By Mike Dionne
Like it or not, consumer and business expectations are not being set by their financial institutions. Instead, the likes of Google, Amazon and Apple have been driving our expectations for immediacy and frictionless experiences. Information is available at our fingertips, transactions are completed in real-time, and a stellar user experience is at the heart of all we do. Today, financial institutions are expected to provide these same levels of service and experience. At the same time, many of these players that are setting the tone for how people and technology interact are entering the financial services space, threatening to disintermediate banks. Already, we see that consumers, especially millennials trust apps like Venmo with their money to make online payments easier.
Despite obvious competitive setbacks, smaller financial institutions have some qualities that larger banks lack. First and most obviously, they have built their businesses on personal relationships and deep local knowledge. They know their customers by name and understand the intricacies of the businesses that fuel their local economy. They also know what their customers want and can tailor their technology to prioritize those customers’ demands. As these institutions pursue digital transformation strategies, they need to do so in a way that helps them retain their local roots and sharpen their edge. In doing so, they can stave off the treat of their larger peers, as well as the nonbank disruptors threatening to poach their business.
And where large banks have the funds to build or buy almost any digital banking product or service their customer desires, smaller regional and community banks are challenged with meager budgets and lean staffs¬—but they do possess one more advantage over the big banks: the ability to adapt quickly. Customers have long valued their community banks for their ability to make a quick loan decision, and when it comes to tech, these smaller institutions aren’t bound by the bureaucracy that can affect innovation within the larger competition. With the advent of the cloud and the rise of banks as service platforms, smaller banks can expand their technology easily and cost-effectively.
Historically, the road to true innovation meant core replacement. For financial institutions of all sizes, a core replacement is a tremendous undertaking with implications that reverberate throughout the institution beyond mere cost. Typically put in place many years ago, these platforms extend into all facets of the banking ecosystem and don’t necessarily work seamlessly with new technologies and services that banks need to adopt to remain competitive. They are also not designed to support the latest technologies and bank functionality, so adding new solutions for bank customers requires shoehorning and patching.
Undertaking a core system overhaul is no easy feat, and for the smaller regional or community banks it can be prohibitively costly and disruptive. But thanks to platformification and open banking, banks don’t necessarily need to replace their existing cores to spur innovation. By embracing “platform-as-a-service,” or PaaS, banks are able to innovate around the core through the use of open APIs.
PaaS has enabled banks to layer modern services onto their existing cores, leveraging APIs to more easily integrate new products in a faster and more cost-effective way. The main issue that institutions face is no longer whether innovation is possible, but if their core technology vendor supports open APIs and a true platform approach to technology delivery.
Connecting the financial ecosystem
Today’s bank customers—both consumer and commercial—are looking for a one-stop shop when it comes to their finances. They want to be able to bank how they want, when they want. Banks increasingly face significant pressure to meet customers’ demands for convenience, such as quickly replacing lost or stolen credit cards, getting paid faster and more personalized and tailored options when it comes products and services recommended to them. And if they’re not able to meet these demands, the consumer will move on.
Looking outside financial services, take the rise and fall of Blackberry. Blackberry came on the scene in the early 2000s and captured the bulk of the PDA market share. Instead of forging ahead with innovation, Blackberry struggled to protect its proprietary technology. Apple saw a gap in the marketplace and introduced the iPhone. The iPhone embraced PaaS and made it so that anyone with a good idea and simple programming skills could build on top of their platform.
This indirectly led to rise of mobile fintech providers such as Clarity Money or Digit. These companies built their products on top of open ecosystems and revolutionized the way consumers manage their finances—by allowing users to link their bank accounts within their platforms and recommend personalized products and provide actionable advice based on data and analytics. What’s more, these fintech players are also partnering with banks to bring users an Amazon-like experience offering convenience, seamless integration and a wider selection of services.
Instead of a fighting a losing battle against fintech firms, banks are employing open banking and PaaS in order to partner with these types of services and bring to market the services that their customers demand. By opening up and sharing data via APIs, banks can provide convenient and tailored bank services without actually having to dedicate time and money to creating these services.
In fact, a recent survey by Manatt, Phelps and Phillips and Mergermarket found that 84 percent of community banks respondents had already met with a fintech company on possibly collaborating together. The survey references a case study on Cross River, a New Jersey-based community bank that has fully embraced collaboration with marketplace lenders like Affirm, Rocket Loans, and Peerform to originate loans for borrowers. In this way, it is providing its customers with the ease and convenience that those players offer while making the process integrate seamlessly. Cross River Bank is a model in how banks can collaborate to innovate. It is a bank that thinks like a fintech company, allowing other companies to offer products to its customers through its banking platform.
The bottom line
A quote by science fiction writer William Gibson rings true in financial services: “The future is already here—it’s just not evenly distributed.” Banks are undergoing massive shifts as tech giants foray into financial services and customers both demand and require digital experiences. Now, more than ever, it’s imperative to join the platform economy. Smaller banks need to begin preparing for this wave of digital disruption and not just count on local to keep their customers around. While relationships give smaller banks a competitive edge over their larger counterparts, it’s not enough. They need to leverage technology to enhance personalization.
Technology won’t wipe out the importance of relationships and larger competitors underestimate that facet. With the help of platformification, smaller banks have a smarter, more efficient way to ride out the digital wave and stay in the game.
Mike Dionne is managing director for community markets at Finastra, whose loan origination system and online loan application technology solutions ABA endorses.
