Banks Can’t Be Agile With Outdated Tech and a Legacy Core

Talking about innovation and agility is just a tease if a bank or credit union remains shackled to an inflexible core processing system that keeps it from competing with fintech rivals and financial institutions that have already broken free — or were never bound.

Who is really setting your financial institution’s strategic direction? You may think it’s top management and the board, and you may even think that the marketing function is exercising some influence through insights and design. But how much really hinges on your core processing vendor and the restraints the institution’s systems place on strategic execution?

“Being a fast follower is not a viable option unless the essential core processing issue gets addressed.”

Even today, when some new developments from outside of the usual financial sphere completely end run traditional players, institutions speak of being “fast followers.” That can be wishful thinking.

Being a fast follower is not a viable option unless the essential core issue gets addressed. Without access to data, for example, the ability to quickly (and inexpensively) test new ideas, and evolve into a consumer-driven culture, there is no “fast” when it comes to following. At worst, the results will ultimately be catastrophic.

How Financial Institutions Stay on the Bad Tech Treadmill

At any gathering of community bankers or credit union executives, conversation will inevitably turn to their core service providers, and the griping begins quickly.

“Given the griping, the casual industry observer would think banks and credit unions would be leaving for alternative solutions in droves.

Complaints will include how the lack of interoperability with fintechs stymies innovation. Another common beef is how the financial institution can’t access its own data easily. And discussions about core providers’ contact are often prohibitively long or expensive or both are inevitable.

Given the griping, the casual industry observer would think banks and credit unions would be leaving for alternative solutions in droves, or at least storming the castle gates with pitchforks.

Quite the opposite: Often in the next breath those same executives will proudly share that they just renewed with the core vendor for another five years. (If you were watching this on TV, you’d do a double-take.) However, they will share that they signed up all over again because they received a discount and “everyone knows how costly a conversion is.”

And frequently that’s not all.

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Getting Stuck on the Treadmill Keeps Narrowing Your Options

Worse than renewing by itself, they also bought additional, incremental services because the core provider promised it would be easy and convenient to integrate them. (A “minor” point is that signing up for these additional services also pushes out the contract term.)

Focusing on near-term profit maximization and convenience is understandable, but focusing there exclusively is strategically unsound and sets up banks and credit unions for expensive detours from where they should be heading.

For many financial institutions, getting stuck in an inferior tech relationship has continuing ripple effects. The core provider is effectively determining their technology stack. The technology stack is determining the institution’s technology strategy, by setting what technology they have available. This, in turn, drives what products they offer, which ultimately drives their corporate strategy. And ultimately, that determines how well they can compete.

Meanwhile, the technology and startup world ignited the customer-driven development revolution that’s increasingly helping progressive incumbents and the large companies from outside financial services to encroach on the traditional banking world.

In that world, financial products get developed and marketed based not on the technology that’s put on the shelf by a third party, but based on the consumer’s needs and in the consumer’s context.

Today’s Frustrations Become Tomorrow’s Handicaps

Bank and credit union marketing departments are canaries in the financial coal mine. Product and marketing executives encumbered by legacy cores face massive disadvantages compared to their competitors, whether that competition be from startups, entrants from an adjacent industry or digitally savvy incumbents. Among the disadvantages:

Inability to delve deeply into data can hobble your institution. Banks and credit unions need to be able to drill into multiple demographics, such as Millennials and Mass Affluents.

Reasonable upfront cost to execute any campaign is critical but impossible to attain. If simply gaining access to data to begin a test costs hundreds of thousands in either hard costs or programming time, justifying an ROI is nearly impossible.

Appropriate speed cannot be achieved. The speed with which a bank or credit union can cycle through tests, and therefore learn, directly relates to their ability to access data quickly and cheaply. A data-nimble organization operates on a weekly if not daily pace. By contrast banks and credit unions held hostage to their core vendor’s data access are lucky to achieve monthly access.

At a minimum, data-nimble companies are giving their marketing teams a four-year head start on the competition. From acquisition to product development to engagement, institutions that aren’t chained to their core can out-maneuver and out-monetize competitors.

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Jumpstarting Your Institution’s Tech Engine

Executives quickly point out that ripping out the core and all of the other services that financial institutions purchase from that provider is not a viable option.

So what can a financial institution do? Here are five actions to get moving on:

1.Every FI needs a five-seven year technology strategy that aligns capabilities with long-term vision and business strategy. “Being a bank” or “being a credit union” is not a strategy, just as personal relationships with customers is no longer a sustainable, unique competitive advantage — at least not by itself.

2.The technology discussion needs to be a board-level conversation. It must acknowledge that costs in the near-term will likely need to go up until the architecture is reconciled. It will also require resources and new performance metrics as this is very different than a core conversation where costs and timelines are well understood.

3.Setting a reasonable budget is a must. Transitioning from yesterday’s core requires funding resources, technology investments, and experiments. Not all of these technology investments will immediately clear the usual ROI expectations nor will all experiments work. Leaders must accept that such foundational investments in data availability, analytics and new capabilities are a necessary expense. Without getting the infrastructure in place the campaigns, products and experiences developed by digitally savvy competitors will be far superior.

4.Developing the organizational muscle and capabilities to make more data-driven decisions must be prioritized. This means getting access to data, even on a small scale, and using it. It doesn’t necessarily mean a massive investment of technology and staff, but for most financial institutions this will mean building a data team for the first time. In the marketing function, it will mean operating under faster cycles based on what is learned.

5.The data-driven approach must permeate the culture. It can’t be limited to the data team. This will require training, coaching and, most importantly, accountability. The desired improvements from fixing the technological issues around the core will be muted if the organization in its entirety doesn’t make the shift.

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