Principles to Drive Digital Banking Transformation

In the earliest moments just after midnight on January 1 each year, millions of people worldwide establish resolutions. While I won’t bore you with my resolution for 2020, I will admit that it was not to spend 11 months of the succeeding year working from a makeshift office in my bedroom or making sure my 6-year-old son was always adorned with a mask for any non-familial human interaction. Suffice to say, last year provided us all with unsuspected challenges and learning opportunities — banks squarely included.

The most impactful learning for banks wasn’t a novel way of connecting borrowers with capital or a new method of taking deposits. In fact, it wasn’t a lesson learned by banks at all, but instead by their customers. While banks have seen foot traffic into the branches decrease at a predictably steady rate, watched ATM transactions hold strong and cheered the increasing usage of online banking, every new medium they introduced to serve clients inevitably became an “and” versus an “or.” Allow me to explain: When ATMs made their way onto the scene in the 1970s, bank customers didn’t stop walking into branches. They leveraged both channels. Same for interactive voice response (IVR), digital banking and mobile banking.

The pandemic changed that. For the first time, it forced banks to close their doors; customers had to stop straddling the line between the branch and digital realms. The choice had finally been made for them. In 2020, customers learned that they can truly have a digital-only relationship with their bank.

Now, more than ever, the crunch is on for banks. Digital banking trends are consistently increasing and the competition is coming in from all sides. Between the moneycenter national banks, a seemingly endless wave of fintechs like Chime and Revolut, and the ever-looming threat of technology firms like Alphabet’s Google and Amazon.com jumping into the mix, how can banks compete? It’s time for a digital transformation.

Where to begin?
There are a number of paths to success in a digital transformation — and an untold figure that lead to failure. Whether your bank starts with the core and works its way out to the digital banking service, or vice versa,– there are a few driving principles to keep in mind.

  1. The cloud provides unparalleled economies of scale. If your bank isn’t taking advantage of a cloud-based solution to realize both the economic benefits and the cutting-edge innovation made available by the hyperscalers (architecture built to scale appropriately as demand fluctuates throughout the day), your institution risks falling further behind.
  2. Data is a bank’s most valuable asset. Unfortunately, it is also the most underutilized. A digitally transformed bank will replace the personal connection of the branch visits by being contextually relevant at the exact right moment, with the proper actionable message to each individual client. Even if they never quite get there, this is the oasis in the desert of commoditized banking relationships and should be every digital transformation journey’s North Star.
  3. Determine how much of the digital banking experience you want to own, really. Many banks strive to create a unique digital experience for their clients, but that uniqueness comes at a mighty expense in both time and money for the duration of its existence. The importance of choosing the technology partner that aligns most closely with your bank’s desired balance of technical prowess and partnered innovation can’t be overstated.
  4. Look for opportunities to leverage your institution’s banking APIs to extend its reach beyond traditional domains. Through initiatives like embedded banking, banks are able to establish mutually beneficial partnerships to empower non-banking services and leverage the functionality of their bank partner. Embedded banking is a growing way for banking services to be integrated into traditionally non-bank websites and mobile applications, like Shopify’s business account offering as part of their seller services. Embedded banking opens the door to perform simple tasks like view account balances, make payments or even originate new deposits and loans.

Even just 10 years ago, these options weren’t available to most institutions. That’s no longer the case. Banks no longer have to resign themselves to providing a mediocre, commoditized digital experience — in fact, it’s the last thing they can afford to do. While the pandemic taught us many things, the most pressing lesson for banks is that the time for a digital transformation is now.

Building a Digital Masterpiece on Top of the Core

Digital banking has become a must-have feature. The coronavirus pandemic forced consumers to accelerate their adoption of digital banking tools; now they love the convenience and flexibility these products provide.

But what is troubling for banks is that many consumers do not care if these services are met by a traditional financial institution or a fintech challenger bank. U.S. consumers are increasingly comfortable transacting with an increasing number of financial service providers to get the specific products and features that are most important to them.

According to a recent survey conducted by Cornerstone Advisors, 35% of consumers now have more than one checking account, led by the 42% of millennials who have two or more accounts. The report found that challenger banks hold a growing number of these accounts by offering specific features that consumers can’t get from their existing financial institution.

This pressure is particularly high on community and regional banks, which lack the budgets and IT resources of the global banks. However, the technology powering challenger banks has also created an emerging option that enables banks to accelerate product innovation and effectively compete with larger financial institutions and challenger banks: modular banking.

Challenger Bank Tech, One Block at a Time

Community and regional banks in pursuit of innovation are often left to choose between two equally unappealing options: wait on a core that may not innovate at the speed they want or take on the risk of a massive core conversion.

Modular banking, on the other hand, applies the challenger bank approach of building hyper-focused services to the realities of a bank’s existing core and IT landscape. Modular banking platforms typically offer the same functionality as a modern core banking system. However, instead of building the entire platform at once, modular banking approaches service much like a set of building blocks. Banks only need to select the products and services that complement their existing systems’ functionality or build new digital products on top of it.

Put simply, modular banking looks at each piece of a bank’s functionality — such as Know Your Customer, card issuance, P2P or rewards — as a collection of loosely coupled microservices and application programming interfaces (APIs) that can be combined and deployed in a cloud environment to facilitate specific use cases.

Modular banking enables institutions to build specific products to meet the specific needs of their customers and quickly adjust as market conditions change. For example, a regional bank could solve an immediate need for banking products to offer contract workers with a pre-built module, before shifting to bring innovative features for families that make up most of the service area with teen and children accounts. A modular approach to digital transformation benefits small and mid-size community banks in two keys ways.

Quickly Develop New Products
By decoupling critical infrastructure, like the systems and processes that need to work reliably but don’t confer competitive differentiation, from the people, processes and technology focused on product innovation, modular banking provides a potential solution to execution challenges that banks face.

Productive Fintech Partnerships
Creating productive, long-term partnerships requires financial institutions to build mutually beneficial relationships with fintech companies. Innovating through fintech partnerships also requires banks to move fast, which is where modular banking comes in.

The open architecture of a modular banking platform can facilitate the rapid integration of third-party partners, by giving potential partners a modern API to connect to and build on top of. Bank leaders can take a much more proactive approach to pursuing and operationalizing new partnerships.

By building these strategic partnerships, they can create a competitive differentiator to fuel growth for the coming years.

What the Fintech Revolution is Really About


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I often hear about how slow and ineffective banks are to adapt to the technological world of the internet age. It is true that banks are challenged in the virtual space of the internet. Their systems were built for the 20th century, where trade was focused upon buildings and humans in trading rooms and branches. However, the idea that banks are going to let fintech just steamroll their current operations is just an illusion.

Banks have millions of customers, billions of capital and centuries of history. This is their strength. They have poured billions of dollars into technology over the years, and still do. Admittedly, their systems are often cumbersome and out-of-date, but that is their challenge. How do they overhaul their systems so that they reflect the modern new age of distributing financial services as data through a network of software and servers, rather than as paper through a network of branches and humans?

Meanwhile, the fintech sun is rising and most of its beam is focused upon areas left dark by the incumbent financial institutions. Much of fintech is about banking the unbanked through mobile wallets. The peer-to-peer lenders appear to be more focused upon small businesses and higher credit risk borrowers, rather than the mainstream consumers and smaller, Main Street companies. Robo advisors are offering advice to those who previously received none, and payments companies like Stripe and Square are purely adding an overlay of an app and an API to an existing payments process that is not fit for that purpose.

In other words, fintech is either servicing the unserviced or fixing the fixable, rather than disrupting, destroying or disintermediating banks. In Europe, there are new banks rising: Atom, Solaris, N26, Tide, Tandem, Fidor, Starling, Monzo and more. They are called challenger banks, and mainly for the reason that they are meant to challenge the large existing banks. But they will not. Their focus is upon building niches, as all new banks start with no customers, limited capital and zero history.

Therefore, to throw a little dose of harsh reality onto the fintech fairy tale, the new world of finance on technology is all about adding to the existing financial system. It is not replacing it or disrupting it. It is supplementing it. That is why we have so many bank hackathons, incubators, accelerators and venture capital funds. Banks want fintech to rise. Banks, insurers, regulators and investors recognize that the financial system is only servicing some of the markets, not all. That is why the times we live in are so exciting and why I often underscore the real change our world is seeing with technology. That change is the inclusion of everyone in the network and, by everyone, I mean every one.

A decade ago, the seven billion people on this planet had just two billion with fully functional bank accounts. Today, we are seeing all of the people getting some form of financial inclusion through mobile wallets. Seven billion people can access the financial network today. That is everyone. Just a decade ago, only one in three people could access the network. That is the real transformational moment that fintech is delivering, and that is far, far brighter than the conversation about disrupting, disintermediating or destroying banks.

So please take note: fintech is about a whole new world where everyone can trade and transact in real time for almost nothing one-to-one globally. This is the revolution we are living through and it is a fantastic change from servicing just those worth serving through a physical network with buildings and humans. Serving the world through software and servers to allow trade and commerce to flow like water is the fintech revolution and I love it. I hope you do too.

Key Trends & Topics in 2016


Small and midsized banks should continue to outperform the market, but “challenger banks” are positioned to take on even more market share. Tom Michaud, president and CEO of Keefe, Bruyette & Woods, identifies these “challenger banks,” which include innovators such as Silicon Valley Bank and Opus Bank, growing due to a focus on technology and niche expertise, and strong performers such as Bank of the Ozarks and Pinnacle Financial Partners, more traditional models with strong cultures that attract talent. Speaking to the audience at Bank Director’s 2016 Acquire or Be Acquired Conference, Michaud outlines expectations for the industry in 2016, including exposure to commercial real estate, a receptive IPO market and whether we’ll see more partnerships between banks and fintech companies.

Highlights from this video:

  • Current State of the Banking Industry
  • 2016 Banking Outlook & Emerging Trends
  • The Rise of Challenger Banks
  • The IPO Market for U.S. Banks
  • Fintech Partnerships
  • Consolidation Trends