Community banks get it — younger customers expect innovation, so technological advancement can no longer be back-burnered. They also understand that by virtue of their size, they must seek partnership with qualified third parties, rather than trying to do everything on their own.
The trick lies in approaching tech improvement through such partnerships while keeping the bank or credit union safe as well as without burning through too much money.
A four-point approach will help traditional institutions evaluate and select tech partners.
1. Determine What Parts of the Bank are Ready for — and Need — Tech Investment
Many banks have incurred significant “technical debt,” according to McKinsey. This entails the legacy tech stacks, unused or mis-used software and applications, and excessive or unused hardware. Many institutions are encumbered with complex, siloed IT structures as a result of the last several decades of rapid technology investment. As such, community banking institutions may already be paying for technology that is not being utilized to its full potential.
To counter potential misalignments or duplicative efforts, leadership should examine the institution’s current technology ecosystem prior to any tech investment. We recommend a technology inventory. Frequently, a product manager on a specific technology or piece of software may no longer be employed with the bank, and bugs, vulnerabilities and upgrades may go unnoticed.
Following the inventory, leaders should ask themselves how the institution’s existing technology can be enhanced. For example, perhaps a customer relationship management system could use a data handling update or the implementation of robotic process automation to improve what’s in place, rather than embarking on a technology project from scratch.
Software in the existing tech stack may already provide more services and features than meets the eye.
Read more: Live From The Financial Brand Forum: How Credit Unions Can Innovate at Scale
2. Be Strategically Conservative with Your New-Tech Budget
The first priority banks and credit unions should have when selecting a tech partner is risk assessment. In order to counter any regulatory, legal or reputational issues, institutions should do their due diligence, including the following:
● Seek recommendations on use cases. Consult with industry peers to see if the partner in mind aligns with specific needs and risk management standards.
● Approach negotiations with confidence. Structure contracts in creative ways to alleviate potential risks. Look to negotiate favorable deal terms such as extended trial periods, guaranteed response times for critical technical support, strong warranties and indemnity clauses. This is especially relevant to partnering with companies in their earlier stages.
● Go beyond compliance checkboxes. Keep a close eye on the partner company’s funding sources, its financial health and online reputation as well as among industry peers. Ask for references from the company that might be able to help you dig deeper into this information — for example, long-term customers or venture capital firms backing it. Research the company and product roadmap for a long-term view of the viability of the relationship.
Take a deep-dive into the company’s operations by conducting process audits as well assessing their own third-party risk management process. Where relevant, you may want to go further, to fourth- or even fifth-party relationships. Evaluate the company’s board composition and its involvement in compliance matters and level of influence on the company. Understand and mitigate risks associated with the company’s business model, customer base and operations.
● Stay in touch. The bank CEO or executive sponsor should be in close contact with the tech firm’s CEO for periodic status updates. In addition, the tech firm should provide subject matter experts as points of contact.
Keep abreast of what’s on the tech firm’s roadmap. For example, if it is backed by venture capital, what does their runway look like? What is its fundraising plan for the future? (Maybe your bank will even want to invest.) What about meaningful hires or turnover? Consider all of these pulse checks on the company’s health.
If your tech partner’s management is on the ball, questions will be coming from that side too.
For example, what features would the institution like to see in product updates? How could the bank or credit union continue to be a design partner and sounding board for product development ideas?
3. Set Up Your Internal Team for Success
“Set it and forget it” has no place in this relationship. Rather, effective partnerships form when the banking institution’s leadership stays actively involved in the management of the project.
Consider creation of a multidisciplinary innovation committee that has some muscle.
The group should be made up of business leaders from a mix of departments such as business unit leaders, IT, operations, compliance, sales and more. Diverse perspectives can ensure critical issues aren’t missed and help see beyond the immediate point of the partnership.
The group should clearly be more than a sounding board. Enable the committee to make executive decisions on the direction of projects and deliverables by committing time and resources from the institution’s executive team.
Banks and credit unions that have embraced the role of Chief Innovation Officer might nominate them to head this effort across the organization. For those that haven’t, the time may be here to do it. Look inward and appoint a talented, forward-thinking, rising leader to run the committee.
Involvement in the process must be wider and deeper than just this internal committee, however. Ensuring transparent, continuous communication with bank employees at large throughout the lifecycle of the project is also critical.
It helps when new tech isn’t rammed through the organization. Explaining the direct benefits and use-cases of the new technology sooner rather than later can help get employee buy-in. For example, the CEO or CIO can host regular town halls to provide updates.
This can prevent miscommunications such as employees feeling they did not have adequate lead time for training prior to going live, or worse, the partnership having launched without internal and external stakeholders’ knowledge. Such friction often results from lack of a proper communication plan in place.
Read more: Overheard at The Financial Brand Forum: How Apple FCU Gives Innovation a Nudge
4. Align Beyond the Technical Side of the Relationship
When it comes to technological alignment between banks and tech partners, it’s about more than ensuring tech stacks are compatible. Cultural alignment on work styles, development cycles and more go into making things work.
Both partners should be up front about their expectations. For example, banking institutions have more regulatory and administrative hurdles to jump through than technology companies. While veteran fintech companies will be aware and prepared to move in a more conservative way, early-stage technology companies may be quicker to move and work in more unconventional ways.
Prioritization of projects on both ends should always be noted in order to set realistic expectations. For example, tech firms typically have a large pipeline of onboarding ahead. And the financial institution typically has limited tech resources to allocate towards project management.
To reduce friction, partners should be clear about preferred ways of working and project management up front.
Finally, when tech firms and financial institutions work together, a strong dose of reality helps. View upfront costs as a foundation for future returns. Community banking and credit union leaders should focus on the potential benefits and value generation expected three to five years after the project begins.
To maintain the focus, one-year roadmaps help. They should include specific quantitative and qualitative success to achieve at set benchmarks. This can create a culture of innovation at the financial institution, paving the way for future partnership successes.
About the Author
Pam Kaur is head of bank technology at BankTech Ventures.
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