Small Banks and the Technology Problem
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Small Banks and the Technology Problem

By Matthew Macia, Executive Vice President and Chief Risk Officer, Bank of the Sierra

Matthew Macia, Executive Vice President and Chief Risk Officer, Bank of the Sierra

Technology expectations continue to accelerate and by this point have largely become ubiquitous across financial services. Smaller community banks have historically leveraged personal interaction and responsiveness as a defense against larger rivals’ slicker technical functionality and product array. Increasingly however, this traditional model has come under threat as technology expectations rise and population shifts. While there are certain demographic pockets who favor traditional channels, the need for independent institutions to address digital experiences is mounting.

The emergence of specialized Fintechs into the equation creates an added competitive dimension for the entire industry. Largely unencumbered by legacy systems and with a technology-first positioning, Fintech firms have established a toehold into traditional financial services markets. Although the product orientation has been focused more on niche or monoline business opportunities, the ease of application use and technology sophistication should not be discounted. 

While generational adoption of technology remains most acute in individuals under 40, older generations are adopting at an accelerating rate (Pew Research Center, May 2017). This acceleration has consequences for financial services as the demand for more modern functionality and channels grows in the historically branch dependent segment. Combine this with the reality that banking product demand peaks in younger age ranges and the result is a greater technology expectation overall.

"The reality of modern banking is that small banks are now frequently compared directly against their multinational rivals"

All these developments have simultaneous consequences and opportunities for smaller financial services firms. Notably, the challenge to sub-regional and community banking is most profound due to expertise and capital limitations. Larger banks are poised to throw $25 bn annually on tech in the coming decade (The Economist, May 2019). All hope is not lost however, as there are options for David in the great battle.

Consider implementing a working group or committee to specifically address information technology and security issues.

A number of years ago, a colleague approached me with the idea of establishing an information technology subcommittee within our risk management governance structure. At the time, the firm was relatively tiny by financial services standards but growing quickly. His rationale was simple in that the existing practice did not provide sufficient agenda time to properly debate information technology issues. I agreed with his assessment and over the next few months, he and I collaborated on establishing an IT subcommittee. The new committee would largely focus on infrastructure strategy development, monitoring and remediation of cyber risk threats and assessment of system performance. The committee, once established, quickly became one of the most impactful and valuable components of our overall governance infrastructure.

It is not uncommon in smaller banks for IT debate to be isolated from broader risk and strategic discussions. This isolation prevents sufficient dialogue and evaluation regarding the importance of systems architecture, interaction and capability. Most executives will easily acknowledge the critical nature of their systems but simultaneously fail to create an environment where IT/IS issues are contextually considered. Strategic technology isolation at small banks likely results from a general discomfort or unfamiliarity with the complexity of systems and their architecture.

Establish clear targets for product functionality

Small banks are increasingly subject to the same demands as their larger counterparts.  While the community bank personal touch was sufficient in a time with more limited technological demands, the reality of modern banking is that small banks are now frequently compared directly against their multinational rivals. A counter-intuitive remote deposit function or a clunky bill pay service makes the competitive landscape much more difficult to navigate. The emergence of third party solutions helps the balance, however, “generic” products are often mundane and offer little in the way of competitive advantage. As such, the “out of the box” offering is vanilla and pale in comparison to the largest capital-rich institutions.

Smaller firms often lack resources and expertise to offer competitive technology across all products and platforms. It would simply be too cost prohibitive. One solution for banks is to be highly deliberate in how they approach functionality. Assessing the current and future target customers’ needs and placing the greatest effort against that target will help focus development and manage costs. Some technology can be approached from a “minimally viable” perspective while others, with greater estimated functional elasticity, can be the target of developers’ time and capital.

Integration of system architecture

Integration of systems architecture is a worrisome problem across the industry. Much financial services functionality is delivered through legacy systems bound together with the proverbial baling wire and broomsticks. The cost of replacement or full integration of large scale operations can be immense and daunting. Many large banks defer maintenance or investment due to the sheer scope and scale of modernizing.

Small banks are generally less sophisticated and have less dependency on an array of legacy systems. In this sense, David may have a competitive advantage over Goliath in an ability to adapt more quickly. Placing a strategic lens on basic systems architecture and its full integration can streamline processes and simultaneously reduce costs. This integration can have client benefits in the form of speed or consistency of delivery. Elongated process for new account opening or credit applications will appear Jurassic in the face of a rocket mortgage. The ability to leverage existing data, even in something as rudimentary as pre populating address information for existing customers, can be meaningful. Smaller banks should be able to rewind their infrastructure much more rapidly. Of course, planning and a keen eye towards design issues are essential.

Create a formal digital and technology strategy

Smaller firms may not have approached strategic development as formally as larger counterparts. The origin of their business strategy was instinctual and highly responsive to community needs and demands. Many times, interests not considered by the less personal approach of the mega banks. Given current market dynamics and consumer expectations, a concerted and comprehensive focus on technology should be a necessary transformative priority for most institutions.

As case in point, some smaller banks have been experimenting with and having some success in transitioning away from the traditional community bank approach to one that is less constrained by geography. Technology, when properly approached, can mask the true size of an institution. As such, differentiating a community bank from a large multi-national is becoming harder. Sofia Coppola, the Oscar winning filmmaker, predicted back in the 90s that soon anyone with a camera and an Apple computer could make a movie. With the popularity of sites such as YouTube, Vimeo and others, her comment was prophetic. A similar situation is afoot with banking. Community banks no longer need to view their strategy as constrained by regional or state borders. Organic growth regardless of geographic location, is achievable with the proper combination of products and a seamless and intuitive technology.

In other cases, banks have addressed the issue through strategic partnerships with Fintech firms. There have been isolated successes where this approach has been effective. Provided the relationship is not one sided, this strategy has potential for some firms.

Naturally, no one solution is applicable for all firms but the deliberate and systematic approach to technology strategy will be necessary for all financial institutions over the coming decade.

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