As Muhammad Ali once said, “Float like a butterfly, sting like a bee.” Translated for the financial services sector, this idiom might read thus: “Act like a startup, think like an enterprise.”
Troy Hagey, Principal, Strategy, KPMG in the U.S., said this is how financial institutions (FIs) must shift their approach to remain relevant in the payments disruptions and movements of the modern age.
Gone are the data-siloed days (or, at least, those days should be gone), he said. Banks must get out of the monolithic mindset and embrace a holistic enterprise view. Hagey noted that a major chunk of banks’ revenue comes from payments, and that makes payments a business — with consumer, commercial, corporate, business and small business (SMB) banks all playing a role.
There’s a lot happening in the payments space, and that isn’t going to change, said Hagey. He believes the only way to “future-proof” an FI’s technical infrastructure against whatever unknowns lie ahead is to demolish the silos once and for all so that, whatever may come, the entire organization can adapt as one.
In a recent interview with PYMNTS, Hagey outlined how this can be done and drilled deeper into exactly why it’s so important.
Future-Proofing Technical Infrastructure
“Be prepared” is a great motto for the Boy Scouts, but how can FIs be prepared for future unknowns? Innovations such as real-time payments will eventually spark unforeseen requirements, and banks must be ready to rise and meet these new standards when they come, said Hagey.
He said one place to start is by leveraging new technologies as they exist today; that way the foundation is in place when those techs and the requirements around them start to evolve.
In terms of real-time payments, he said banks that have already gone down the path of transforming their infrastructure are in a good position. They’re familiar with using API calls and a smart orchestration layer that helps coordinate all the pieces.
But a bank that hasn’t gone down that path is going to have to play catch up, and that can be overwhelming, said Hagey — in some cases, discouraging FIs from trying at all. These players may need to make changes to support 24/7 activity before they can start thinking about real-time payments.
Funds must be available at all hours, and transactions must be posted the day they’re made. Offering these capabilities means protecting those activities with fraud defenses that never sleep. Only once those pieces are in place can an FI take the next step to powering real-time payments.
If that’s where a bank is starting out, said Hagey, then it’s a perfectly good place to get the ball rolling. Every transformation starts somewhere. If a bank can layer in intelligence layers around its legacy platforms, he said, then it can get new features to market quickly and kick off the process of phasing out those legacy pieces.
More Than a Checkmark
Regulations and requirements are constantly evolving, but while it’s important that organizations keep up with these, Hagey said they shouldn’t settle for ticking off the necessary boxes.
He said there is so much potential for FIs to serve customers and differentiate across the “STEP” landscape — that is, the categories of social changes (like the gig economy and millennials coming of age), technology trends, economics and market changes.
For example, with regard to the gig economy, banks should consider how those workers want to be paid. Real-time payments may not be a requirement yet, but introducing them could serve customers better than FIs are currently doing.
Hagey said what it really comes down to is the ability for banks to be nimble in the face of changing customer behavior and expectations, and it takes a strategic approach to manage those dynamics so they can continue to grow and react to new evolutions.
MVP Is No MVP for Banks
Corporates don’t always know what is meant by buzzwords like “real-time payments” and “distributed ledger,” Hagey said, so if banks choose to implement techs like these, then they must be ready and willing to educate their customers about new features they’re offering.
That’s why he said a traditional “minimum viable product” (MVP) approach to innovation and disruption isn’t enough when new tech is involved.
Customers understand that “real-time payments” means transactions are posted to their account immediately, and they don’t really care how that happens. But organizations that pay for payments must know how it happens and what that means, and Hagey said it’s the bank’s job to fill them in.
Banks must be able to answer what real-time money movement and fund availability means for them in terms of factors like liquidity and cash, Hagey said.
He added there’s nothing wrong with doing MVP as long as the focus remains on the broader ecosystem. Look at a transaction end to end, he said, and map out the value chain from start to finish. It’s not just money movements. Many players are involved, and they interact in a myriad of ways.
For example, if a customer wants to buy a car, there’s a business-to-business (B2B) process that takes place at the dealership which enables the dealer to update its books and receive deposits in real time.
Yet in the back office, after the deal is done, there’s a stack of paperwork that still needs to be completed manually. Plus, the dealer must get in touch with the registration authorities and his insurance to notify them of the transference of the asset.
But the bank is already talking to all of those parties as part of the transaction, Hagey noted. Is there value in offering a bundled solution where the bank could also notify the buyer’s insurance and other parties involved using information it already has on hand? Would customers pay for that?
Maybe, maybe not, said Hagey — but the important thing is to think about it rather than just settling for the MVP.
Desirability. Viability. Sustainability.
FIs should always be asking, “What is the problem? What new ideas can help us solve it?”
However, Hagey contends that the most important question of all is, “How do we test that?”
The answer, of course, depends on the new idea. There are various levels of prototyping and rapid innovation cycles. Something that’s already been vetted may be ready for a robust prototype. Other ideas may be so new that a lighter prototype is more appropriate.
Either way, once a prototype is developed, Hagey said it’s absolutely critical to have real customers try it out and supply feedback — and this must be done early and often, he said.
“If you have successful sessions with customers, they’re going to want to keep doing it,” he said. “Engage with customers early with any new product innovation, including real-time payments.”
N.B. The information contained herein is of a general nature and is not intended to address the specific circumstances of any particular individual or entity.