Dan Fisher’s core system review business is flourishing. Where he used to do three or four reviews a year for banks and credit unions, he did 12 in 2017, and expects to do 18 in 2018 and 25 or more the following year.
“We had clients initially that would die before they’d change vendors,” says Fisher, president of Copper River Group, a consultancy. “Now, 70% or more of the clients that go through the review end up changing vendors.”
Fisher attributes the change to retirement of older management. “Younger managers have either never been through a conversion or just embrace the newer technology,” says Fisher, a former bank chief information officer.
The reluctance to change technology providers is understandable to Dharmesh Mistry, chief digital officer for Temenos: “Who volunteers for open heart surgery?”
But he agrees this view is changing. The reason he gives is that the banking industry “has not faced this level of disruption in many years,” referring to the competitive impact from fintech start-ups and so-called “challenger” banks—banks that are digitally powered from the get-go and often target a particular niche market.
“Newcomers into the business can get access to computing power through the cloud at far less cost [than traditional banks],” Mistry says. That lets newcomers come to market with new ideas faster.
Mistry, who is based in London, cited examples in the United Kingdom of challenger banks: Monzo and Starling Bank are two; a third is Metro Bank, now seven years old. He notes that in the United Kingdom, where regulatory powers are more fintech friendly than in the United States, just under 30 new banks have been approved in the last few years, with 20 more in the pipeline—many of them nontraditional entities.
Here in the States, the fintech presence is equally strong, but mostly without the actual banking charter. That may change, in time, as regulators now seem more inclined to encourage innovation.
Even without that, however, bankers increasingly are sensing the importance—even urgency in some cases—to upgrade technology capabilities. As Fisher notes, after a core review, it’s not unusual for clients to react, “OMG; we’re so far behind!”
Mistry’s colleague Larry Edgar-Smith, executive vice-president of Temenos’ Lifecycle Management unit, says more banks now realize that how they are positioned today is almost secondary to “Will we be in position to be successful three, four, five years from now? Do we have the processes and systems in place?”
Often, this view is accelerated when people from outside the industry assume a leadership position and ask, “Why are we doing it this way?” adds Edgar-Smith.
(The views of five bankers on the digital revolution are presented in the companion article, “After the tech wake-up call”)
Willing to change
The very largest banking companies are not known for being nimble. But in one sense at least, they don’t have to be. They have so many people and so much financial bandwidth that they can attract talent, buy companies, and experiment with the latest technologies at will—like artificial intelligence and blockchain.
Smaller financial institutions, including good-sized regional players, cannot match this extravagance. They must rely in whole or in part on the bank technology companies that support the industry.
Most banks are not “masters of their own fate,” says Terence Roche, a founder and partner at Cornerstone Advisors. “They are highly reliant on vendors developing the capabilities they need.” This is particularly true, he says, with “delivery systems”—e.g. loan origination, cash management, mobile banking, money movement, etc. Banks other than the largest can’t develop these applications, says Roche.
This situation has evolved into the current U.S. environment where three companies dominate the bank technology business: Fiserv, FIS, and Jack Henry & Associates. But there are alternatives, and judging by Fisher’s opening comments about his core review business, bankers increasingly are willing to explore them. That could include switching among the big three; moving to one of the next-level tech companies like Finastra, CSI, or DCI, or to one of the overseas companies active in the United States, such as Temenos or Infosys; or simply reaching out to work with one of an ever-growing list of companies providing specific “delivery system” solutions.
The emergence of the fintech movement has heightened a long-running debate in the bank technology world: Is it better to choose a so-called “best of breed” solution from a third-party supplier (one not affiliated with, or loosely affiliated with, your core processing provider), or stick with the full package of services offered by the major bank tech companies?
It’s a complex issue with proponents on both sides. The big tech companies, having built up their solution portfolios through numerous acquisitions, naturally prefer the “all-in” approach. Even so, these companies have noticed the changes wrought by new entrants and are quick to say they will work with any solution that a bank client wants. There are good reasons for, and good reasons against, both options.
Looking at the reasons against first, the CIO of one midwestern community bank says he has done research on the big core providers and found that they really haven’t made much progress in becoming truly open platforms. He says that ideally a “banking-as-a-platform” approach would mean a platform in which all the “plumbing” was set up such that an outside application could drop onto the foundation just as easily as the similar application provided directly by the core vendor.
“U.S. core providers make hurdles and don’t integrate outside solutions well,” the banker says. “Ultimately, they’ll have to.”
Roche agrees that integration of third-party solutions is an issue with some vendors, and that going forward banks’ vendor management focus will shift. Instead of being on risk/regulatory issues, he says, “increasingly, it will be about performance.” Bankers will ask their core providers: “Are you giving me the option of the same, self-service tools that the biggest banks are putting in their internet and mobile banking offerings? Are you giving me an easy-to-use online loan application system? And if you are not giving these to me, are you committed to working with outside vendors to integrate their systems?”
For their part, vendors acknowledge these questions. “We respect that our clients have a choice,” says Byron Vielehr, a Fiserv group president. He adds that Fiserv is investing in an enterprise services framework to facilitate integration. “This is not just about integrating components,” he says. “It is about delivering a better customer experience.”
CSI, which markets itself as a single-vendor solution, nevertheless built the CSI Bridge to facilitate integration of other solutions, notes Steve DuPerrieu, vice-president of channels and analytics. The bridge involves a series of application program interfaces “that connect third-party software to the CSI core system in a simpler, quicker way,” he says.
Go with single vendor
A single-vendor approach has its proponents, however, and not just from the vendor community.
Dan Fisher, who works with both community banks and credit unions, maintains that to have true real-time processing, where the customer’s balance at any given moment is the same on any device, the best integration will result from having one vendor deliver all the applications and not relying on third parties. He’s actually skeptical even when a core provider has a third-party partner for a solution like mobile banking.
“If that relationship is fragile, or the third party can jack up the price,” says Fisher, “it can impact the effectiveness of the core, which is mission critical.” [Read Fisher’s BankingExchange.com blog, “Beyond The Bank,” appearing regularly]
In addition, Fisher notes that a fully integrated system is a much better safeguard against fraud and identity theft. In addition to keeping better track of balances across channels, it allows a bank to push out fraud alerts to clients in time for them to take immediate action, such as turning off a card.
To Fisher’s point about third-party partners, Sarah Fankhauser, executive vice-president and chief operating officer of DCI, a bank-owned core processor, notes that at DCI, “a top priority is to build solutions ourselves, but we can’t always do that. We vet potential partners very carefully and either private label or embed them in our core.”
Fankhauser says DCI will work with other vendors that aren’t partners, often at a customer’s request. If the arrangement works out well, DCI may offer the solution to other customers.
Asking people to define a “digital bank” is a bit like asking them to define a “beautiful painting.” In theory, it shouldn’t be subjective, but there is no official meaning to digital bank, any more than there is one meaning for a customer relationship management system.
Herewith are some of the comments elicited from various sources, arranged roughly in terms of scope.
At the more focused end is the concept of a bank that is deliberately moving to offset the ongoing decline in branch transactions. As described by CSI’s DuPerrieu, “Such a bank’s primary channel would be digital. Brick and mortar is there to support digital, not vice versa.” He sees more banks moving to this approach.
Cornerstone’s Roche agrees: “The movement of service transactions to digital and away from the branch and call center is just accelerating and will continue. That is a given.”
A consequence of this is a shift away from geographically defined markets and increased service opportunities. Notes DCI’s Fankhauser, “It used to be that when a customer moved away from their bank’s market, they would open up an account in a new bank. Now, they can stay with their existing bank through digital channels. It’s a great retention tool.”
Fiserv’s Vielehr frames the concept a little differently. “It is no longer about physical versus digital channels,” he says. “It’s about a seamless experience driven by digital capabilities in every channel.” As an example, he mentions using a mobile app to make an appointment to come to a branch to discuss a loan.
Taking digital banking to a different level, Roche says banks need to ramp up online marketing, online sales, digital account opening, and online fulfillment.
“Many banks right now originate maybe 10% of their loans online and none of their deposits,” he points out. That number can and must be higher, he believes, as there are institutions already handling 30%-50% of consumer loans end-to-end digitally.
The steps Roche describes are what Temenos’ Mistry refers to as “digitizing”—adding digital capabilities incrementally. That is the norm for most of the company’s clients, he says. Even further along the curve are true digital banks—existing only on a mobile device or online. Two that Temenos has worked with are Canada’s EQ Bank and Bank Leumi’s recently launched Pepper.
Mistry doesn’t feel it is feasible for most traditional financial institutions to undergo a “big bang” conversion to become completely digital.
But the incremental steps are important, nonetheless, Mistry says, because any all-digital institution has a “massive advantage” over a traditional institution in terms of time to market.
Author and fintech observer Brett King says attitudes of banks toward being digital have evolved significantly. Old resistance has given way to questions about how to make the transition. While attitudes have changed, he adds, budgets haven’t. “Banks often don’t invest enough [in digital] and don’t have the skills.”
A cautionary note
There are those who are more outspoken about the slow pace of change in banking to become digital. One of them is David Birch, author, and director of innovation at Consult Hyperion.
Banking hasn’t really made the change from digitization of traditional banking to digital banking, according to Birch. As an example, he cites the Barclays’ mobile app, which he uses and likes very much.
“But I am using it to access the same products I would have accessed ten years ago—even 20 years ago.” Birch believes that digital should instead be a new approach to people’s financial needs.
The problem for financial institutions is that in the current digital environment, they could become a platform—“operating the pipes,” as Birch puts it—for companies, such as Facebook, to do banking transactions.
Both Birch and King say it’s not clear that banks will be winners if they essentially just “operate the pipes.”
In any event, it’s not a game many banks will be able to play, according to King. Partnering with fintech companies, especially larger ones, he says, would generally mean one winner.
When it comes to technology, one concept has long been embraced by many bankers: They don’t want to be on the “bleeding edge.” They would rather be “fast followers.”
There is a fair amount of wreckage in the tech space from the many start-ups that didn’t make it. That’s capitalism. However, banks also must preserve depositors’ funds and meet regulators’ requirements. So the fast-follower concept has served many banks well. Will it still?
“When you don’t develop software, you almost have to be a fast follower,” observes Roche. But banks have to be careful that they are not just using the concept as an excuse to not do things, he points out. “‘Fast’ nowadays means ‘really fast’,” he says.
Agreeing with that, Edgar-Smith of Temenos says that in the past, if you came up with a response to a competitor’s initiative within two years, you would qualify as fast following. Now, the requirement is a few months.
“Banks are not ever going to be bleeding edge,” explains Edgar-Smith, “but some banks are more willing to have failures” in trying something new. He gives the example of one customer that introduced an innovation only in certain branches. That way if the innovation didn’t work well, the bank could easily take a different approach.
Financial institutions can be agile in trying out new concepts, according to Edgar-Smith. “They just need to put a little bit of a safety net under it to protect themselves,” he says.
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