Regardless of a Recession, Banking Technology Makes Sense

No bank wants to be Southwest Airlines Co.

Investing in technology with recession clouds brewing might seem counterintuitive. But as Southwest’s crisis over the 2022 winter holidays showed, technology shortcomings can incur enormous costs in the short-term and in the future.

The company has estimated that its scheduling system meltdown will cost it as much as $825 million. Customers disparaged the airline and executives received a pay cut. Southwest had been investing in customer-facing technology. But the back-end limitations of its operations technology hampered the company’s ability to handle the most basic customer service for airlines: safely getting customers where they needed to be in the wake of a winter storm.

Community banks face downside risks from inflation, rising interest rates and continued geopolitical uncertainty. As a result, bank executives may be inclined to delay or cut spending on technology that can help their institutions grow or be more efficient. Southwest’s experience shows that would be a mistake. According to Forrester data, firms pursuing technology-driven innovation grow three to four times faster than industry averages. Institutions that undertake multi-year efforts to make digital technology a priority recognize digital acceleration is a way to:

• Permanently reduce the cost of doing business.
• Improve customer and employee experience.
• Outperform competitors ahead of a looming downturn.

Bank executives facing pressure to downshift their digital efforts in the name of cost reduction should remember the following lessons from Southwest’s experience:

1. Back-office failures directly affect customer experiences. Southwest prioritized technology spending on customer experience gains over back-end improvements, such as a digital way for flight crews to report their locations and availability. As a result, crews spent time manually calling in to report their locations, rather than helping solve customers’ problems. Delays or cuts in spending on technology that would make bank lending more efficient, for example, could mean longer loan turnaround times for customers.
2. Systems fail at the worst time. Systems usually buckle under stress, rather than when it’s convenient – whether the system is a complex staffing solution or basic spreadsheets tracking loans in the pipeline. On the other hand, the Paycheck Protection Program demonstrated how institutions that had invested in technology earlier could capitalize on that opportunity faster than those that did not. If the economy downshifts, banks may be too busy putting out figurative fires to assess vendors and initiate technology that would help them manage lending and credit at scale during and after any recession.
3. Viewing technology as a near-term cost, instead of a long-running investment that drives growth, ultimately hurts the organization. Forrester notes that Southwest apparently “budgeted for technology on an ‘allocative efficiency’ basis, focusing on optimally allocating costs to meet current demand. In doing so, it appears to have largely neglected ‘productive efficiency,’ or focusing on maximizing future outcomes given current cost constraints.”

What to Do Instead of Cutting
As bank boards and leaders consider their technology budget and expenditures, remembering Southwest’s lessons can help guide their investments. They should narrow their focus to vendors set up to meet their needs and provide the appropriate return on investment. For example, a bank looking to purchase software to process and analyze loans may encounter systems designed for larger banks. In their evaluations of lending software, they should consider:

1. How long will implementation take? Smaller financial institutions often have small staffs, so implementing new technology quickly is critical.
2. Does the loan system foster cross-functionality to support staff with more generalized roles who wear multiple hats?
3. Does the bank need to make adjustments to the technology before using it, or can it use “out-of-the-box” standard templates and reports to get them up and running?
4. Is the technology capable of processing the various loan types offered by the community financial institution?
5. Can the lender maintain control of the relationship throughout the process? For example, many community banks want the flexibility to either have a lender start a loan request in the branch, or let the customer enter key information and documentation at their convenience.
6. Does the software provide straightforward summaries of individual deals and portfolio-wide summaries for greater collective visibility into the pipeline?
7. Will the community financial institution have to switch vendors if it grows substantially, or can the software partner handle the transition?

Community financial institutions are vital to the communities they serve and need to be able to respond quickly to meet borrowing and other demands of their customers. Continuing or pursuing technology investments regardless of the economy will help the community and the bank thrive.