Bankers these days are painfully frustrated with the slow and inconsistent pace of technical innovation in their industry. In the past few weeks, I have heard bankers mention the words COBOL, proprietary, Btrieve, DOS and manual interface. It’s 2002 and hard to believe some of those phrases are still out there.
This frustration has caused a classic “blame game” between bankers and the vendors who provide systems. To put it bluntly, banks think vendors are liars and vendors think banks are stupid.
However, through empirical evidence, GonzoBanker has discovered that neither of these statements is true. In a double-blind, random study, Faber College utilized full-body MRI scans to determine that 99% of bankers actually had brains and 98% of vendors had hearts.
Why then, one might ask, isn’t innovation occurring faster? “It’s money,” some bankers may say. “We just can’t afford to invest in technology like the big guys.” This statement, too, is incorrect – the banking industry has enough money to fund any technology innovation it wants. Here are some stats to prove it:
These stats indicate that banks could double their strategic technology spending by investing only 5% of annual profits or 3% of excess capital. “Not our job!” many bankers may say. “I’m counting on my vendor to invest in technology innovations.” Dream on!
Here’s the problem with that line of thinking. The vendors have nowhere near the funds to invest in technology innovations that banks have. While banks earn $90 billion a year in profits, the top 10 providers of tech services to the banking industry (see list below) earn only $750 million in annualized profits and produce only $6 billion in annual revenues. If one assumes that vendors invest 5% of total revenues on real R&D, that means the major vendors can only stomach $300 million in strategic investment under the current business model. This isn’t enough to get us there.
Banks, wary of upfront financial commitments, are waiting for innovations to come from the vendor community. Vendors, running on 10% – 15% profit margins, are loath to develop new technologies with no financial investment or forward commitments from customers.
Imagine if the U.S. government encouraged the aerospace industry to build a new multi-billion dollar rocket ship with no guarantee that it would buy the rocket once it was designed and built. No aerospace company would be willing to take that risk. And right now, for the same reason, most vendors are not willing to take the risk of building the next generation core system, payment system or delivery channel.
How do we break this stalemate? Let’s accept that a ton of effort will be required to bring banks and vendors to a healthier, constructive middle ground. Here are 10 things I’d encourage our industry to work on:
Step one will be for vendors to come clean and for banks to respect the plain truth. Let’s dump statements like, “We have an integrated, seamless solution running in banks throughout the country,” and replace it with, “We’ve got two banks testing the first module. We’re working through problems with the data integration on the back end.” Banks in turn have to make vendors a real part of the project team. Hold them accountable, but don’t be so demanding that you encourage them to lie.
#2: The R&D Budget
Technology, manufacturing and pharmaceutical companies always plan for an R&D budget. Banks never do. We may need to start small, but let’s start budgeting money each year for certain tech projects that may take more time and learning before an ROI can be guaranteed.
Network economics will tell you that many of the next breakthroughs in financial services will only come if banks work together on common pursuits. Want real aggregation? We need data exchange standards like the ones BITS is pushing. Want a new, cheap Web payment system? We need to get behind initiatives like NACHA’s Project Action. Want faster, cheaper integration? We need to heed the words of Carl Faulkner in last week’s Gonzo about XML. Financial services could be a lot simpler, faster and integrated if banks and vendors commit to common standards.
#4: Best Practices
Innovation will occur faster if banks and vendors develop a strong discipline for identifying, sharing and assimilating best practices. In addition to providing fodder for new ideas, best practices save an incredible amount of time by eliminating the need for each bank to reinvent the wheel. Best practice sharing also helps banks find ways to cost justify new technology investments.
#5: Process Orientation
To make new innovations successful, both banks and vendors have to change their mindset on technology. We’ve got to move from buying and installing systems to looking hard at how processes are designed today and how banks/vendors will work on improving them. How often do you see bankers and vendors together in a room really digging into new processes together? Not often.
#6: Project Management Discipline
Bankers collect 99.5% of their loans, balance their teller drawers to the penny, and yet unfortunately find that 70% of their technology projects come in either late or over budget. Investments in innovation will be worthless unless banks begin to view project management as a discipline equally important to those in credit, finance and sales.
#7: JAD Baby!
As a wannabe techie, I feel so cool when I use the term “JAD”, which simply means “joint application development”. This concept has been around for decades but is embraced by only the most innovative banks and vendors. The drill is to bring business and technology folks together in focused workshops with accelerated timelines to design specs. This methodology has proven to be more effective than the traditional sequential approach to development, but how often are bankers invited to JAD sessions?
How can training foster innovation? It’s simple. If employees used 50% of the capabilities in most of their systems today, they would free up time for both internal I.T. teams and vendors to quit answering the “I forgot my password” calls and start developing new stuff. Bank techies and vendors spend a huge amount of time “fighting fires” because banks are generally poor users of their systems.
#9: Penetration Pricing
The vendor community is overpricing newly introduced systems and losing out because of it. In an environment where banks are very skittish about “going first” with a new system, vendors are trying to recoup full-boat pricing for data warehouse, Internet and CRM systems on the poor souls willing to act as crash test dummies. With a great deal of cost sunk, vendors should be sprinting for installs as fast as possible. The price for Beta clients? Free! For the next 10? A whopping 50% off! All of a sudden there’s critical mass. The banks have the comfort of a user base, and vendors are off to the races with new sales and maintenance revenue.
#10: Creative Deal Structures
If banks and vendors are going to truly work together on innovations, they are going to need to structure more interesting partnerships than “You buy the software for $500,000 and we’ll waive the implementation charges.” Deal structures need to acknowledge that investment, risk and upside should be shared more equally with technology innovations. Banks who take the time to define requirements and whip a vendor’s system into shape deserve some type of revenue share or financial recouping of their investment. Vendors deserve more serious consideration of R&D investment money from the banks to get these kinds of projects started.
The Innovators’ Dilemma?
2002 is turning out to be a year of strong bank performance and a renewed focus on pragmatism with technology. What a great time to go back to the drawing board and explore how banks and vendors can work together on new innovations.
Top 10 vendors referenced in this article: