10 Steps That Banks Can Take to Drive Their Digital Future

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More than a dozen years ago, I managed digital banking at a community bank.

Back then, keeping up with available digital solutions for customers meant attending our core system and digital banking provider’s user meetings and conferences. The major limitation we experienced was that we could only deploy technology readily integrated into our core and digital banking systems. If we brought in technology that wasn’t already integrated, we would be paying for the integration — paving the way for our competitors. In at least one situation, the rollout failed because our provider could not get the technology to scale.

Due to high costs and technical expertise, most community-based banking organizations have had to settle with being mostly buyers of technology. In contrast, many larger banks are viewed as builders of technology, despite the fact, that many of the larger financial institutions that have developed digital banking technologies in-house were net buyers as well.

With the growing adoption of application programming interfaces (APIs), banks are no longer limited to the binary choice of being a buyer or a builder of technology. Organizations that were previously constrained by integration limitations can finally own their own digital experiences — not by buying technology outright, but by building relationships with fintech firms. Increasingly, fintechs have shifted from wanting to disintermediate banks to partnering with them to provide the digital products, services and experiences that retail banking customers demand.

The biggest hurdle to taking advantage of these opportunities to partner with fintech firms as a way to manage your institution’s digital future is changing legacy mindsets in the community bank space. How do bank executives move from thinking of themselves as a “buyer of technology” to focusing on orchestrating and building partnerships?

Here are ten general steps to start this journey:

  1. Define explicit business objectives: Program goals, metrics of success, etc.
  2. Assign the person(s) responsible: Ideally, this should be driven by the CEO as the ultimate strategist for the bank, but day-to-day can be managed by a chief information or marketing officer, head of digital or another executive.
  3. Identify addressable gaps: Stay away from shining objects by identifying real gaps in the bank’s capabilities and addressing customers’ needs that the bank can close with a partner’s technology.
  4. Create a program to identify possible partners for each gap: This can be done through literature reviews, participating in conferences, innovation hubs, research firms or consulting partners, among others.
  5. Decide between build, invest or partner: Executives should categorize each partner into three options — build/customize a solution with them, invest in them for more strategic control and oversight or partner in the traditional contractual sense for the use of their product/service. A partner may fit more than one of these categories.
  6. Evolve resource allocation: Partnerships require organizational commitment, such as funding, networking opportunities and ongoing support.
  7. Build required technology and infrastructure: Develop the capabilities required to support your bank’s growing ecosystem, including APIs, cloud infrastructure, sandboxes and agile practices.
  8. Adjust planning practices: Fintech speed is counted in days or weeks, not months or years as banks tend to use. Apply agile thinking to planning, budgeting and testing.
  9. Iterate processes: Internal processes, such as vendor management, should support continuous iteration based on results. Additionally, banks should remain open to working with fintech firms to mature their processes.
  10. Revisit metrics: Make sure your bank is measuring successes and making appropriate adjustments.

Available technologies — such as APIs and cloud platforms — allow banks to step away from the shadow of their core providers. Banks now have an opportunity to own their digital futures and, more importantly, the digital experiences they offer their customers. Strategic partnerships allow financial services organizations of all sizes to compete and serve the needs of consumers by successfully leveraging the latest technology.

3 Principles to Promote a Bank Culture of Innovation

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Many bank leaders I talk to are very aware of the importance of innovation in the face of a fast-paced, changing environment. Yet, they have trouble promoting change and adopting more modern and efficient processes and technology — contributing to the struggle of making their bank more innovative. While every institution is slightly different, I wanted to share a few practical approaches to achieve internally led innovation that were very effective during my 12 years at Alphabet’s Google and another six working with the most innovative community and regional banks.

A recent survey from McKinsey & Co. found that 84% of CEOs understand innovation is imperative to achieve growth, yet a mere 6% are satisfied with the level of innovation within their organizations. These numbers reinforce that executives have the desire to promote innovation, but continue to struggle with execution and strategy.

One of the main problems I see institutions having in their typical approaches to innovation is the reliance on external paid consultants instead of activating an existing resource within their bank: their own employees. Employees already have a deep understanding of issues that both they and customers experience with the existing services and technology stack and are in a unique position to generate ideas for improvements. Not to mention they are also highly motivated to drive these innovations to a successful completion.

Embracing this approach of where the innovation most likely comes will enable bank leadership to focus on creating an environment that is conducive for innovation. Here are three practical suggestions executives and boards should consider:

1. Make it “Safe” to Fail
The foundation of a successful bank business model includes managing risk, such as balancing the downside of defaulting loans with the benefit of interest income on performing loans. And just like it is impossible to benefit from interest income without risking the principle, it is not possible to innovate without trying some things that, in retrospect, do not work out as originally planned.

The key here is to make sure everyone in the organization knows it’s OK to try things and sometimes fail. Without trial and error, there is no reward. Organizations that minimize the negativity around failure and view it as an opportunity to become better are often the ones that are able to move forward and innovate.

2. Encourage “Bottom-Up” Ideation
Most are familiar with “top-down” change that stems from leadership teams and management. However, this approach makes it harder to innovate; in many cases, it ignores the unique context that front line employees have gleaned. These employees use the bank software and speak with customers, giving them a unique and very valuable perspective. They know what is causing pain and what modifications and improvements would make customers happier. The key to promoting innovation is to extend the opportunity for ideation to all employees in a “bottom-up” approach, allowing their voices to be heard while embracing and appreciating their creativity and insight.

Giving employees a safe space to voice their ideas and an opportunity to provide feedback is at the core of innovation. Executives can achieve this by shifting the organizational process from a one-pass, top-down approach to a two or more-pass approach. This is front line employees can propose ideas that management reviews and vice versa: management proposals are reviewed by the same front line employees for feedback. Management proposals’ are then refined to reflect the employee feedback. This allows management to incorporate all relevant context and makes everyone feels part of the process.

3. Enable an Agile Approach
While planning everything down to the smallest detail may seem like the safer option, it is important that boards and management teams accept that the unexpected is inevitable. Rather than trying to foresee every aspect, it is important to incorporate an agile mindset. An agile approach starts small and observes, adjusts course based on those observations and continues to course correct through repeated observation/adjustment steps. This allows the organization to absorb the unforeseen while still continually making progress. Over time, the pressure to be correct all the time will dissipate; the bank will feel more in control and enabled to make appropriate adjustments to increase the chances of the best possible outcome.

The rate of change around us and within financial services is steadily increasing; it is impossible to predict and plan for what will happen in the next few years. Instead, it is crucial that bank boards and management teams embrace adaptability as a critical element of corporate survival.

Disrupting the All-or-Nothing Mindset in Banking

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Nine and a half times out of 10, you don’t eat the entire pie during dessert. Instead, you opt for a slice – maybe two.

It’s the same with financial institutions and their services.

Most banks don’t originate every type of loan or allow customers to open every type of account in the market. But when they are in need of a specific capability, such as banking as a service capabilities or acquisition, development and construction financing, it can be difficult to find a solution that does only that.

In certain cloud-hosted environments, however, banks can create the exact solution they need for their business and customers.

In this episode of Reinventing Banking, a special podcast series brought to you by Bank Director and Microsoft Corp., we speak to Robert Wint, senior product director at Temenos, a cloud-based banking technology solutions provider.

Wint describes how Temenos’ cloud banking focus is helping financial institutions spin out specific, individual technologies and launch them as stand-alone solutions. He brings to the table some impressive case studies, and introduces a potentially new term to our American audience: composable banking.

Temenos reports that its technology is used to bank over 1.2 billion people. Listen to find out how.

This episode, and all past episodes of Reinventing Banking, are available on FinXTech.com, Spotify and Apple Music.

Creating Breakthrough Value: Crafting the Right Technology Strategy

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Banking is becoming more invisible, more embedded and less conscious to consumers. Finding ways to capitalize on this banking shift will continue to be one of the industry’s defining evolutionary challenges.

And it all begins with crafting the right technology strategy.

In this episode of Reinventing Banking, a special podcast series brought to you by Bank Director and Microsoft Corp., we talk to Nikhil Lele, Global and Americas Consumer Banking Leader from EY. He brings his expertise as a former core technologist to expand on how banks can digitally transform by using the correct data.

Lele also touches on three fundamental pillars that banks can build on to drive digital adoption: growth and strategy ambition, incentivized leadership and talent, and having the right capabilities.

The business model of banking is changing. Listen here to find out how to stay proactive in that change.

This episode, and all past episodes of Reinventing Banking, are available on Bank Director.com, Spotify and Apple Music.

Bank Fraud: Where Do We Go From Here?

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The work of so many bank fraud teams is to ensure that they don’t wake up to a crime scene.

In the latest episode of Reinventing Banking, a special podcast brought to you by Bank Director and Microsoft, we discuss the evolution of technology that helps fight cyber fraud and where the industry goes from here.

Seth Ruden is director of global advisory for the Americas for BioCatch, a behavioral biometrics company that helps financial institutions gain actionable insight, including fighting fraud. He talks with Bank Director’s FinXTech Research Analyst Erika Bailey about the promise that machine learning and automation have for bank fraud teams.

He also talks about the increasing sophistication of data analytics in tracking, and finding, potential fraud. Ruden also reveals his strategy for getting resources for bank fraud teams at your bank.

Finally, he chats a bit with Bank Director’s Erika Bailey on their mutual love for classic rock.

So ramble on …

The Future of Banking

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Open banking is bigger in the United States than it is in Europe, says Lee Wetherington, the senior director of corporate strategy for Jack Henry & Associates, one of the banking industry’s largest technology solution providers. For financial technology companies, that means an unlimited potential to access data, and offer products and services that customers would like or will like in the future.

Wetherington answers three questions in this video:

  • How can fintechs leverage open-banking rails to improve their offerings and reach?
  • What will the banking industry look like in 10 years?
  • Looking beyond 10 years, will there be a banking industry as we know it now?

How Bankers Can Use Relativity to Power Tech Decisioning

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“A good plan, violently executed now, is better than a perfect plan next week.” – Gen. George Patton Jr.

Banking has been around for thousands of years, but digitization of the industry is new and moving fast. The changes have left some bankers feeling stuck, overwhelmed with the sheer number of technology choices, and envious of competitors rocketing into the future.

Back in the boardroom, directors are insisting the team design its own rocket, built for speed and safety, and get it to the launch pad ASAP. The gravity of this charge, plus the myriad other strategic initiatives, means that the bank is assessing its tech choices and outlook with the same exhaustive analytical vigor as other issues the bank is facing, and at the same speed. This is a subtle, but significant, error.

Based on experience leading both financial institutions and fintechs, I’ve seen how a few firms escaped this trap and outperformed their competitors. The secret is that they approach tech decisions on a different timescale, operationalizing a core principle of Albert Einstein’s theory of special relativity known as time dilation: that, put very simply, time slows down as velocity increases.

How can executives apply relativity to banking?
Our industry exercises its colossal analytical muscles every day, but this strength becomes a weakness when we overanalyze. Early in my career, I reported to a credit officer who routinely agonized over every small business loan. Each one seemed unique and worthy of lengthy discussion. He would only issue a decline after investing many hours of the team’s time analyzing together; the team lost money on loans the bank never made.

The same mistake can occur when banks assess their fintech options. Afraid of missing a risk factor and anxious to please the board, executives fall into the trap of overanalyzing. There’s good reason to justify this approach; major projects like a core conversion are truly worthy of great care and deliberation.

But most tech decisions are not as risky and irreversible as a new core. Just as we can download apps to a phone and later remove them, the industry has embraced the concept popularized by Amazon’s former CEO Jeff Bezos of a “two-way door” to deliver turnkey solutions that are fully configured and ready to use in a matter of hours. Developers are writing new code and deploying to the cloud continuously, with no downtime. A few companies, including Cirrus, even offer money-back guarantees, to eliminate a bank’s perceived risk from the decision.

Tech moves fast. What can happen when a bank accepts this challenge and invests in rapid tech decisioning? There are three important aspects of time dilation to consider:

1. Even at only a slightly higher velocity, it has been empirically proven that time marginally slows down. The rate of change in time increases parabolically as velocity increases.
This means that increasing the speed with which your bank makes decisions, even a tiny bit, pays off immediately, and the learning curve will magnify payoffs as the bank improves its decision-making process. There’s a significant compounding effect to this discipline.

2. When traveling at faster speeds, time appears to be passing no differently; to an outside observer, your clock is ticking slower.
Once the team is accustomed to making good tech decisions rapidly, its normative behaviors may seem odd to outsiders. Your colleagues in other internal departments who have become jaded by previous approval cycles may not be able to believe how rapidly your bank is now able to stand up new solutions. Your firm will accomplish much more than before.

3. The faster your velocity, the more mass you accrue.
Making decisions quickly frees up time for more decisions. Decision-making is a force multiplier. It’s not just your clients who will appreciate the upgrade — your vendors will be energized as well, and far more likely to treat you as a valued partner than a counterparty.

Intrinsically, banking exists to solve problems, but to solve problems, we must make decisions. Decision-making is a core competency of good banking. The bankers who are winning — and, candidly, having a lot more fun these days — approach their tech decision process with the same care and weight as their credit decision process. They no longer make tech decisions on a banking timetable; instead, they are creating time by moving faster.

What the Heck is Web3?

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With increased interest around Web3, making sense of the latest and newest technology trend — and its potential impact on financial services —  could add value to strategic discussions as leadership teams and boards consider their long-term strategies.

For early and seed stage venture capital, the top 15 firms invested $1.3 billion in Web3 and decentralized finance in the third quarter 2021, according to Pitchbook. The research company said investment in the space — which includes $900 million into the cryptocurrency exchange FTX and $120 million in Offchain Labs, a blockchain-based, smart contracts platform — beat out the separate fintech category, which landed in the No. 2 spot with $860 million invested.

Not everyone is convinced. In a December 2021 tweet, Tesla CEO Elon Musk called Web3 “more marketing buzzword than reality right now.” He was responding to a video of a 1995 interview of Microsoft Corp. founder Bill Gates with David Letterman, in which the TV host asked, “What about this internet thing?”

That question seems quaint today. Amazon.com had just opened for business as an online bookstore; Mark Zuckerberg would start Facebook roughly a decade later.

Facebook represents the current state of the internet, characterized by centralized platforms that own or leverage user content. But the web continues to evolve; venture capital firms and tech titans are using the term “Web3” to discuss this next phase. These changes encompass concepts that bank leadership teams and boards should be watching and regularly discussing.

“Web3 is really just a rebranding of a lot of the things we’ve already been talking about for a while,” says Alex Johnson, director, fintech research at Cornerstone Advisors. “It’s the collision of the internet and crypto in a way that allows for users of the internet to have verifiable ownership over the companies and products that they interact with.”

The expansion of digital assets underpinned by blockchain — including cryptocurrency and non-fungible tokens (NFTs), which represent ownership in art, music or even real estate — are reshaping the way that internet users think about ownership.

“There will now be the capability to give verifiable ownership — over content, over relationships, over access to special features, over [intellectual property] — to customers or users. And the potential impact of that is that companies that do that will have a significant marketing advantage and retention advantage,” says Johnson. Companies could use tokens to build loyalty and community, granting partial ownership to customers of products or ideas, similar to a referral bonus or share of stock.

Leveraging blockchain technology, investor Ryan Zacharia envisions consumers and businesses building digital identities. “People are going to effectively own and control their own identities and information, and hold that information in a digital wallet,” providing access when applying for a loan, for example. Zacharia is general partner at JAM Special Opportunity Ventures, which invests in up-and-coming bank technologies on behalf of partner institutions.

At the same time, a few banks are using blockchain to power real-time transactions. Last month, I watched the first real-time interbank transfer of stablecoins — cryptocurrency pegged to a stable currency or commodity — between two banks, $53 billion Western Alliance Bancorp., based in Phoenix, and $2.5 billion Coastal Financial Corp. in Everett, Washington. The transaction was facilitated by Tassat Group, which provides blockchain-based payment solutions for banks.

“The ability to have programmable money is a game changer for the whole economy,” says Chris Nichols, director of capital markets for SouthState Bank. “It’s the first time where you have value, the message and the ability to program all in one unit of code. … [T]his opens up a whole new set of products for banks.” Signature Bank, JPMorgan Chase & Co., Customers Bancorp and New York Community Bancorp are among the banks exploring blockchain-based products and services focused on payments and asset securitization.

Fintechs competing with banks are also taking advantage of the disintermediation trends promised by a Web3 economy. In March 2021, Block (formerly Square) acquired TIDAL. The artist-centered music streaming platform allows the Jack Dorsey-led digital payments provider to tap into another niche. In a press release, current TIDAL head and Square executive Jesse Dorogusker said the two platforms would “explore new artist tools, listener experiences, and access to financial systems that help artists be successful.”

Musicians and artists have been early movers on NFTs. Just last month, Ozzy Osbourne launched a “CryptoBatz” collection of NFTs, commemorating the notorious 1982 gig where the rocker bit the head off a bat. Earlier in 2021, the band Kings of Leon released the first NFT album.

“There is an opportunity for content creators, music creators, owners and writers and musicians to eliminate intermediation, connect directly to their fans [and] sell their music as NFTs,” says Zacharia. “That can generate revenue for the musician, and the NFT holders can receive programmatic royalties based on [a song] being played …  or what have you.”

Web3 requires an open mind and a firm foot in reality. Research into these concepts quickly unearth ideas that seem more like science fiction than traditional economics and finance. Facebook, for example, recently changed its corporate name to Meta Platforms as Zuckerberg expects people to interact more in the metaverse. Will part of the economy take place in a digital world, where we interact via avatars in a virtual space?

”It’s important to have conversations that contemplate what the world could look like in five or 10 years,” says Zacharia. The metaverse is an unlikely next step for a typical bank, but he could see an early-mover advantage for an enterprising financial institution that figures out how to bank the space. And despite the sci-fi luster, the evolution of the web promises to soldier on, bringing opportunities and risks for banks to consider, including fraud and cybersecurity. “There’s a tremendous amount of talent and effort and capital that’s going into this,” he says. “Frankly, I don’t think it’s a fad.”

2018 L. William Seidman CEO Panel

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Former FDIC chairman and Bank Director’s publisher, the late L. William Seidman, advocated for a strong and healthy U.S. banking market. In this panel discussion led by Bank Director CEO Al Dominick, three CEOs—Greg Carmichael of Fifth Third Bancorp, Gilles Gade of Cross River Bank and Greg Steffens of Southern Missouri Bancorp—share their views on the opportunities and threats facing banks today.

Highlights from this video:

  • Reaching Today’s Consumer
  • Front and Back-Office Technologies That Matter
  • Competitive Threats Facing the Industry
  • The Future of Community Banking

 

Banking Compliance and the Cloud: Can They Coexist?

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cloud-computing-8-3-15.pngBusinesses large and small are enamored with cloud computing. After all, it promises less information technology expense, delivering cheap, on-demand, and elastic processing power, disk storage and memory, while cutting down on energy use. By meshing their services with the cloud, companies gain social and mobile capabilities that can connect them more closely with their customers. But is it right for financial institutions?

In short, it depends—both on what systems your financial institution is considering and what types of data will be processed, stored or transmitted by the cloud service provider. With careful monitoring and attention to key risk areas, cloud computing can work, and it can be a solid, budget-friendly choice for financial institutions seeking computing power and the ability to scale quickly as business grows.

Cloud Deployment
When considering a cloud solution, you’ll first need to choose a deployment model. Your bank may select from private clouds, which belong to a single organization; public clouds, offered by companies including Amazon and Microsoft; and hybrid clouds, which use a mix of public and private clouds.

Second, consider your service model:

  • Software as a service (SaaS): Your bank uses the provider’s applications and operates them on the provider’s infrastructure.
  • Platform as a service (PaaS): Your bank deploys its own applications onto a cloud infrastructure using the provider’s programming tools—a good choice for banks that develop their own applications.
  • Infrastructure as a service (IaaS): Your bank runs operating systems and applications on the cloud provider’s infrastructure.

Are Cloud Solutions Secure?
For banks, data security is paramount, and you must comply with the Federal Financial Institutions Examination Council (FFIEC)’s Outsourcing Technology Services Booklet, federal and industry protection regulations, and payment card data requirements under the Gramm-Leach-Bliley Act, among others.

Though FFIEC and other guidelines give some clarity on how banks should approach data security, they miss some key nuances of cloud computing. Specifically, banking institutions will also need to consider:

Provider and Data Location
Where your institution’s provider is located and where your data is stored, processed or transmitted can trigger a variety of state, federal or international privacy compliance concerns and issues.

Multiple Levels and Layers of Risk
Cloud providers commonly resell other providers’ services or rely on other subservice providers, which makes risk assessment extremely difficult. Furthermore, data could be backed up and stored by multiple service providers and facilities.

Vendor Risk
Your vendors may use cloud services to store your customers’ information. As a result, you may need to spell out in your contracts what your cloud computing policies are, or at least incorporate questions about cloud computing practices into your vendor risk management program.

Institutions that implement cloud technology will need to address these risks specifically, requiring all parties involved to conform to the security and privacy mandates outlined in their contracts. You’ll also need to develop plans to continually monitor the activities and performance of both service providers and third parties.

Moving to the Cloud
Cloud computing is likely here to stay. And while the shift may be too large for some banks’ tastes, it does come with certain benefits. Keeping compliance and regulations in mind, embracing the cloud may mean increased agility, speed and competitiveness for financial institutions of all sizes.