Seismic economic, competitive, and technological shifts will combine to create a uniquely disruptive environment for financial institutions. With change accelerating amidst uncertainty, how should banks chart their tech strategies in 2024 and beyond?
Pal Krogdahl, director of technology strategy and advisory services at digital banking platform provider Samlink, has navigated these digital transformation currents for over 20 years, advising financial firms globally.
In a wide-ranging discussion with host Jim Marous on the Banking Transformed podcast, Krogdahl unpacked his advice on how banks should defend and prioritize their projects for the coming year.
Current Conditions Will Require a Precarious Balancing Act
Q: What is your perspective on the macroeconomic outlook for banks?
Krogdahl: There’s a “schizophrenic situation” brewing. Rising interest rates will boost bank profits in the short term as higher loan yields pad margins. But those gains could quickly evaporate if slowing growth spurs widespread loan defaults from consumers and businesses strained by inflation and higher borrowing costs.
This volatility means banks must invest any windfalls strategically amidst conflicting economic signals — shoring up outdated systems before the window closes as downturn risks increase.
Rate relief preoccupied leadership for over a decade as margins compressed from rock-bottom policy benchmarks. But righting the ship internally before economic winds shift represents wise stewardship of current inflation-driven revenue surges.
Q: Why does the economy prohibit deferring core modernization investments?
Krogdahl: Lingering technology debt risks overwhelming balance sheets in a downturn unless its resolved proactively during the current prosperity. Leadership must strategically allocate any extra income rather than assuming stability persists indefinitely.
The gaping chasm between slick customer apps and archaic backend processes is already near a breaking point as consumers flock to digital platforms. Despite public progress, many institutions still maintain archaic processes relying on manual workarounds between legacy systems never designed for real-time data flows. Bandage solutions cannot sustain mounting experience debt.
Leaving outdated systems in place no longer works, since they inhibit new products and adapting existing ones at the pace that’s demanded today. Restructuring offerings like mortgages and checking accounts can’t take 6+ months anymore.
At the same, piecemeal modernizaton constantly proves inadequate — only a comprehensive platform overhaul can supply the agility required now. Unfortunately, attempting that independently almost always fails. Most banks should partner with specialized technology firms so they can focus on core banking strengths while leveraging vendor scale advantages.
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The Paradigm Shift of Ubiquitous Banking
Q: How does embedded finance change bank positioning?
Krogdahl: Consumers now readily spread their financial relationships across more institutions as new niche providers proliferate, steadily diluting loyalty. The notion of concentrated one-stop shopping with a single bank has faded as users assemble personalized collections of apps fulfilling specific needs (See “What Banks Can Learn from Plaid Study of Fintech Apps”).
To compete, banks must enable ecosystem connections that allow them to participate in diverse daily life events, versus rigidly trying to control all customer needs in-house. Open banking facilitates integration into third-party journeys where banks can provide specialized services behind the scenes, rather than needing to own the entire platform.
Accepting the reality of co-creation with partners can sustain banks relevance at the moments of need, versus vainly battling fragmentation. As fintechs and big tech disrupt bundling, banks should re-bundle offerings through strategic collaboration.
Q: Doesn’t building internal platforms seem safer for protecting customer data?
Krogdahl: The risks of attempting to handle everything in-house greatly outweigh the supposed security benefits, because of execution complexity. Lingering delusions persist of some banks becoming an “IT firm with a banking license” – but even the largest lack the singular focus and scale advantages of dedicated technology partners.
Banks waste resources endlessly customizing generic packages when configurable solutions could launch faster. Partners can securely compartmentalize data while still enabling rich personalization.
The future will inevitably run on best-of-breed platforms built via partnership ecosystems. Promising emerging capabilities like voice interfaces and predictive personalization hinge on scalable, reliable infrastructures. Banks acting as lone orchestrators stifle innovation and forgo the upside of cooperation.
Complacency carries grave consequences. Leaders must scan the horizon continuously and pilot emerging innovations before they disrupt institutions overnight.
Dig deeper: How Fintechs are Balancing Growth with Compliance Risk
Which Tech to Prioritize and How
Q: Which technology capabilities should banks prioritize?
Krogdahl: AI is at an inflection point where modest experimentation now prevents ceding significant ground later, as it becomes increasingly foundational across finance. Banks shouldn’t rewrite strategies around AI yet. But planned exposure can shape prudent deployment as opposed to reacting rashly once disruption strikes. And quantum computing disruption looms beyond AI.
Q: Can you expand on prudent paths institutions should take exploring generative AI?
Krogdahl: The ideal path lies in rigorous exploratory testing in narrow applications to incrementally grow familiarity without risking large-scale dependencies. With circumspect design, AI assistance will permeate banking far beyond efficiency use cases over the next decade to augment staff and delight consumers.
But ignoring AI altogether cedes any influence over its financial development to more aggressive competitors. Prioritizing education, cultivating internal expertise, and stress-testing ethical programming provide the best inoculation against the misuse and overhyping of generative technologies. Setting AI’s direction proactively beats reacting defensively.
Q: How do you see consumer experiences changing from AI influence?
Krogdahl: Virtually every bank believes they know customers deeply. Yet few translate data abundance into meaningful personalization. Many institutions still cling to product pipelines and monetizing captive share of wallet rather than enabling financial joy and reduced anxiety. But generative intelligence can radically smooth journeys through contextual advice and anticipating needs.
Leaders adopting AI to simplify money management earn rewards from empowered loyalty beyond efficiency gains.
Learn more: An Inside Story of Ally & Microsoft’s Groundbreaking AI Collaboration
Leadership Principles for Turbulent Times
Q: As senior leaders plot strategies amidst mounting turbulence, what overarching advice do you offer?
Krogdahl: Have courage, take reasoned risks, and keep reinventing experiences while doubling down on trust and agility. Avoid paralyzing indecision through declarative direction setting and inspiring teams purposefully.
Smaller banks possess inherent advantages of relationships and community embeddedness that technology can augment when applied thoughtfully. Combining digital proficiency with human compassion sustains loyalty. But delay risks being outrun.
Focus on understanding customer needs first, not chasing every tech fad. Then, map their ideal journey. Finally, utilize technology and partnerships to make that personalized vision a consistent reality across channels.
Q: How should management measure success on this transformation journey?
Krogdahl: Fixating on backward-looking return on investment in new initiatives won’t cut it anymore with the disruption’s pace. Think broader and deeper — how does this change unlock future value? What new capabilities become possible? Does it reflect our purpose?
Adopting platforms built for adaptability provides the most flexibility in responding to yet-unknown scenarios. Seek upside in expanded capabilities versus tracking predetermined requirements. And listen to creative staff insights closest to the impact of emerging innovations. Their lived experience spotlights possibilities.
The Mandate for Specialization
Q: Is focus now preferable to scale for most banks today?
Krogdahl: Yes. Do one thing exceptionally over many things mediocrely. Chase scattered half-innovations across the sprawl of banking no longer cuts it. Institutions enamored with their supply of products lose sight of how little modern consumers care.
Getting fundamentally good at a niche aligned to capabilities creates separation. But doing so often requires relinquishing legacy domain assumptions and deliberately specializing in targeted segments.
For a longer version of this conversation, listen to “Adapting for 2024 Digital Banking Success“, an episode of the Banking Transformed podcast with Jim Marous, available here or wherever you get your podcasts. This Q&A has been edited and condensed for clarity.
Justin Estes is an award-winning writer, strategist, and financial marketing expert with expertise in banking, investments, and fintech. His clients include the NYSE, Franklin Templeton, Credit Karma, Citi and, UBS, and his work has appeared in Forbes, Barrons and ThinkAdvisor as well as The Financial Brand.