The accelerated pace of change in today's banking industry means that every institution must adapt in order to survive. However, while new customer demands—especially for technology products and services—are transforming the industry as a whole, the pressure points vary by market region, consumer demographics and customer behaviors. For this reason, bank leadership must look to their institution's strategic plan for guidance when determining which changes to implement.
To Change or Not To Change?
While most institutions will find it necessary to evolve in order to thrive in today's new banking environment, every bank's market and goals are unique. "While adapting to change is critical for every bank, the pace and extent to which the bank changes should be a function of local market and strategy," said Lee Wetherington, director of strategic insight at Jack Henry & Associates. "There's not one right answer."
"Certain banks have established niches or operate in communities which are relatively insulated from many of the changes impacting the industry," explained Kyle Manny, CPA, CGMA, senior manager, financial services at Plante Moran. "Those in communities with consumers who demand innovative products and services will need to innovate in order to maintain and expand their market share."
Different institutions also have different thresholds for risk which will impact the speed and degree of their technology changes; it's not always about keeping up with the bank up the street. "Your technology can be on the bleeding edge, but if your risk management isn't, that could be a problem," cautioned Ken Schweiger, COO at Community First Bank, Boscobel. "Many times organizations make changes for competitive reasons, and while that is often appropriate, it can also lead to strategic and other types of risk that the institution is not prepared to handle."
Like with any other high-impact decision, the board and bank management should look to their institution's overall strategic plan when making strategic technology decisions in order to ensure the new technology product or service fits holistically. "Having and updating a strategic plan is absolutely critical to determining which investments in technology should be made," said Manny. "Without that plan it is extremely difficult because banks are thrown new opportunities all the time." Wetherington cautions against the natural tendency to haphazardly go after those "shiny objects" rather than pursue innovations that fit the bank's overall strategy. "Begin with strategy," he said. "Never change for change's sake."
An initial assessment of the bank's strategic goals is the best starting point for any technology planning. "You have to decide what you want to achieve from an organizational standpoint," Schweiger advised. "Then take an inventory of where you're at and decide if you need to fill in holes in your product offerings, or if you want to advance on the curve with a market-leading product." Then, management and the board can begin evaluating specific opportunities.
Evaluation Before Evolution
Using the strategic plan as a guide, the board and management must evaluate the wide array of technology investments available to financial institutions and select the few that will help the bank accomplish those strategic goals. That winnowing process can be difficult, and there are four elements to keep in mind during each evaluation: data, infrastructure, metrics and partnerships.
Banks, in general, have all the high-quality data they need in order to determine which products and/or services will bring the highest return based on their current customer base. However, many institutions don't have the means or the inclination to fully leverage that information. "I recommend community banks harvest the data available to them in order to determine which investments will have the most meaningful impact to the retention and development of customer relationships," said Manny.
It's also critical to factor in the bank's current technology capabilities based on its infrastructure. "Your technology infrastructure needs to be able to handle the new product or service, especially from a risk management perspective," said Schweiger. "A good strategic planning process should help ensure the infrastructure is in place to bring new products and services to market when the organization is ready to implement them."
Metrics are essential because they provide concrete, measurable goals and benchmarks for the success of the new offering, whether it's customer adoption rates, usage statistics or profit. "The best strategic objectives are measurable, so pursue technologies that will give you the results you're looking for," Wetherington advised. "Optimally, you want to be able to measure before and after implementation."
As for partnerships, fintechs are no longer generating business models designed to replace banks. In fact, 60 percent of fintech venture capital goes to collaborative business models (rather than disruptive), according to Wetherington. "The real challenge is navigating the complexity of opportunity banks have in working with these new fintechs," he said. "The highest-performing banks will be those who best navigate, curate and leverage the opportunities and innovations offered by fintechs, and it starts with the strategic plan."
Smooth and Strategic
Strategic technology plan in place, the board then typically steps back and management must implement the new or updated product or service. Rolling out a new product, no matter how large or small, is a complex process. By focusing on small changes and relying on standard procedures, management can help ensure a smooth strategic change process.
For most banks, the most appropriate strategy for change will not involve trailblazing, according to Manny. He described it using a baseball metaphor, recommending banks focus on singles rather than homeruns. "Incremental improvements to the community bank's value proposition will keep customers loyal and attract those from other institutions," Manny explained. "It's always been the community bank model to deliver excellent customer service over and above the latest technology." For this reason, even when implementing a large change—such as the launch of a new website or mobile app—focusing on smaller improvements is essential to stay ahead of the competition. "There are so many options that can differentiate you incrementally from direct competitors that the real challenge isn't putting in any one technology, it's sustaining a systematic effort to incrementally differentiate from your competitors," said Wetherington. "That's the key to long-term viability."
Putting a standard procedure in place will help manage change at the bank by ensuring that not only are all the essential operational steps followed, but also that all potential risks are recognized. "Since essentially all new product and service offerings require a several-step risk assessment today, having a well-defined process for product and service development is helpful," Schweiger explained. "Creating standard procedures and templates to facilitate things like model risk, vendor risk, and IT risk assessments as part of the product development cycle can be very helpful."
Finally, no significant technology change at any institution will go smoothly without open and active communication between the bank and its regulator. "Be proactive in communicating your strategic plans with your regulators, especially your technology plans," Wetherington advised. "Familiarize yourself with your regulators' innovation posture and outreach. It's one thing to assume, but it's better to know."
By placing the strategic plan at the center of all technology changes, banks can evolve and thrive in today's tumultuous industry by investing in the right products for their customers and implementing those changes smoothly. Finding the right fit in technology is the only way community banks can keep up with the pace of change; technology is one more tool they can use to define their brand for their customers and their community. "There are so many options out there, the challenge is to figure out where to put your assets," said Schweiger. "You can't do everything in every market, but that doesn't matter because not every market requires the same products."
On Trend: What the Experts See
The three experts interviewed for this article shared their thoughts on top trends in the banking industry that you should pay attention to:
"From an operational standpoint, it's very important for small community banks to consider developing a shared services arrangement," said Manny. "That could be the last frontier in cost-saving opportunities for banks."
"If we're going to stay relevant we have to make payments faster and more convenient for customers while still controlling risks," said Schweiger. "For mainstream consumers, we'll need to look more like a fintech solution than the traditional banking model."
"The advent of real-time payments will create opportunities to re-engineer existing products and services, and create new ones as well," said Wetherington. "Imagine how real-time money movement will enable banks to do things like onboard new accounts faster or offer instant loans."
Plante Moran is a WBA Silver Associate Member.