Message to Small Banks: Join the Digital Revolution or Become Obsolete

Across all financial institutions there is a strong push for digitalization in the name of improving the overall customer experience. However, this is easier said than done for certain institutions. All too often, our focus turns to the large firms with a matching pocketbook as the audience for digital transformation projects.

Meanwhile, small local banks are barely keeping their heads above water due to their dependence on aging legacy technology. Community and regional banks are often more directly involved with their customers than megabanks are, but still risk losing their client base to their competitors if they cannot gain independence from their old technology providers. 

As the landscape of banking has evolved, the technology has evolved with it. The rise of nationwide megabanks in tandem with an increasingly digital-native clientele have created an enormous competitive challenge for small to mid-tier banks. Much of the current discourse surrounds large banks and their foray into cutting-edge technologies such as Artificial Intelligence (AI) and Application Programming Interfaces (API). But smaller, local banks are focused still on keeping their heads above water.

Many banks are feeling left behind in the midst of technology innovation and new solutions. They are stuck with old, manual processes which impact operational efficiency, client experience and, perhaps most urgently, a bank’s regulatory compliance positioning. 

Banks can end up spending 80% of their budgets on maintaining and upgrading legacy technology solutions. The problem is that they aren’t the only ones looking for upgrades. If a bank wants to add in a feature such as a payments app, they must wait in line with several other banks who have requested an upgrade. Even if the upgrade is successful, it is only a minor dent in the armor, forcing banks to repeat this process multiple times, with an added cost for every new upgrade.

The death by 1000 cuts model of expensive and constant upgrades is an inhibitor that many small banks simply cannot afford. It is a constant battle just to meet a decades-old standard, leaving little to no room for any all-too-necessary value adding innovation. Banks are stuck between a rock and a hard place of not wanting to funnel profits into maintaining the aging technology suite but still being dependent on it for day-to-day business.

For many local banks, their strength lies in their personal, one-to-one approach to clients. However, the smiling face of your trusted customer service representative can only go so far if the underlying systems at the bank inhibit a streamlined experience. If a client opens a second savings account or a credit card, but the bank can’t access the existing data, the entire customer experience is in jeopardy.

It is important for banks, particularly smaller ones, to invest their money wisely. Rather than reinventing the wheel, find a technology provider that can solve problems rather than create new ones. With an abundance of fintechs and startups on the market, it can be overwhelming trying to find the right fit when they all claim to be the holy grail.

Here are 5 things to look for when considering investing in new technology:

1. Flexible and Pluggable – In order to counteract the rigid, immovable legacy technology, the solution needs to be flexible. It will need to integrate seamlessly to any systems, whether it be from the core banking providers or the bank’s own IT. Smaller technology solutions tend to be more agile and able to react quickly to new challenges and needs from the bank. This flexibility will allow the bank to adapt quickly to new launches from their tech provider, new regulations the bank needs to abide by, other leading-edge solutions and any unforeseen challenges along the way.
   
   
2. Industry-Built – For smaller banks, the personal and collaborative approach is everything. They speak to their customers face-to-face and hear their issues first-hand and many banks may have similar burdens to face. Find a solution that shares your client-centric approach and takes your opinions and needs as seriously as you do for your own customers.
   
   
3. Digitally Enabled – It goes without saying that the digital experience is becoming synonymous with the customer experience. If banks want to keep up with the industry behemoths, they will need to adopt a more digital approach to complement their customer-centric values.
   
   
4. Configurable – The long waits for innovation upgrades from core banking providers is a massive pain point. A solution that allows banks to make their own edits cuts down on time and cost, creating a path to self-sufficiency.

There is no questioning the fact that banks must adapt and innovate or be left behind. The prevalence of decades-old technology makes this process less linear than one might imagine. To keep up with a digital-first client base, banks must take a hard look at their technology stack and see how they can work with it, or rather work around it. A flexible, configurable digital solution, with a strong client-centric focus can help bridge the gaps in a core banking solution and enable banks to transform how they do business and maintain their competitive edge.

About the Author:
With over 15 years’ experience in the financial services industry, James Follette joined Fenergo as Global Head of Commercial, Business and Retail Banking in December 2018. James will oversee the division’s go-to-market strategy, drive the product roadmap development while ensuring current and prospective client needs are fully met within his division. Before joining Fenergo James held roles at Citibank, IBM and other global consulting firms where he was responsible for implementing client onboarding technologies, leading digital transformation initiatives and overcoming regulatory challenges. James holds a Bachelor of Business Administration by the SUNY University at Albany.