How Banks Can Catch Up to the Speed and Scale of Fintechs

Community bankers need competitive technology to successfully go up against large banks, fintechs and neobanks, but legacy technology holds them back.

Community financial institutions make up an overwhelming majority of America’s insured banking institutions. Yet, their numbers continue to shrink as they struggle to compete with megabanks and emerging fintechs. According to FDIC data, community banks are also experiencing consolidation at a much higher rate than larger banks.

What’s contributing to this shift? The cost of innovation is a major factor. For example, technology expenditures at megabank Barclays amount to only 0.03% of their total assets. However, the technology budgets of community financial institutions, even though small in terms of actual dollars spent, represent a far higher percentage of their asset size.

This makes it increasingly difficult to compete because the cost of rapid innovation and maintaining a best-in-class technology stack can be out of reach for even the best-performing financial organization.

So, how can community bankers honor their local service traditions while offering a world-class banking experience? They must focus on delivering personalized products and journeys at scale while significantly lowering their total cost of technology ownership.

The Shift Away from Core-Centric Technology

Community financial institutions continue to spend large sums of money maintaining their legacy technology stacks only to watch their market share grabbed by megabanks, neobanks, and fintechs who can deliver personalized products and experiences at scale, and they make it look easy.

According to a BAI survey, while more than half of consumers increased their usage of digital banking apps during the pandemic, community banks and credit unions had the lowest growth of digital adoption.

Furthermore, that same study revealed that almost half (47%) of consumers across all generational segments indicated they would be willing to switch primary financial services organizations for better digital capabilities. Recently we spoke with a community banker who was in line with her core provider for nearly three years to implement a digital onboarding solution. Yes, three years!

This banker had enough and was looking for a digital account onboarding solution fast. She was pleased to learn she could implement a best-in-class digital onboarding solution in months, not years, without replacing her core provider. While we certainly enjoyed turning this banker’s frown upside down, we asked ourselves, how could bankers continue down this path? They can’t.

Core-Centric or Best-in-Breed Solution?

Historically, many bankers have relied on large core technology providers’ end-to-end, turnkey solutions. This “buy” strategy worked well for decades and enabled financial organizations instant parity with their peers. Still, this strategy never fully allowed bankers to drive the innovation and personalization required to differentiate as digital experiences have become front and center.

As customers’ expectations continue to evolve rapidly, should bankers double down on next-gen, core-centric technology when more agile banks and fintechs release new products and personalized functionality daily?

More significantly, even if your organization can afford the “core-centric diamond package,” are you willing to allow a third-party provider to determine your bank’s roadmap and priorities when more flexible, agile, and affordable best-in-class banking solutions are available?

Transformation on Your Terms

How can community bankers compete and win? Primarily, they need to break their dependency on core-centricity.

The ongoing debate regarding how to build a sustainable banking operation typically revolves around two camps of thinking “build versus buy.” Building new technology in-house or in partnership with a services provider can be time-intensive and expensive. It’s a multi-year engagement at best, plus you must hire, nurture, and retain the right tech talent to fend off rapid obsolescence.

On the other hand, bankers may consider making a clean sweep and “rip and replace” their legacy technology. While a clean slate may be attractive, the up-front cost and time to do so are significant, and the change can be disruptive for any financial institution.

Plus, at the end of the implementation, will you finally have the infrastructure you need to scale and personalize on your terms, or will the vicious cycle repeat? There is another option — what we call high-productivity fintech infrastructure (HPFI).

Speed, Scale and Agility Without Core Disruption

A high-productivity fintech infrastructure is the engine that powers a fully integrated fintech platform with a unified suite of capabilities. By using HPFI to modernize existing technology stacks, bankers can innovate at the speed and scale of fintechs, while avoiding huge budgets and oversized DevOps teams.

The critical components to a successful HPFI strategy are simple: composable architecture, a no-code/low-code interface, security, and scalability.

Composable architecture and no-code/low-code tools enable bankers to choose the exact components they need to configure new products, digital journeys, and the key connectors, all with limited IT involvement. Composability also gives banks and credit unions new freedom to start small, prioritize products and digital journeys that they need the most while continuously driving maturity and creating new products and journeys to meet customer needs, drastically reducing time to market.

Further, this can be accomplished through a secure integration with a financial organization’s existing core systems and eliminate the friction sometimes experienced with large implementations.

Over time, with an HPFI strategy, banks and credit unions can scale through continuous improvement and migrate more and more of their digital products and services into a cost-effective and data-driven customer-centric platform. This enables bankers to move quickly to defend and scale market share through innovation — at a fraction of the time and cost.

That’s the power that, until now, has only been enjoyed by megabanks and fintechs.

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