Direct-Channel Digital Maturity Needs Another Look

By: Tyler Brown

MAY 21, 2024

The drama of risk management gone wrong at Banking-as-a-Service (BaaS) banks is taking attention away from a key imperative in financial services: the work financial institutions (FIs) need to do on their direct channels. Many customers find FIs don’t meet the bar with their customer experience — in CCG Catalyst’s US Banking Study 2023, the top complaint bank executive respondents said retail and commercial customers had was “customer experience is lacking.” Moreover, direct channels are an area where there is well-documented guidance on compliance, making it far less risky to tinker with.

Bankers want to create a better experience. The top priority in the next 5 years that bankers have for their retail business, according to our study, is to improve the customer journey (64%). That goes for the commercial business, too (56%). Bankers’ control over relationships through their direct channels should give them both a risk cushion and a strong incentive to invest strategically in next-generation solutions for the customer journey. But that doesn’t mean such efforts will be easy — FIs need to put in the work.

Here are three key areas necessary to address for a better customer journey:

• FIs need a model for product development that informs a modern customer experience. That includes their philosophy about creating something that’s competitive: Is the focus on keeping up with competitors? Are vendor roadmaps a crutch? Are they doing the right customer research, and is it thorough?
• FIs need to offer the features and functions their customers demand, delivered through the right channels and straightforward to use. Those channels may include digital banking, the customer service center, the branch, and physical self-service. Employees also need the right tools to make the back office efficient.
• A huge hurdle FIs face with implementation is the complex patchwork of vendors, platforms, and point solutions across channels that form the foundation of the customer experience. As we’ve written, it may be tempting to go with one or a few vendors to simplify the procurement of comprehensive solutions. But that strategy is unlikely to support a best-in-class product.

As we discussed in our report, “Successes in Transformation: Lessons from the Field,” customer expectations for the experience have risen thanks to tech-focused providers. Banks need to evolve and differentiate in response. To compete successfully for customers, FIs need to commit to omnichannel digital maturity — modernizing and integrating digital and physical banking.

Core to any FI’s direct strategy should be the holistic experience and smooth handoffs between channels. Fortunately, FIs are starting from a point where their management, risk departments, and regulators should feel comfortable. Third-party risk is not out of the ordinary for direct channels — today’s banking rules are written with the context of bank technology that FIs use to serve their customers directly. Vendors have historically designed their products for that use case. As such, direct channels are a safe way to do business, and they remain an important way to drive innovation, with the right commitment.

A Mental Model for Bankers’ Technology Practices

MAY 23, 2024

By: Tyler Brown

Core Banking and Modernization

Jack Henry clients’ top technology priorities for the next 2 years are fraud detection/mitigation and digital banking, according to a study by the company, based on a survey of CEOs at a selection of its customers (typically small US banks and credit unions).These tools are among many tied to a financial institution’s (FI’s) transformation strategy, which may be limited by technical and institutional baggage, financial resources, and the board and senior leadership’s philosophy about innovation.

Practices toward technology generally fall into four buckets:

• Industry leadership, or routinely budgeting high technology investment relative to the size of the institution with an aggressive modernization plan calibrated to business strategy and the organization’s capabilities.
• Incremental investment, characterized by pushing for upgrades from a core vendor or going around the core to modern middleware, enterprise applications, and other architecture for up-to-date platforms or point solutions.
• Maintenance, by which institutions focus budget on upkeep of their tech stack and its organizational support, with upgrades dictated by their core provider.
• Underinvestment, whereby FIs leave legacy systems in place under all circumstances. A hazy technological vision and poor governance leave the institution chronically underprepared for the future.

FIs can’t always pick the bucket they fall into. Maintenance costs can suck up the budget and cut into modernization plans. The greatest tragedy is the 19% of the Jack Henry study’s respondents that plan to keep spending the same on technology in the next 2 years. They will inevitably slip into the “underinvestment” bucket if they don’t fall into it already.

Bankers need to strike a balance between maintenance and modernization. That balance demands a long-term view, reasonable risk tolerance, technical competence and commitment, and a holistic perspective on what needs to change. Management should build a forward-looking technology plan that keeps in mind key constraints.

Here’s a simple, six-step model for setting an achievable technology strategy:

1. Observe your trends in technology spending.
2. Break down your spending by maintenance and modernization.
3. Identify the magnitude and rate of change of each. Find out why.

When you have your baseline:

1. Identify ideal practices toward innovation.
2. Design your roadmap based on your business strategy.
3. Allocate and scale investments accordingly.

Bankers still are stuck with the details of those investments. Those include selecting solutions — fraud detection/mitigation and digital banking, or as the study also covers, perhaps analytics, automation, and cybersecurity. They must also acknowledge the challenges of implementation. Those come back to the core’s capabilities, conscious vendor evaluation, and a path that steers clear of unhealthy dependence on one or a few providers.

A best of breed strategy, the ideal approach to effective modernization, requires an industry leadership mindset. In the long run, it’s about efficient spending, not dramatic growth in the technology budget. But first FIs must get over the hump of legacy infrastructure. A composable core, modern applications, and microservices are the long-term answer, but guts and commitment come first.

We just published our latest report, “Core Modernization 2024: The Next-Generation Opportunity,” which covers the balance between best of breed and stability and reliability, experiments with flexibility and scalability, and a glimpse of the future of financial technology.

Click here to read the key findings and download a free copy.