FinTech competition quickly ended banks’ practice of turning a blind eye to a lack of digital offerings. With more options than ever, customers demand better services, and that often cannot be offered without better technology.
While partnering with and acquiring FinTechs has emerged as a key strategy for traditional financial institutions to ramp up their digital offerings, they cannot rely on M&A alone to complete their digital transformations. Rather, FIs have been forced to look inward at their IT systems that, in many cases, have been around for decades, and figure out some way to tackle the monumental task of upgrading them.
A 2012 report from Oracle summarized the conundrum for banks:
“Banks need to modernize their business operating models and their technology components if they are to benefit fully from the next period of growth,” the company stated. “Indeed, if they do not [do] so, they are likely to fail.”
Several years later, however, banks continue to struggle with their digitization journeys, and according to Rebecca Skitt, group managing director at bank platform technology firm 10x, says that challenge is a painful one.
“Many [banks] are suffocated by out-of-date technology, glacier-pace product development, fragmented and siloed internal views of the business, and the high cost of maintaining their legacy technology,” she told PYMNTS. “This is all being done while managing capital requirements and compliance costs in a rapidly evolving digital landscape marked by increased competition.”
Indeed, it isn’t just FinTechs adding disruption to the market. The continually rising complexity of regulations, as well as rising and evolving demands from both businesses and consumers, have changed the face of banking.
Yet many traditional FIs continue to live in the past, thanks to legacy IT.
Beyond the App
According to Skitt, many traditional institutions have turned to the mobile app to build out their modernization strategies. While customers are indeed demanding mobile-friendly solutions today, she warned it’s not enough to roll out a new app in pursuit of customer satisfaction.
It’s a “move in the right direction,” she said, but fails to address the deeper fundamental issues at play. Beyond introducing new digital tools for customers, bank leaders should take an organizational view of their transformations, modernizing from the inside out, end to end.
In a way, banks are getting a late start at their modernization efforts, compared to FinTechs that are built as digital companies from the get-go. To make matters even more difficult, financial institutions don’t just have to catch up to modernization demands, but the technologies they embrace must also be “future-proof” to manage the ever-changing landscape of customer demands, innovation and regulations.
Skitt said cloud-based solutions are essential to ensuring any integrated technology is flexible enough to adjust to future changes in the market. The APIs, too, are an important piece of the puzzle that “enables developers to focus on the service they are building and deploying, rather than the underlying infrastructure, network or hardware,” she said. “With banks’ legacy technology, that is not the case.”
Open Banking Fuels the Change
In the U.K., open banking regulations are an important example of the opportunity traditional financial institutions have to not only introduce digital tools and services to their customers, but also to take a holistic approach to overall transformation.
The initiative has the potential to transform business banking in particular, noted Skitt, but “it has yet to be embraced at scale.”
“Businesses have, for too long, had to endure paying more, given how banks have passed on their own rising costs related to inefficiencies in the payments ecosystem,” she said. “Branch closures have not helped.”
Those setbacks in the business banking space have introduced barriers to customer satisfaction due to high costs and a lack of advisory services – both issues that cannot be entirely addressed with the rollout of new apps or flashy products. Rather, an internal overhaul of infrastructure can lower costs while improving services and experiences for end users.
Luckily, as customer demands, regulation and technologies evolve, new solutions are available for financial institutions to not only enhance products offered to customers, but to address the friction of legacy systems internally. The ability to “react quickly to product development requests and new regulation” is essential, said Skitt, and cannot be achieved without agile infrastructure.
And banks today are diving deep into the digitization journey. Skitt said financial institutions have shown particular interest in APIs, identity verification and data analytics technologies, to name a few. Perhaps the most important part of exploring these technologies, though, is for financial institutions to see these innovations as individual parts of a larger picture.
“Technology is simply a tool,” noted Skitt. “Financial services and products, at their core, are collections of data. With this in mind, using the tools and platforms available, providers need to make the choice to focus on making the lives of their customers much easier.”