Ever since the introduction of the ATM machine in the 1960s, which several inventors have claimed credit for, banking’s technology has often come from outside the industry. Community and some regional banks across the country almost exclusively rely on vendors for everything from check processing to their core banking systems, and they have done so for decades.
Some banks don’t even count their own money. Counting machines developed by vendors do that, as well.
But banks in general have preferred to keep vendors hidden in the background so customers didn’t know they were there, and big banks have sought to develop much of their own technology in-house. Last year, when I interviewed Fifth Third Bancorp CEO Greg Carmichael for the third quarter 2016 issue of Bank Director magazine, the bank was proud to have developed and spun-off payment processor Vantiv and was planning to hire 120 technology staffers so it would have roughly 1,000 people working in information technology at the end of that year. Bigger banks have even larger crews.
Some of the biggest banks continue to invest in innovation laboratories and pump out new technologies with little to no help from outside vendors, and do an excellent job with it. But there is evidence that even some of the largest banks are warming to the idea that great technology really is coming from startup fintech firms, and that partnerships will speed up the process of innovation and give banks access to sizeable talent outside the banking sector.
“The market is changing way too fast for banks to do all the things in-house they’ve done in the past,’’ says Michael Diamond, general manager of payments for mobile banking and identification vendor Mitek, which sells its products to several of the biggest banks. “They know that.”
Aite Group researcher Christine Barry describes it this way. Historically, most large banks have promoted the technologies they have built themselves and kept the names of any technology partners undisclosed. “They did not view such partnerships as a strength and rarely allowed technology partners to reveal their names,’’ she and David Albertazzi wrote in a recent research report, “Large Banks and Technology Buying: An Evolving Mindset.” “That mindset has begun to change, given the increased attention many fintech companies are now enjoying in the marketplace.”
Nowadays, fintech partnerships are viewed as a leg up for a financial institution, and even the biggest banking players are proudly announcing their affiliations with a multitude of small firms.
USAA, long an innovator in its own right, partnered in 2015 with Nuance to offer virtual assistants to customers, and later, a savings app. TD Bank last year partnered with Moven to offer a money management app for consumers. This year, Capital One Financial Corp. joined other big banks in offering Bill.com to small- and medium-sized businesses, a platform for managing invoices and bill payment on a mobile device.
About 92 percent of banks plan to collaborate with fintech companies, according to a 2017 survey by information technology consulting firm Capgemini Global Financial Services.
In the past, technology might have helped improve back-office efficiency or reduced wait times in the branch. Nowadays, it’s at the forefront of strategic planning and the way banks plan to offer a competitive edge, Barry says.
It’s not just attitude that’s changed. The technology itself is developing rapidly. New ways of interacting with customers using artificial intelligence or virtual reality will be harder to banks to develop themselves, and easier to obtain through partnerships. Amazon’s Alexa, the voice service that powers the Echo, already is transforming consumers’ expectations for shopping, because they can now talk with a robot and order what they want online through voice commands. (For more on what banks are doing about AI, see Bank Director digital magazine’s Fintech issue.)
APIs, or application programming interfaces, will make it easier for banks to offer their customers a variety of technology solutions, by opening up their systems to technology vendors, as described in a recent issue of Bank Director digital magazine.
One of their biggest obstacles for banks is to monitor every vendor for compliance with regulations and security concerns. Smaller banks just prefer to do business with established vendors they trust. But already, they have begun to tap into the benefits of a wave of new fintech technologies, too, by asking core processors such as FIS and Fiserv to connect them with best of breed products, Diamond says. “They need the outsourcers to outsource themselves,’’ he says.