Bigger Than a Bread Box - The Online/Mobile Replacement Cycle

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 Editor's Note: As an industry, we have really only reached the tip of the iceberg as it relates to digital banking. FinTech companies have the advantage when it comes to being nimble and providing the services that users want/need. In the eyes of many financial institutions, that same nimbleness can also make them risky. However, if financial institutions want to keep up and not risk commoditization and/or consolidation, they are going to have to partner with these digital banking companies. 

Last week I was in Washington D.C. at a board meeting of a company that provides services to banks and credit unions. The board meeting included the usual - a company update plus discussions around opportunities and challenges, competitive activities, et al. It also included presentations by lobbyists and analysts who came to offer points-of-view from their areas of expertise. Interestingly, the one area the board spent most of its time discussing was the online and mobile banking replacement cycle. That would not seem all that remarkable, except that this particular company offers no services that addresses the trends emerging in that area directly. 

Wide and Deep

This is an indicator of how far-reaching the effects of this replacement cycle are. It touches not only the digital channels financial institutions use or plan to use to serve their customers and members, but also impacts other aspects of how an institution does business. That's why those board members in D.C. spent the amount of time they did discussing this topic. Even if a company does not provide services or products to banks or credit unions that relate directly to digital banking, the decisions being made about the replacement of legacy online and mobile banking are likely to impact what they do sell. 

The reason: any institution whose retail banking strategy is important to its ongoing health must now make its digital strategy a priority or face commoditization and, ultimately, consolidation or death. This includes institutions of all asset sizes. The evidence supporting this statement is being seen all across the marketplace. Banks and credit unions serious about their digital futures are restructuring to create new positions and departments that focus solely on digital channels. In addition, these institutions are making decisions concerning their future digital banking strategies that defy historic patterns. 

Good Enough Isn't

This is a paraphrase of statements made by two different representatives of two different companies that provide core processing solutions along with a bevy of other products for retail banking: "Customers will not unbundle our deals as long as we have 'good enough' secondary solutions." This point-of-view by such vendors was once the norm as concerns the purchasing habits of community banks in particular. However, the norm is changing. The larger customers of the core processors are considering other options for securing their digital banking strategy because "good enough isn't" when it comes to their futures. Other customers of these companies will do the same over time if they wish to avoid commoditization and/or consolidation.

Not If, But When

Large financial services vendors that offer a multitude of products, including those for digital banking, cannot move fast enough to keep up with the rate of change being driven by consumers. This observation is not prophetic. It is fact.  Gartner's Stessa Cohen has made similar statements in her reports and briefs that focus on steps required to deploy a successful digital banking strategy. This is the nature of scale in business. Big companies are not as agile as smaller companies and the main reason is their own success. As a colleague of mine at one such company said to me, "God was able to create the heavens and earth in six days because God did not have an installed base of users."

These large vendors do attempt to present another reality to their customers, of course. They put on flashy presentations at conferences that show the latest from their "innovation labs" that are quite impressive. However, to the degree that any aspect of what they "demo" ever trickles down to a customer, it won't make the journey in less than 18 to 24 months. That is too long for any bank or credit union that wants to remain relevant to its customers and members. For this reason, specialty software companies that provide only digital banking solutions are beginning to be the preferred choice of financial institutions of all sizes, except for the biggest who built their own. This has required institutions to re-evaluate how they evaluate and address vendor risk since these specialty companies - while much more innovative - are thus so because they are small. In most every case, this makes them a riskier choice.

Rewiring Risk Mitigation

To obtain a sustainable competitive differentiation in their markets, banks and credit unions are finding methods for assessing the risk inherent in doing business with these more innovative emerging digital banking specialist companies. Often CIOs are tasked with this duty. For those looking for guidelines, a Gartner report published in February 2017 entitled How Bank CIOs Can Make Fintechs Work for Them offers the following:

  • Clarify the fintech threats to your organization and the potential benefits that might accrue from a successful partnership by conducting an initial workshop for peer executive colleagues.
  • Distinguish between fintechs by determining whether the startup drives IT cost optimization or supports digital business transformation, and develop different selection criteria based on that characterization.
  • Adapt traditional risk and procurement metrics to assess the value of a fintech to your organization by focusing on the additional benefits that fintechs provide, including increased agility, improved customer experience, new services or brand differentiation.

The second bullet point above is the impetus behind the early momentum in the online/mobile replacement cycle in the United States. Currently, the digital channels financial institutions use are a collection of fragmented, disparate systems and services that are complex and costly. However, one of these - complexity - provides the ultimate tipping point toward emerging FinTech companies that provide a digital banking platform built on API-driven architecture and a modern tech stack.  

This phenomenon is already in motion as these digital banking specialty companies are already behind some of the largest online and mobile replacement projects in this history of the industry. These replacement projects involve millions of users. Each time one of these companies successfully completes one of these projects, the risk associated with them decreases. This is not good news for incumbents. Expect this trend and that success to continue.