Not innovating is not an option.
Perhaps in the early days of digital banking and mobile apps, innovative technology was a “nice to have,” but that is no longer the case. Today, it is a must-have for financial institutions (FIs) — that is, if they want their payment products to be the first one for which customers reach at the point of sale, whether physical or digital.
The Bank Innovation Readiness Index, in collaboration with payments solutions provider i2c, provides evidence to back that up. It’s now been empirically shown that successful FIs are able to deliver new payments products and features, and those at the head of the race share some common attributes from which the rest can learn.
Fortunately, FIs seem to realize the position they’re in, though some are further along in the journey than others. Only 3 percent of survey respondents told PYMNTS and i2c that they had not been focused on new payments products and features within the last year.
Karen Webster recently hosted a webinar with i2c executive vice president of global client success Peg Johnson to dig into the Index survey results and reveal what FIs can learn from the data. According to Johnson, the key takeaways are as follows:
Innovation is a “must,” and it should not happen in a lab. Johnson elaborated on the sandbox methodology 40 percent of the most successful FIs are using to develop new products and features.
Flexibility is key to success, and an FI’s core technology is at the heart of it all. Johnson took a hard stance against continuing to use legacy technology in this day and age. It had its place, she said, but it is static and does not sync up with the more immediate needs in today’s real-time, consumer-driven economy.
Finally, change can be incremental. It’s not always about the shiny new technology that is here today and may wind up in a dresser drawer, so to speak, when the novelty wears off tomorrow. The important thing is to keep moving — a goal that is supported by that sandbox methodology, said Johnson.
“This survey really brought home that there’s an innovation focus for banks,” said Johnson. “We all chat about it around the water cooler, but I’ve never seen a survey that quantified what we all logically knew. There is an intense focus on payments innovation in FIs, and what’s interesting is that there’s also investment to back it up. They recognize the importance, and they’re funding what it takes to drive the agenda forward.”
It is important to note that 214 banks, excluding the top 25, participated in the Bank Innovation Readiness Index survey. These comprised regional banks, smaller commercial banks, community banks and credit unions, the majority having assets between $500 million and $5 billion. The survey also included banks outside this profile, and represents a broad range of FIs reflective of the market.
The 34-question survey was not conducted digitally; rather, PYMNTS spoke individually with bankers running payments for each of the 214 FIs.
It is also important to note that “innovation” in this index refers to the implementation of new products, or of new features for existing products.
Innovation As A Core Competency
The Index shows that the top drivers behind innovation are current client needs and potential client needs. It’s all about the customer journey: meeting their needs, keeping pace with their changing behavior and catching up to the digital mobile market to become their brand of choice.
A key goal here is to remain top-of-wallet. While attracting new customers is always a goal, Webster and Johnson agreed that the focus must be on taking care of existing clients. FIs must listen to what those parties are saying they want and need, and then, to keep those customers around, they must deliver — and deliver in a timely manner, before competitors can sweep those customers away.
So, who are these competitors? It depends on which FI one asks, Johnson said. The Index revealed that smaller entities view their peers, local and regional banks as their main competitors. They deploy a high-touch model that, for many customers, is reason enough to stick with a smaller institution rather than moving to a big one — but Johnson says it may not keep customers from moving to a competitor of the same type.
Conversely, banks with assets exceeding $100 billion are more forward-looking, Johnson said. In addition to seeing competition from their larger peers, 50 percent view FinTechs, including PayPal, as competitors.
These large FIs can see that FinTechs offer the flexibility that yields the results they want; therefore, they invest in delivering comparable solutions that make it easier for customers to access and use their products. That, Johnson said, is just the cost of doing business today.
Because of their different perspectives, large and small FIs approach the same problem from different angles. Larger banks tend to focus on innovating new products and strengthening their digital game. Smaller ones tend to play catch-up by adding new features to existing products — and this approach often generates some success for them, Johnson explained.
“Technology can level the playing field and make banks of any size more agile,” she added.
However, smaller FIs are the most at-risk because they do face a very real threat from larger players that have deep pockets and could erode their customer base. If a smaller bank has a flexible program and is ready to innovate, there’s no reason it should wait until the industry giants make a move.
Flexibility Is the Secret Sauce
“What separates the wheat from the chaff is the ability of core technologies to be very flexible,” said Webster. “That’s an enabler of successful innovation. Not having flexibility inhibits the ability of banks to do what they want to do — and what they know they must.”
Johnson and the data agreed: Roughly 70 percent of FIs with flexible core technology felt they were achieving success in the payments space, while only half as many said the same when their existing IT infrastructure was making innovation more difficult.
That is the biggest problem for FIs, according to Johnson. Compliance and regulatory challenges can also get in the way, but those challenges are the same regardless of the FI’s size, and banks have little control over those factors. Technology infrastructure, on the other hand, is within their control, and those who have not updated are now finding themselves at a dramatic disadvantage.
Thirty percent of banks said inflexible payment technology systems were their primary barrier to innovation, and 40 percent said they were a hindrance.
A lack of organizational agility, difficulty measuring returns on investment and inadequate speed to market are all symptoms of tired old tech, Johnson said. To become the brand of choice, FIs must roll out their new products and features at a relevant time — not three years later — and they must strive to remain ahead of the competition.
Similarly, legacy processors have achieved much through technology they already have. That makes integration difficult, however, and the system grows cumbersome over the years, making each new addition more costly and time-consuming than the last. Plus, said Johnson, bolting on a new feature can take six months or even a year — so much for speed to market.
These processors had their place, but Johnson said they were built for a different time. These are static infrastructures. While the top performing banks in the survey have a payments processing system that accommodates their appetite for innovation, the overwhelming majority of respondents — 70 percent — reported their processing technology lacked configurability and multifunction capabilities.
Inevitably, customer expectations and competition will become more demanding. The worst thing an FI can do is become paralyzed by it all, but it can be hard to decide where innovation should begin.
Johnson feels that bidding adieu to legacy tech should be the first big move, but change doesn’t have to be that dramatic. It can happen incrementally, just as long as it happens.
A “sandbox” environment gives banks a means of testing out new products and features in a payments processing environment that isn’t live, or is only partially live — say, with small subsets of consumers to see how the new offerings function in the real world and how real people receive them.
This is a great way for FIs to take baby steps, said Johnson, because it de-risks the innovation while enabling the FI to respond to and work at market speed. With the right processing platform, banks can rapidly scale innovations in the sandbox environment to full production in market.
“Forty percent of the top performers use the sandbox to scale functionality to get innovation to market,” Johnson noted. “They listen to customers’ feedback and test products and features with customers and employees. That helps them in the long run.”