How Community Banks Can Compete In The Digital Age

With the digital transformation in the banking industry, many community banks and credit unions may believe they are at a disadvantage. The truth is, a smaller size can be an advantage during times of change if an organization is willing to disrupt themselves and embrace the future.

As organizations in all industries face the impact of nascent digital technologies, some executives find themselves at a loss on how to adapt their business models and strategy. For most community banks and credit unions, the business model hasn’t changed in decades. Strategy in many of these organizations has been non-existent at worst, or simple at best, developed around excellent in-person customer service and not focused on a specific target customer segment. In this model, technology remains a facilitator of excellent customer service delivered by humans, whether they are advisors, banking officers, or tellers.

When the smartphone was introduced, banks and credit unions approached the device as they had ATMs and the internet previously. The smartphone was viewed as another channel – peripheral to the bank branch.  The smartphone was the catalyst that brought many other technologies to bear, including other connected devices and artificial intelligence. Also, it brought a renewed focus on designing experiences from the view of the consumer.

Some institutions, usually the largest banks, began to understand that these new technologies were impacting business models in various industries. Before the banks were able to adjust, fintech firms sprung up introducing new business models, such as mobile-only banks and mobile payments. It has taken a while, but first mover banks are investing heavily in new business models, including the idea of banking platforms.

With these changes afoot, innovative banks have started to reorganize, combining technology and banking teams.  IT teams will no longer be peripheral to a bank’s operations, as they have been traditionally. Technology and business units are partnering to define new models.  Banking product managers are transitioning from focusing on pricing to applying Jobs to be Done (JTBD) design principles. IT developers are moving from waterfall to agile methodologies.   Banks are beginning to test new products, services, and experiences, while changing business models.

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Banking Models at the Mercy of Outside Providers

The emerging approach of integrating technology into all of banking areas requires that a bank leverages at least some of their own technology. This is a challenge, as most community banks and credit unions outsource their technology entirely to their core and digital banking providers. Changing how FIs approach strategy, new business models and innovation becomes a problem when none of it is managed by the organization itself.

However, many of these organizations have yet to come to terms with the changing landscape. As their technology partners present them with a new functionality, community banks and credit unions offer it to their clients and accept whatever success it brings. These organizations call themselves ‘fast followers’.

Smaller organizations usually rely on their technology providers to define what to follow and hope to implement it quickly. They don’t always ask how their providers arrive to the new feature or determine how far behind they are when they implement, risking wasting resources and falling behind. In the meantime, the functionality gap between innovative organizations and the rest of the industry widens every day.

Unfortunately, many banking technology companies lack a well-defined process for innovation. Many of these organizations are a result of consolidation within the industry and continue to operate as separate divisions focused on banking verticals. The technology provider either has ‘user committees’ or a customer feedback platform that is used to generate ideas and prioritize them.

The resulting product map prioritizes the most popular and easier to implement ideas which are then delivered in the coming release, which may not come out for up to a year later. This approach gives community banks and credit unions the semblance of being central to development of new ideas. This practice results in a lowest common denominator product management process, as it results in incremental improvements but not breakthrough thinking.

Current practices compound the challenge for financial institutions that fail to make technology a core competency.  As organizations flounder at changing their business model or setting their own strategy, they are at the mercy of organizations that give them new features based on what everyone else expects.

Since financial institutions rely on many single solutions providers – even if those are under the umbrella of a single large bank technology firm – the challenge of coordinating across several solutions complicates the matter. The problem goes beyond technology, often involving legal and compliance issues. For example, if the digital banking provider has a new feature that integrates ATM cards with mobile banking, an organization that doesn’t use the integrated card solution has few or no options.

Organizational Impact

The challenge isn’t limited to customer experiences. Digital technologies are changing the operations of a bank, from the back-office to the branch and beyond. Executives in charge of operations of any kind need to be champions of digital technologies that make operations more efficient and innovative such as AI, machine learning, RPA, and platforms.

Digital marketing and data analytics have revolutionized marketing functions, requiring banking CMOs to be more engaged in how technology is changing everything that their teams do. For example, social media and data analytics bridge functions like marketing, customer service, HR, and operations. Digital technologies form new ways for separate departments to work together.

Accounting, Finance, and Human Resources are also heavily impacted by the application of technology in their everyday activities. Recruiting, for example, heavily relies on digital data. Many community banks and credit unions no longer use paper resumes and require all applications to come from their websites. However, very few have any way to complete applications via mobile devices. Accounting and Finance functions use automation to perform tasks that once were done on spreadsheets by a team of analysts.

Even the risk functions are seeing the impact of new technologies. Long gone are the days of compliance officers storing the Big Orange Book on their shelves. While the Big Orange Book survives, it is now digitized, which makes it significantly easier to search and use. There is a whole subset of fintech, called regtech, that is dedicated to disrupting how compliance and risk management is performed.

Community Bank and Credit Union Response

Community banks and credit unions can solve these dilemmas.  At a high level, these 6 steps must be taken:

  1. Obtain full support for a transformation agenda from the executive team
  2. Assign transformation to a high-level team member or team
  3. Adopt ‘Jobs to be done’ (JTBD) design principles within product management functions
  4. Engage existing technology partners and industry disruptors
  5. Develop transformation goals for all areas, including risk management
  6. Build innovation into the culture of the organization

1. Display Top-Down Commitment

The entirety of the Executive Team must be on board to change the way their organization approaches a major shift in the market. Unfortunately, many financial institutions have identified the industry changes as a technology problem only, and look to the CIO to drive necessary changes. In the short-term this approach has had some results, as CIOs focus on introducing new technologies such as mobile apps. However, digital technologies go well beyond a newer form factor. Community banks and credit unions cannot stop innovation at offering a mobile app.

2. Find and Promote Innovation Champion

To drive true digital transformation, including changing company culture, the organization must have someone, or a team, who are focused on making the change happen. Assigning the job to a head of digital banking, who is tasked with managing digital banking functionality, is not addressing the whole problem. As stated before, changes are happening throughout the organization.

Assigning the responsibility to drive change to a CIO, CMO, or another functional executive can be a danger if they are otherwise engaged. Ideally, this should be the job of a CEO, but if the CEO cannot give it the time it deserves, assign this to another dedicated resource who is empowered to work across the organization.

The innovation champion should develop in-house understanding of the changes that new technology has brought and will bring. They should have the leeway to engage with non-traditional vendors, while still having appropriate vendor management controls. The champion should partner across the organization to include all kinds of resources within the organization to drive culture change and define new business models.

3. Integrate Design Principles Within Product Management

Traditional product management should be replaced with a JTBD design practice that engages directly with technology providers. This requires a deliberate switch from channel and product, that most community banks and credit unions continue to have, towards true customer-centric design. Central to the approach is definition of target customers.

4. Engage Partners

It takes everyone’s effort to transform an organization. The organization should engage their current technology partners. If they don’t share the same vision, then it may be time to find new partners. The organization should also engage with disruptors looking for education, synergies, and possible partnerships. This is important to understand noble ways to address customer needs. Specialists in fintech innovation, like Fintech Forge, can also bring new perspectives to an organization.

5. Measure Impacts

As with any strategy change, organizations must define innovation goals for all areas, as well as metrics to gauge success. It isn’t enough to track “digital customers” as the measure of how digitally-enabled an organization has become. Remember that digital technologies are affecting all customers, employees, and functions.

6. Build an Innovation Culture

The sum of these activities should begin to drive culture change. An organization cannot stop at leveraging the expertise of the Human Resources department. Engagement of managers at all levels is paramount to drive culture change.  Cross-functional collaboration, sharing of information, and application of digital technologies and customer-centric design internally will also contribute to transformation.

It’s Time to Take Charge of the Future

Community banks and credit unions can keep up with fintech firms and large banks, but it requires changing their approach for the future, including how they manage their own destiny. Leaving innovation to the technology function or, worse yet, to core or digital banking providers amounts to capitulating.

Time and time again, we’re seeing companies fail because they refuse to change their strategy and adapt to societal changes. The slow demise of Sears, for example, is a reminder to all current successful businesses that doing the same thing isn’t going to maintain that success. Further, a business strategy must be driven and executed by the organization, and not allowed to be defined and implemented by others. The other approach is to sell to another organization that has moved forward or is on their way to disrupt themselves.

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