Facing Existential Threats, Banks Need to Become Technology Companies
Somewhere on the outskirts of Orbit City, a round, blue-and-white industrial building sits atop a reddish pastel base, surrounded by a lush green landscape. Inside, George Jetson leans back in his chair and contemplates his worth to his employer, Spacely Space Sprockets, Inc.
Jetson is a digital index operator. He works in the back office, and his function there is to push buttons — two, to be precise. Spacely Space Sprockets, Inc. is not a financial institution, but it might as well be, for Jetson is doing a low-tech job in what should be a high-tech environment. His employment may be safe for now, but for the company to effectively compete, it will have to significantly up its game.
Am I calling out financial institutions here? You bet. Not all are like that, of course, but from my perch at a startup fintech that focuses on the mechanics of foreign exchange trading, I see numerous banks acting like it is still 1973, when the Society for Worldwide Interbank Financial Telecommunication (SWIFT) was formed.
Many banks do not seem to grasp where their world is going and often say, “My compliance department will not allow me to (fill in the blank).” However, at many of the biggest ones, CEOs acknowledge their banks are really tech companies first and finance companies second. Celent projects the financial services industry will spend nearly $300 billion in 2021 on IT, up from about $260 billion just three years earlier.
Institutions investing in technology often do so like there is no tomorrow, but that has forced a corollary: Banks that fail to embrace technology could find there really is no tomorrow for them.
If It Ain’t Broke, Fix It Anyway
So, why the hesitation? At many financial institutions, compliance runs the show to an outsized degree, and innovation is forced to work around it. Rigidity in the decision-making process is the order of the day, a result of an operational philosophy that lends primacy to internally focused legacy systems. Furthermore, there is a reluctance to invest in new technology that makes old investments obsolete. It’s perceived as throwing away money; this is the sunk cost fallacy at work.
Fintech companies are changing the way the financial services industry runs, though, and that means adaptation is key for incumbent financial companies. Flexibility and innovation are paramount.
Here are three examples where financial institutions frequently come up short:
• In the back office, computers run systems built with an antiquated programming language. Few employees know how to “speak” it; the language is not being taught in school, and most of its purpose now is to maintain existing applications.
• Straight-through processing of transactions should be easy in a digital-first society, yet it remains a pipe dream in financial services.
• Blockchain technology buttresses the efficiency of a financial transaction; it can go through without breaks, reconciliation errors or corrections, because the parties involved are looking at a single source of truth. But at many financial services groups, there remains staunch resistance to switching to blockchain.
On that topic, blockchain technology has an additional benefit: Because it increases the odds that a transaction will be processed seamlessly, it allows banks to cut their human capital costs, which can increase competitiveness.
Spending Money To Make Money
Still, lower expenses are not the only reason financial institutions should invest more in technology. It can also benefit the income side of the ledger. For example, the original bank we used at my company recently lost a revenue opportunity when we went shopping for corporate credit cards. As a new company with no established corporate credit, we were denied despite keeping our assets with the bank.
We turned to a payments startup that required no personal guarantee; the credit line is simply pegged to our corporation’s bank account. We can have a certain percentage of that account outstanding on our corporate cards. This redefining of how credit cards can work is just one example of how technology is transforming the financial services landscape.
How do banks fight back? It’s not an easy transition, culturally or functionally, but it is possible. An absolute prerequisite: The shift has to start at the top. In the earlier example, Cosmo Spacely has to drive change — if he doesn’t, no one else will. In the real world, JPMorgan Chase and Goldman Sachs would not be the tech companies they are today had Jamie Dimon and Lloyd Blankfein, respectively, not sold stakeholders on tech metamorphosis.
These companies had a key advantage over smaller financial firms looking to go tech: top-notch underlying businesses. It’s hard to invest in technology if you are constantly looking to cut costs to feed dividend hikes and share buybacks. IT spending at financial institutions isn’t always about playing defense, though. It can create new revenue opportunities that make and save money.
For community and smaller big banks, this means investing in fresh customer interfaces. At the biggest institutions, where market share is more or less set, tech can be used to improve relevancy through e-trading platforms. Adopting blockchain in the back office can streamline operations and cut expenses. And at many institutions, AI can be used to improve credit assessment rather than to improve the chatbot experience.
If banks do not evolve, they will be left with “bill pay” as their primary service function. Like Spacely Space Sprockets, Inc., companies of the future will become companies of the past. Just ask George Jetson, if you can find him.
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