When it comes to digital banking the law of unintended consequence is alive and well. As bank customers use digital channels for self-service simple tasks, they demand more time of call centers when they have complex issues and banks are finding that staff are opening fewer new accounts per FTE.
Ron Shevlin, writing at Cornerstone Advisor’s Gonzo Banker takes a look at what digital has done to banking and it’s pretty impressive.
“Active online banking users grew 82% and active online bill payers increased 134% between 2007 and 2017.”
The growth in digital is strongly concentrated in the biggest banks. Accenture in a new report said that “In U.S., more than half of new current accounts have been opened by three big banks that are investing heavily in digital.”
The big bank leadership in online was also reported by Javelin Strategy & Research which looked a consumer “satisfaction with online banking and identified three leaders in each category. Bank of America repeated as ‘Best in Class’ overall, ranking as a leader in five categories. Fifth Third, Huntington, Navy Federal Credit Union, SunTrust, U.S. Bank, USAA, and Wells Fargo ranked as leaders in at least one category.”
Shevlin says that the biggest banks are pulling ahead in digital: “Just 51% of mid-size banks’ checking account holders banked online in 2017, and only 11% paid bills online through their banks.”
In part that could be because big banks can afford to develop their own mobile and online banking platforms; smaller banks rely on tech vendors — primarily the Big Three — Fiserv, FIS and Jack Henry.
Thomas Hogan, CEO of Kony, a tech firm which often fills gaps left by the Big Three, told me at Money2020 that among banking CEOs, there is almost unanimous disdain for the core providers. Their systems are seen as inflexible, overpriced, difficult and expensive to modify, but banks are locked into long-term contracts, averaging seven years, in an era when the technology change is accelerating. The vendor-provided systems may have placed regional and community banks at a competitive disadvantage.
Alan McIntyre, a senior managing director at Accenture, said the Big Three constitute a strange system.
The tech vendors are bigger than their bank clients in a lot of cases, he said.
"So the power relationship is not necessarily in the banks' favor. The Big Three were all built through acquisition, bits and pieces so there is a lot of fragmentation of those systems. It's a patchwork with each of the major players having hundreds of different versions of their core, much of it 30 years old. The industry has a lot of bilateral commercial contracts and not a lot of scale."
Because banks have a series of bilateral commercial relationships, they will find it hard to innovate unless they modernize their systems. Rather than working with tech partners and seeing a constant flow of products, they don't have choices they want.
They may get rescued by Amazon, of all companies.
In a March column, which I somehow missed, Shevlin wrote that: "Amazon isn’t the future model for banks, nor is it banks' biggest threat. The players who are most threatened by Amazon's entrance into checking accounts (and lending) are the legacy fintech providers--the Fiservs, FISes, and Jack Henrys of the world. Amazon is positioning itself to cut these players out of the loop."
He admitted it might sound farfetched "But if Amazon can go out and acquire a Whole Foods, why can't it build or acquire core processing capabilities and establish itself as a platform services provider for banks' technology and marketing needs?"
Shevlin has come across some odd numbers. He says it is no surprise that the number of transactions at branches has declined, but he found that new accounts opened per platform full-time employee fell by 44 percent.
“That’s simply inexcusable. For years, branchaholics have claimed that branches will become ‘advice centers’. Maybe platform personnel are advising consumers to apply online.” He doesn’t offer a time line for these numbers — it can’t all come down to reformed practices at Wells Fargo, can it?
Calls to contact centers have increased in length by 46 percent, which Shevlin suggests is because people handle simple matters through self-serve channels and only call when they have a complex issue. Clearly not all customers are willing to stick around for the chance to talk to a person — wait times rose from 22 seconds to 39 seconds and the abandon rate rose 36%, he said.
Bankers seem to be aware of the challenges ahead. Shevlin said that “just over half of bank execs think their digital banking capabilities are even somewhat future-ready.” and only three in 10 think their branches are ready for the future.
Chris Skinner at The Finanser thinks one problem is that technologists are rare on bank boards and in senior executive positions.
“Banks are run by financiers, not technologists” which creates a problem. How can you change the bank to be digital if (a) the leadership doesn’t understand technology and what digital means; and (b) if no one on the Executive team has any experience of technology.”
He cites a 2016 Accenture report which found that only 3% of CEOs of leading banks have professional technology experience, only 6% of board directors have professional technology experience and 40% have no board members with any professional technology experience in their career.
Accenture says the problems facing big banks are significant.
“The IT challenge is all the more acute because of problems many big banks already have with their antiquated ‘core banking’ systems. The big UK banks have core systems dating back to the 1970s or even 1960s that are inflexible, vulnerable to outages and ill-suited to the heavy demands of digital and mobile banking.”
It notes that the role of technology has changed from simply making back office processing efficient.
“Digital has changed that. Technology has become an intrinsic part of the business strategy at financial services firms. Digital not only means new banking channels, it also offers a unique opportunity for banks to drive growth and profitability.”
Bank Director finds that bankers are becoming more aware of the role of technology, and even use it more themselves.
Research Director Emily McCormick writes that boards are paying more attention to technology — half say tech is an issue at every board meeting and more than three-quarters actually use the bank’s mobile and online channels, up from 51% three years ago, and 55% say they have a high-level executive focused on innovation. The article doesn’t, however, offer a head count for board members with tech backgrounds.
