Issues : Technology

Buying Bank Technology: If Not Now, When?


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FoMO, or the Fear of Missing Out, isn’t just a pop culture buzzword created to describe our obsession with social media. It’s an actual, scientifically proven phenomenon described in scientific literature as “the uneasy and sometimes all-consuming feeling that you’re missing out—that your peers are doing, in the know about, or in possession of more or something better than you.”

That feeling probably sounds very familiar to bankers these days. In the press, in blogs, on podcasts, and at every industry conference, bankers are hearing that the time is now to make big technology changes in their organizations. Everyone seems to be busy innovating, and many bankers are left wondering if they’re the ones being left behind.

In this case, the answer may be “Yes.”

We are facing a set of once-in-a-generation circumstances that will determine the winners and losers in banking for the coming decades. And this separation of the “haves” from the “didn’t act fast enough to be among the haves” is already in motion.

Here are the four big trends that have converged to create the opportunity—or threat—of a lifetime for banks.

1) Tech Spending Neglected
A great deal has been written about how antiquated much of the banking infrastructure has become. Some concerns about legacy systems are overblown, but there is undoubtedly a marked difference between the digital experience customers have with their banks and what they encounter in most other parts of their lives. Banks still handle debits and credits as well as ever, but when compared to the Amazon, Netflix or Gmail experience, the gap is widening. Banks cut all spending following the financial crisis, and have been slow to replace those vacated technology budgets in the face of new regulations and shrinking margins. The result is wide swaths of banking technology that haven’t been upgraded in 10-plus years.

2) Expected “windfalls” from regulatory and tax reform
In our interactions with banks, there has been a sudden change in mood. Bankers have shifted quickly from the glass being half empty to half full, in large part because of the outcome of the November elections. Banks now see the potential for big windfalls, in the form of tax relief and regulatory reform, with a recent Goldman Sachs piece suggesting that industry earnings in 2018 could increase by 28 percent over current estimates if the chips fall just right.

3) Interest rates (and margins) are rising
In addition to those windfalls, banks are also getting a long-awaited earnings boost from rising interest rates. The Federal Reserve has increased overnight rates by 0.75 percent, and long-term rates have followed suit, with 10-year Treasury yields up more than 1 percent from their 2016 lows. Deposits rates have been slow to follow along, resulting in margins that are finally improving after years of painful compression.

4) Game changing technology is plentiful and accessible
Finally, in the decade since most banks have been actively in the market, the number and quality of technology solutions has exploded. Computing power, high quality data sets and cheap storage are contributing to a renaissance in enterprise software, and banks now have multiple possible solutions for just about any conceivable business need. You are no longer beholden to your core provider to sell you everything, as the new generation of tools are better at integrating, easier to deploy and easier to use. On top of all that, most of them are also incredibly cheap for the value they are providing, making them accessible to banks of all sizes and shapes.

When you combine these four factors, you see why there is so much hoopla around innovation and fintech. Many bankers are viewing the next few years as their one big chance to completely revamp the critical pillars of their business. Due to the long gap in meaningful technology investment, they are starting with a blank slate, and because of the recent improvement in profitability trends, they have sufficient budgets to make substantial changes. They are approaching the market and finding plentiful options and are excited by the opportunity.

Some will choose wisely and win big. Others will choose poorly and will not fare as well. But FoMO is real: If you simply stand on the sidelines and do nothing, that is also a choice. Your competitors will leave you behind, and soon your customers might just do the same.

If you’re not willing to make some changes in this environment, when will you be?