Four Surefire Ways to Test a Banking Vendor for Strategic Alignment

Need to Know:

• Legacy tech starves innovation budgets. Community financial institutions allocate just 15% of their technology budget to new initiatives, with the rest consumed by maintenance and opportunity costs from outdated systems.
• Think in 5-year returns, not upfront costs. Strategic technology investments should deliver 5 to 10x ROI through long-term cost savings and new revenue streams — reframing major projects as growth investments rather than expenses.
• Acquisition kills vendor innovation. When best-of-breed vendors get absorbed by larger incumbents, their innovation typically stalls — making organically innovative partners critical to an FI’s long-term digital strategy.

Community financial institutions are positioned to outperform megabanks and fintechs, but to do so, their vendors must be strategic partners — not just basic service providers.

A bank or credit union’s reliance on partners for technical enablement demands excellence in a provider’s products and client services. Banks and credit unions should look for vendors with best-of-breed technology and an equal-partnership model, ensuring the vendor will uphold high standards and enable the financial institution’s long-term business vision.

Vendors that strategically align with customers:

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1. Frame Outcomes Based on Long-Term ROI

Banks and credit unions should expect vendor actions that demonstrate a commitment to the bank’s or credit union’s long-term business needs.

Think bigger: A true partnership starts during the strategic planning process. When the board develops a technology strategy, or senior leaders are tasked with implementation, they need a vendor that understands the financial institution’s business needs, is invested in the client’s long-term growth, and speaks convincingly about the end game for digital transformation.

When a major technology project is on the table, costs must be seen through the lens of return on investment (ROI).

The true cost of legacy technology is the sum of maintenance fees and opportunity costs; neither is palatable. A recent survey suggested that community banks and credit unions allocate, on average, just 15% of their technology budget to new initiatives. When they do invest, financial institutions often encounter major expenses and operational roadblocks related to legacy systems, including high professional services fees and API access charges.

Key insight: The only sustainable path to success is to untether from systems that are no longer fit for purpose. While the immediate cost of a major technology project may seem high compared with the running cost of the existing tech stack, the bank or credit union should focus on the ROI five years out.

The money spent on strategy, planning and implementation should return a minimum of 5x to 10x in long-term cost savings and new revenue streams. From this perspective, the resources invested become less about the amount on a bill or the risk of change, and more about the positive long-term impact of a conscious technology choice.

2. Prove a Commitment to Organic Innovation

A chosen vendor must demonstrate a commitment to internally driven innovation by consistently being first to market or best in market with applications and features.

Remember the ROI: Banks and credit unions should expect a convincing two- to five-year vision from the vendor for the industry and itself, as well as a clear plan for how frequently the product roadmap is updated. The roadmap should anticipate where banking is headed and allow the vendor to tailor evolving solutions to fit customer needs.

Many primary alternatives to a consistently innovative vendor are large incumbents whose strategy is to buy products they don’t offer and grow by reselling them to existing clients. It is common for innovation to stall after vendors are acquired, and a best-of-breed vendor in that situation will not be one for long. The vendor’s ability to evolve and flexibly support the financial institution’s objectives fades away once the company has been absorbed.