Consumers and businesses in the U.S., looking for the holistic, hassle-free customer experiences they get from technology giants such as Amazon and Uber, are struggling to get the same from their banking providers. This is particularly true of smaller businesses: according to JD Power’s 2020 U.S. Small Business Banking Satisfaction Survey, such businesses “have seen significant declines in satisfaction”. What is preventing financial institutions from evolving in the direction their customers want?
One reason is complacency. As regulated entities possessing banking licenses, banks and credit unions have long enjoyed exclusivity in providing core banking services such as deposit accounts, lending and transaction banking. But that premise has come increasingly under threat, as today it is possible for non-banks to obtain limited licenses for lending and money transfer services.
The lending marketplace is already well served by alt-lenders: fintech mortgage originators, for example, have reduced the top 5 banks’ share of mortgage originators from 50% in 2011 to 21% today, as found by Business Insider Intelligence’s Online Mortgage Lending Report. Banks’ traditional dominance in the area of money transfer services is also under attack, with digital wallet and P2P payment services like PayPal and Venmo increasingly used for both business and consumer transactions.
The cryptosphere poses another threat. Bitcoin and its brethren are designed to allow payment transactions to be made without a traditional financial institution involved. Of course, it remains to be seen whether cryptocurrencies will become a mainstream medium for the exchange of funds, in addition to storage of value, but they could create a fundamentally different model for the movement of money.
In order to neutralize these threats, banks need to move forward with digital CX adoption for their customers, particularly small businesses and corporations, and do so quickly. Banks are finding it difficult to keep up, however, because of outdated technology in their core banking, payments and lending systems. For instance, some banks are using mainframe systems that can be up to 20-30 years old. This legacy technology represents a massive store of technical debt. Combined with the 60% or more of their budgets that banks spend on compliance, there is precious little room for innovation.
So how can banks need to obtain the freedom to evolve in the direction they want for themselves and their customers? For some institutions, the only answer is to replace their legacy systems, despite the difficulty of doing so. In other cases, it means working around them.
Commercial payment services provide some instructive models. Real-time payment networks, such as The Clearing House’s RTP®, allow banks to provide 24×7 immediate payment services. Since RTP is new, it makes more sense to simply adopt that type of service on the cloud, allowing for the injection of new technology approaches into the banking infrastructure without touching the existing systems. For Fedwire™ transactions on the other hand, where the pandemic has driven the fastest rise in volumes in forty years, it is better to decommission and replace the aging account-to-account payment systems that represent the weakest link in the payment chain, with technology that is more likely to stand the test of time. Whatever the approach, in order for banks to truly rejuvenate their customer experiences and provide differentiated services, ultimately they need to modernize how they move money.
Ideally, the solutions that banks need to emulate are those provided by consumer technology platforms, such as Netflix or Facebook, which handle massive data-rich transaction volumes daily, without downtime. The banking equivalents of these solutions typically run in the cloud with 24×7 resiliency and are API-centric. They also excel at handling extended data sets (such as those found in ISO 20022) using modern streaming real-time databases, and are extremely efficient in terms of managing high transaction volumes. Last but not least, these solutions provide speed to market.
All of these factors represent critical components for banks in their quest to free themselves from the limitations of legacy technology. Finding themselves up against a dramatically changing landscape, this approach will not merely allow banks to stay competitive, it may well prove pivotal to their future, enabling rapid evolution instead of quick extinction.