendors have to offer, and then decide what you will truly receive from your investments.
14. There's more to the bank tech space than five top core solutions companies.
Eleven small core companies have survived the shotgun weddings of FIS and Fiserv, and my guess is they will remain independent forever.
Eleven companies combined represent 13% of total installed core systems, and 16% of all new core sales in 2014. None of these is a startup. They know banking, technology, customer loyalty, consistency of service, access to best-of-breed if they don't own a requested solution, and in my opinion, they have expertise that answers the phone when customers call.