Putting the Bank First in Technology Decisions
Bank technology is way too important to be left to the technologists, which is why line involvement is needed to shape technology decisions.
By Charles Wendel
Virtually all of my institutional clients, no matter their size or sophistication, are struggling to deal with the same issue: How to manage technology? There are at least two aspects to this problem. The most basic issue involves managing the ever-changing technology requirements that are necessary to compete; customer requirements never stop increasing as demands for one new “gotta have it” innovation follows another. The second problem is at least as intractable as the first: managing technology vendors. Increasingly, the two largest vendors rather than the banks call the shots, determining what can be offered when and, in effect, holding banks hostage to their development schedules and execution capabilities.
The industry has to address both these issues if it is to operate with the flexibility and speed demanded by many customers and provided by the biggest banks and many nonbank players. “Shadow banks” are becoming increasingly important both in lending and payments, in part because they lack the legacy systems and mindsets that tie banks down. Regional and community banks, operating with limited resources, face a much greater challenge than the largest banks.
First, how should banks decide which technologies to invest in and when? At most banks, innovation seems to be mostly limited to technology areas with a constant stream of new delivery channels or ways of transacting business. For example, USA Today recently discussed campus use of the app Venmo, “which links bank accounts and allows for easy payment among friends.” The article continues: “Google, most major banks, Square [now a bank lending competitor], Register, Clinkle, and Pay-Pal (which owns Venmo) are heavily investing in paying via the smartphone.” How many readers even recognize the names of all these vendors?
Gartner, Inc., a research shop, estimates that mobile payments totaled $235 million in 2013, just a blip on the payments landscape. But who knows how important a Venmo-like capability will be and how quickly, if ever, it becomes another cost of doing business, or a product banks must provide to remain competitive while generating an uncertain, if any, revenue stream? While USA Today noted that “most major banks” are investing in this area, there are only four or five major banks in the U.S. The other 7,000 banks need to determine how to address this and similar choices.
How can banks make the determination of what to invest in and what to ignore? In some cases, such as payment apps, banks may have no choice but to offer an additional capability if they are to attract and retain the younger (under 40 years old) customer base. The price of admission for attracting and retaining some segments keeps rising, but where is the payoff? While the “major banks” (meaning very BIG) have the staff and the budgets and the economies of scale to assess and offer yet another payment method, most banks find themselves increasingly stretched, both economically and intellectually.
Perhaps even more frustrating, when banks determine a product or channel they wish to offer, they need to depend upon their vendors to deliver them. Increasingly, banks are beholden to FIS and Fiserv, the two largest, with some banks feeling that they are migrating from the client to suppliant category. These vendors often determine what capabilities banks can offer, when they will be available and what features they will provide. Making changes to the product or their schedules can be difficult and/or expensive as well as time consuming.
As the pace and cost of change increases and as these big players acquire start-ups and specialized software providers, most banks have increased their reliance on them. Relatively few banks have developed the type of Information Technology (IT) enterprise strategy that allows them to augment their core systems with third-party applications from other companies to provide better capabilities more quickly than the two big core companies provide. Many banks need to fundamentally review and rethink IT organization and processes. Just what is your bank’s IT strategy? How effective does it seem to you?
Another issue centers on the lack of IT knowledge (and sometimes interest) that many bank CEOs possess. (Even more dangerous are the CEOs who think they understand technology when they don’t.) Too often, this knowledge gap results in reliance on IT staff that can frequently drive decisions without the close involvement of line personnel. We have even seen instances in which banks view their IT people as having “gone native,” in effect, becoming too close to the bank’s core provider and, thereby, not demanding enough of the vendor. If they wish, IT people are perfectly capable of driving senior management to distraction with levels of detail and acronyms that leave the executives begging for mercy.
Banks should review their IT strategy to determine whether it provides the necessary flexibility and allows the bank to leverage all third-party providers. While many would like to, senior managers cannot ignore or throw up their collective hands at the complexity and density of the IT process. IT groups often fill a strategic gap because the line abandons, either by choice or due to intimidation, its own responsibility.
Bank technology is way too important to be left to the technologists. The best technologists agree with that view and encourage, and even demand, line involvement in shaping IT decisions. Arguably, no other area is as misunderstood, as expensive and as critical to a bank’s success today as technology management. IT issues cut across virtually all segments, products and delivery channels. Line and executive officers have to deal with the frustration and opacity of this area and take command of the vendors that serve it to direct their bank’s future.
Mr. Wendel is president of New York City-based Financial Institutions Consulting, Inc.
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