“And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile…”
For regional and community banks there has never been a more frustrating time to be a buyer versus a builder of financial technology. While it’s been a tradition since the punch card days for bank executives to complain about their technology vendors, today these challenges run so deep they are threatening these institutions’ ability to survive competitively.
Any bank or credit union that’s standing at the end of this decade will have successfully leaned into tech to change their business, but this transformation is hamstrung today by the industry structure that has evolved with banking vendors. In nearly every encounter with clients, I hear stories of missed deadlines, releases with dingbat issues, integrations that mysteriously stop working, and fewer gritty professionals to assist in implementation and support efforts.
Navigating service these days feels like trying to work through a medical HMO call center. As one executive lamented regarding a vendor, “These guys don’t even have the manners to get back to us with reports on our issues.”
My point here is not to take a cheap shot with more vendor bashing, but instead to take a step back and ask the provocative David Byrne question:
“Well, how did I get here?”
The suboptimal structure of the bank tech world today has several root causes:
Tech companies trying to support a bank stack have no easy task. Across requirements in payments, delivery channels, lending, diverse business lines and regulatory requirements, providing solutions to banks is definitely a “triple diamond run” when it comes to complexity and degree of difficulty.
It’s great to chat up trends like “open banking” and an “API economy,” but today the several hundred major vendors that support the bank ecosystem have little in the way of either top-down intentional or bottom-up organic technical standards and interfaces. This technical friction causes initiatives to slow and allows less room for innovators to deliver new value. Techies may dream of a cloud-native, microservice marketplace of plug and play solutions, but that just doesn’t currently exist in a meaningful way.
Banks have ceded ownership of their tech value chain to primarily public and P/E or venture funded players. These players create impressive shareholder value because they have a strategic “moat” in the form of switching costs. Executives routinely compare conversions to heart surgery, and the pain threshold must be high for banks to spend precious resources on a technology change-out.
In this structure, major players got really good at scaling for efficiency and financing and managing a portfolio of acquisitions. “They are more like investment funds than tech companies to me,” one executive concluded. When banks need more complex implementation and support assistance, or the blue-sky development of a new system, vendor executives have to realistically balance such an investment against good ol’ EBITDA targets and the opportunity cost of other investments. Here’s a hint: doing another deal with financing and cutting costs at scale likely has a higher short-term internal rate of return for vendors than investing in white glove service.
Bankers shouldn’t feel smug merely pointing the finger at vendors. With our industry shifting to digital first delivery and a need to better automate processes and leverage strong data intelligence, most banks have not invested enough nor sufficiently developed the I.T. team for the next decade. We are just scratching the surface with internal talent in some of the most critical areas of expertise.
The record low 3.6% unemployment rate in the United States is nothing compared to the striking 1.3% unemployment rate for tech occupations. As banks work with vendors to transform their organizations, the cold reality is that turnover, recruiting headaches, and big dollar compensation costs dominate the bank tech landscape.
“And you may ask yourself, ‘How do I work this?‘”
For banks hoping to avoid living in a “same as it ever was” state with bank technology, there are five mandates that executive must follow:
Executives are waking up to the fact that dreams of effortless partnerships with vendors are silly. Vendors that provide mature solutions at scale are only part of the equation. New vendors with more unproven solutions require another set of challenges and a different management playbook. Vendors can be part of transformation, but transformation cannot be simply purchased.
As banks focus on speed to market, they must become more discerning about how different solutions impact the pace of delivery. Conducting due diligence on integrations requires a rigorous “trust but verify” process, and spending time working in test systems prior to signing the check to a vendor can help stress test how easy the solution will be to evolve with the bank’s own resources.
Community and regional banks will never have the budget of the national banks, but every organization needs to build a tightly integrated “seal team” that can extend, integrate, lightly customize, and monitor a growing stack of new platform solutions (primarily cloud-based). For the CFO in the room, this means a punctuated investment in the raw talent to make the bank more self-sufficient from a tech perspective.
Cornerstone Advisors continues to sound the drum that bank executives have way too little visibility into the spend and target outcomes of their technology investments. In 2021, the Standish Group reported that 83% of I.T. projects fail to meet a deadline, cost estimate, or target business outcome. Just like a loan production, delinquency or budget report, management reporting and accountability giving visibility to tech must become more commonplace in the C-suites.
Banks overwhelmed with tech initiatives are frequently asking themselves, “Where Does That Highway Go To?” With so much at stake, executives need to create and oversee a formal tech road map that visualizes key initiatives, go-live dates, vendor contracts, and important business outcomes to deliver. By continually working with a road map, executives will soon realize there is no quick way to transform – it takes grit and tenacity along each workstream and deadline in the road map to be a truly different bank in the future.
“Into the blue again, after the money’s gone
Once in a lifetime…”
Community banks, regional players, and credit unions are all in the fight of their lifetime with the need to transform their business. While it might be easier to think about building a new bank from the ground up, most banks simply do not have that luxury. They need to transform the existing bank and they need to do it primarily by buying and better managing technology solutions. As bank tech buyers, executives need to invest more in these purchases than they are doing today, and they must build a better rigor around the discipline of technology performance management.
Whether you’re under competitive pressure to meet changing customer expectations, dealing with evolving compliance requirements, feeling the pinch of the talent shortage, or wanting to save money and improve efficiencies, you need clear insight into the state of your technology and your vendors.
Cornerstone Advisors can help you transform your institution by better managing your technology solutions.