If you want a more innovative bank, it starts, and largely stops, with what your approval process looks like for new technology. Take a human and force them to grow up in New York City. Around age 20, you force them to go to conferences on living in the outdoors, hunting, fishing, and survival. You also hire consultants to come in and teach outdoor skills. Take your well-outdoor trained city dweller and then put them into the middle of the Colorado Rockies, chances are they become bear-food in a week. That is basically how banks are handling innovation.
Back in the 1980s, there were more banks, smaller banks, and little technology. We were still driving checks around, there was no online banking, and networked ATMs was the latest in bank technology. At the time, the rule of thumb for bankers was that each bank employee produced about $20,000 of operating profit per year. Since each bank had about 100 employees, operating profit was about $2mm per community bank. In this article, we look at how this equation has changed and what it means for the future.
Paladin's CEO, Aaron Silva, recently had the pleasure of appearing on the This Month In Banking podcast by The Kafafian Group. Aaron and the hosts - Sharon J. Lorman, Jeffrey P. Marsico, and Gregg J. Wagner - discussed what the future of banking looks like, industry issues with the Big Three core providers, and the relationship between the two.
In late June, Forbes published an article on FIS’ recent attempt to unilaterally implement a new security surcharge on a “select few” of their clients without their permission (FIS has not stated publicly how many were targeted but GCC estimates there were 250-300 guinea pigs). These fees, costing several tens of thousands of dollars per client, were imposed because FIS stated it had recently improved its security infrastructure to address new threats and that they wanted to “partner” with their clients in sharing this expense. No explanation was provided as to exactly what these threats were or why they decided to deploy this tariff [now] and without the consent of their clients, even though each FIS client had already agreed to a security SLA guarantee in their existing agreements.
According to FIS, this security surcharge was justified, and in exchange they would extend indemnification to include the Banks’ client behavior subject to exclusions and Limits of Liability (LOL) already stated within their agreement. LOL is traditionally woefully inadequate in most standard FIS agreements as it is and so this "benefit" really has no tangible value to a banking franchise. FIS stated that these kinds of security measures are becoming increasingly necessary, as cyber-attacks are growing in popularity and evolving in complexity.
The largest problem with bank innovation is that we see or hear about a sexy piece of technology at a conference or at another bank and then acquire it. The new piece of technology ends up solving a known problem but in the process actually creates more problems, and risk, than it solves. It’s called the “Shiny Object Syndrome” (SOS), and it could be sowing the seeds of destruction for many banks. In this article, we look at the seven strategic questions you need to answer before acquiring any piece of technology.
While online account opening and digital lending are great, there is one function that is the most in demand by bank customers, yet most banks don’t think to provide any digital functionality around it. It is the one function that drives up the most cost for a bank and is the most significant reason why bank customers still say they want a branch. Solve this problem, and you start to become a true digital bank. In this article, we look at the data around the problem and how to solve for it.
One question we always ask is if we are spending enough on technology? After that question, we get confused and mired in the quicksand of financial reporting, finance philosophy and technology strategy. “Technology” is so pervasive that it is difficult to determine what the difference is between spending on “digital” projects versus “analog” projects. For instance, if we upgrade our phone system from dedicated copper to fiber optics that is an analog project but if we convert over to a slower voice-over-IP system is that a digital project? In order to shed some light, we did some research to help banks set their IT budget for next year.
Technology Spending As A Percent of Non-Interest Income
The Wall Street Journal published a story about small banks beginning to rebel against the Big Three Oligopoly ("the BTO") of core IT suppliers Fiserv, FIS and Jack Henry - now commanding more than 90% of market share according to CELENT. I was interviewed extensively by the writers about the ease (or difficulty) of technical access and economic affordability when banks need unfettered access to their data (i.e. for third party fintech partners). While they are starting to provide access, they're doing it in a way that unfairly monetizes your data to their exclusive benefit. Here's how.
The experts agree. Artificial intelligence (AI), the process of machine learning, is exploding and we’re just getting started. According to Gartner Research, AI is the number one strategic technology trend in 2018. The American Bankers Association says AI is one of the top five fintech trends that will drive the next decade of banking.
Global independent investment banking advisory firm Evercore ISI interviews fintech expert Aaron Silva on all things banking. Listen now to Aaron's predictions for the banking industry: bit.ly/SilvaOnEvercore