The banking landscape is in a state of flux. Emerging financial technology companies have built new services and offerings that place the customer experience front and center, providing a flexibility and speed that traditional banking institutions struggle to match.
Fintechs are carving into the essence of what regional and community banks have done for generations, and they’re doing so by thinking more like software vendors than financial institutions. These disruptors have none of the history, infrastructure and trust of regional and community banks. But equally, they do not have the burden of antiquated legacy technology.
This powerful combination of agility and technological know-how has seen the fintech segment more than double its value in the space of four years, and there’s no sign of this growth stopping any time soon. Analysts are predicting almost 20% annual growth through 2028.
First, be bold
In the face of such success, how can regional and community banks — institutions that do not have the large IT budgets of national bank brands — hope to compete?
The answer is that community financial institutions must be bold. That means rethinking established and possibly ingrained processes and beliefs while embracing input from existing customers, partners and other business stakeholders. They must build a modern IT infrastructure that enables them to quickly develop, iterate and deploy digital banking applications that are on par with fintech offerings, or risk losing additional market share.
Resist half-measures. Embrace new technologies. Don’t be afraid to envision a new landscape. Inevitably, the landscape is changing.
Precisely what the new landscape of financial services looks like will be unique to each bank. However, there are several vital technology infrastructure elements that virtually every regional and community bank must consider as they aim to modernize and compete.
An incremental approach
First, it’s essential to recognize that fintechs don’t necessarily hold all the chips. In fact, traditional banks hold several key advantages over their fintech rivals. Chief among these is their reliability and continuation of service — qualities that customers still value highly.
This lineage is an edge that regional financial institutions should carefully maintain. Therefore, it is essential that they continue to offer their existing services throughout any digitization process. Ripping out reliable and trusted offerings and systems to pursue exciting new technologies should be avoided at all costs.
Rather than throwing out the banking baby with the legacy bathwater, any digital platform should iterate and expand upon existing capabilities. In other words, banks and credit unions should seek to add value for customers rather than slashing services in pursuit of something new.
Extensible and open platforms
Implementing a new digital banking platform, a new mobile app or even launching a new digital-only product are all initiatives with discrete start and end points. Developing an IT infrastructure is very different. It will incorporate the aforementioned individual projects and more, and it will need constant oversight and maintenance. A modern IT infrastructure is something that remains in service and must be slowly expanded upon and improved for years — perhaps more than a decade — at a time.
For this reason, any banking deployed platform must offer two things: high extensibility and open integration. Extensibility focuses on the ability to add new capabilities or functionality to any existing platform quickly and easily. Integration extends this capability by enabling connectivity to other IT platforms and systems within (or outside of) the financial institution. McKinsey describes this as a move from “closed systems to ecosystems,” a core shift in mentality from the multiple application silo approach commonly deployed in recent years.
Indeed, it’s possible for this extensibility to include partnerships with the very fintechs that traditional financial institutions are worried about. As noted, small banks hold many advantages that fintechs would love to access, such as a bank charter and recognized compliance capabilities. These can be leveraged into partnerships that allow banks to offer new services, tap new markets and expand both businesses.
Remember, extensibility and openness do not just mean that a platform is easy to modify or integrate from a purely technical standpoint. It must also be resilient in the face of new business demands and market shifts. If the past few years have taught us anything, it’s that we can never entirely prepare for tomorrow’s challenges. Therefore, from the very first planning stages, banks and credit unions need to measure how easily they can build upon a prospective platform and how much effort it will take to achieve desired outcomes.
Iterate and improve
In some industries, lagging slightly behind the curve in terms of offering a modern experience from any device is a mere annoyance that can result in a few bad online reviews. When it comes to banking, however, stalling out on upgrades and security improvements can spell impending doom for both the platform and the business.
Business-critical IT systems and platforms must accommodate rapid iteration and development to avoid creating digital monoliths that are unable to adapt and evolve. Legacy systems do not help this situation. Coded in dying languages such as COBOL (now over 60 years old), IT applications are difficult to extend, require specific programming skills and do not integrate well with other applications.
Modern banking technology platforms counter these challenges in several ways: They are developed in modern programming languages using cloud-native concepts that enable scalability, modularity, integration and overall flexibility. In addition, no-code and low-code development tools give everyday business users the ability to quickly configure just the solution they need, without the need for training or special knowledge. No-code/low-code tools extend IT platforms and expand the pool of employees who can enhance the systems beyond just highly skilled software engineers. This capability allows financial institutions to experiment and adapt faster and with greater agility — if they choose to.
For many banks and credit unions, improvement isn’t just a technology question but a question of wider business philosophy. The speed at which an institution needs to innovate is faster than ever, meaning that the IT team cannot solely be responsible for owning and enhancing the IT platform. The bank’s overall team must be able to expand existing offerings quickly, easily and with the minimum technical requirements.
Without this ability to iterate, any banking or IT platform risks becoming a severe drag on operation. That can have a costly impact on banks that need to invest significant human and financial capital into their digital transformation efforts.
It’s also trying for customers who have started to rely on new offerings and services. With brand loyalty continuing to drop off, it’s safe to assume that those customers won’t hesitate to look to other banks that provide up-to-date products and a better user experience.
Embrace change now, avoid customer attrition tomorrow
Banks are, by nature, cautious institutions. Indeed, for some customers, a reluctance to take risks can be a benefit. But this caution can sometimes manifest as resistance to change and an unwillingness to invest in new technologies and ideas.
For those banks and credit unions still using systems designed in the 1980s and 1990s, moving to a new IT infrastructure can be daunting. However, the move is arguably more important for these institutions than ever.
As more financial institutions begin to lean into digital services, the real danger lies in being left behind. Research and consulting firm Gartner estimates that banks spent $623 billion on technology in 2022 alone. If you’re not in the raft of organizations investing in new technology, you can be sure that your competitors are.
Jason Burian is vice president of product at KnowledgeLake. He has 15 years of experience helping customers solve automation and document problems, and manages the complete product lifecycle, including research, design, requirements, execution, enablement and launch.