4 ways for financial institutions to slump-proof their technology

Is the party over? In the years since the Great Recession, financial institution executives became increasingly optimistic. In Cornerstone Advisors’ annual What’s Going On In Banking study, CEO optimism hit a five-year high in 2017 and, for the most part, stayed that way for 2018. Looking ahead to 2019, however, many bank and credit union execs are singing a different tune.

“The Trump bump is turning into the Trump slump,” according to my colleague Ron Shevlin, research director at Cornerstone Advisors and author of What’s Going On In Banking 2019: Is The Party Over? In the latest study results, bank executives that claimed to be somewhat or very optimistic about the coming year dropped 16 percentage points from the prior year, and credit union execs who expressed optimism about the future tumbled by nearly 30 percentage points.

Robert Bradley, chief risk officer at $1.3 billion Bank of Tennessee in Kingsport, Tenn., was one of many institutions surveyed for What’s Going On In Banking who expressed pessimism about 2019. “The expansion cycle is nearing its end,” Bradley said. “The slowing housing sector and rising rates could slow loan demand, and the good economy that made many projects look attractive may prove somewhat illusory.”

In a recent Duke University survey, 82% of surveyed CFOs predicted another recession by the end of 2019 or early 2020. As we look ahead to a year forecast to be less than bright, can the FIs whose executives gave themselves improved ratings for IT future-readiness in What’s Going On In Banking 2019 sustain a recession?

Even CIOs who are optimistic about 2019 need to take precautions with their technology. Regardless of whether the party is over, financial institutions can use these four GonzoBanker strategies to help protect their tech initiatives.

1. Leverage the cloud and outsource services. Institutions surveyed for What’s Going On In Banking named cloud applications their top-rated IT technology to add or replace in 2019. Almost anything that is available in-house is available through the cloud, and financial institutions will do well to investigate the flexible pricing and scale options of cloud and outsourced computing. Many cloud and infrastructure outsourced services also offer the ability to pay based on usage. Of course, cloud computing and outsourcing come with cybersecurity, disaster recovery and other risk implications, but we’re feeling optimistic about the increasing number of institutions that are successfully navigating the risks.
2. Stay on track with the tech refresh cycle. Cloud computing won’t substitute for network and desktop refreshes. An institution’s infrastructure is essentially the heartbeat of its operation, and it’s critical that it be current and maintained at its highest possible level. Executives surveyed in What’s Going On In Banking apparently agree, as 87% of them said they plan to increase tech spending by 10% or more in 2019. Unfortunately, in hard times expensive technology lifecycle refreshes are often deferred. If a total suspension of refreshes is unavoidable, CIOs can defer non-critical software and infrastructure upgrades and extend equipment replacement lifecycles by up to a year to free up some cash for bargain hunting around the corner.
3. Watch your MRCs and COLAs. Many technology contracts have minimum revenue commitments owed to vendors, which can increase as volumes and usage increase. These MRCs are typically set to the volumes when the agreement was first signed—but not always—and although minimums can periodically increase as an institution’s usage increases, they seldom decrease with decreased usage. Vendor contracts also frequently include annual cost of living adjustments, an amount by which pricing can increase to offset indexed cost of living hikes. COLA adjustments can be based on the Consumer Price Index or a fixed percentage that often exceeds CPI. A recession-proofed contract includes the lowest possible MRCs and COLAs that don’t permanently increase with sustained, increased usage.
4. Leverage your contract renewals. A financial institution has the best negotiating leverage when its agreements are up for renewal. To prevent gaps in benefits or coverage, technology contracts are often set up to automatically renew, and while auto renewals aren’t universally bad, actively negotiating should be the default approach on key tech contracts. Auto renewals can provide flexibility, and they can be a useful strategic tool to set up a larger negotiation strategy. Auto renewal requires a written notice from the vendor, typically provided three to six months before the renewal date. We recommend keeping renewal terms to a 12-month period and setting tickler reminders months in advance of the due date.

Everyone makes money in a growth cycle, but smart investors and smart bankers build long-term wealth in downturns by bargain hunting—whether that’s buying depressed real estate, failing banks or rock-bottom-priced technology. And opportunistic institutions will stretch/conserve non-strategic and discretionary operating and capital spending to be ready to take advantage of deals when vendors get hungry in a downturn.

Business continuity planning usually focuses on disasters, and there is no more widespread disaster than a global economic downturn. Thorough planning in advance of the event, without the stresses of living in the midst of the event, is crucial. While we all want to hope for the best, planning for the worst is the best defense against a slump.