The rise of FinTechs in the last decade – and the millions of customers they’ve siphoned away from mainstream financial institutions (FIs) – has changed the landscape for banks. Innovation is no longer optional – it’s table stakes to stay in the game.
The good news: There is no shortage of innovative ideas and options for today’s FIs to offer to their customers: digital wallets, P2P payments, card controls, fraud and security protection, and loyalty and rewards perks among them.
“The list goes on and on,” i2c’s Head of Global Products Ava Kelly told Karen Webster in a recent conversation. “There is no lack of good ideas in financial services, but FIs run into implementation issues because of antiquated systems.”
Some FIs are ready to innovate, and some aren’t. What separates the two groups? PYMNTS and i2c have been studying that question for the last two years – and attempting to answer it with the Innovation Readiness Playbooks.
Size isn’t the answer: Smaller FIs have increasingly made it to the top of the Index. Simply picking and choosing a menu of innovative agenda items to build out isn’t the answer, as an innovative idea is only as good as a bank’s ability to deliver on it in a timely manner in a fast-moving market.
At the end of the day, Kelly noted, those with enabled technology infrastructure were better able to plan and budget, get to market early or on schedule, and go deeper into improving their value proposition. More than a third of FIs that lack technology enablement claim it is an impediment to innovation – and an obstacle to staying competitive in the next decade.
The New Core Competencies
If a firm can’t innovate, it won’t survive, Kelly told Webster – because it won’t be able to respond to what is going on in the fast-moving marketplace. Innovation readiness depends on the ability to respond in real time to market changes and get ahead of them whenever possible. The flexibility to innovate is the new core competency required to survive and excel in today’s market environment.
Flexibility, Kelly noted, requires the second core competency: technological agility. No matter how good the ideas are, if an FI can’t get them to market quickly enough, they face a disadvantage. Consumers aren’t patient about getting what they want when they want it – and a bank that lacks the infrastructure to respond to changes in real time risks losing their customers to a more flexible FI or FinTech.
“Not focusing on shoring up capabilities is a real risk these days. This isn’t a conversation about future innovation outlooks – these are issues that banks have to act on,” Kelly said. “The payments and banking landscape is going to be unpredictable – that presents a challenge, but it isn’t going to change or go away. The bottom line is that every FI needs to be ready and able to adapt to be successful.”
Firms with flexible infrastructure are rising to the top, she added – and firms that don’t have it need to find a way to add it, and fairly quickly.
To Build or Not to Build
Building a flexible, adaptable infrastructure is an easy command to give – and a hard thing for FIs to do. Building these things in-house over a legacy platform is expensive and difficult. i2c knows this from experience, said Kelly, because they provide these services to banks as an outsourcing option.
“We invest over 600,000 engineering hours a year to enhance our platform,” Kelly noted. “Doing that internally is not impossible, but it can be very challenging to keep up with.”
Especially for smaller FIs, which are almost always better served by focusing their efforts on what they do best: building and maintaining relationships with consumers. When used properly, technology can enhance those relationships and simplify the back-end operational experience – but “properly” is the operative word.
Outsourcing often makes more sense, Kelly said, provided the right outsourcing model is chosen. Systems must be agile, but they also have to be reliable and work 100 percent of the time without outages. Agility requires reliability, as one without the other just isn’t useful.
Doubling Down on Readiness
One of the more interesting trends in tracking innovation readiness for 24 months, said Kelly, is the degree to which the playing field has been leveled for smaller banking institutions that have enabled their technology infrastructure. In earlier days, one might have been inclined to regard FIs controlling the smallest amount of assets as the most likely to be overwhelmed, but the data has not borne that out. Large banks are often weighed down by their massive legacy systems in a way their smaller counterparts are not.
“Over two years of research, we saw small FIs that were technology-enabled rise to the top of the performance list, taking a leadership role in their space as innovators rather than waiting around for others to introduce something and being fast followers,” Kelly said.
FIs must be agile enough to respond to a marketplace that will continue to advance, shift and become more competitive. Over the past 10 years, small banks have gotten good at what FIs of every size have also mastered, which is constantly looking at the infrastructure and planning map and asking themselves a lot of questions: What has my technology done for me lately? Can I create the products and services I want? Can I do it quickly enough to be relevant?
No FI can predict exactly what is coming in terms of advances or needs – which is why being innovation-ready isn’t about trying to predict the future and doubling down on one particular innovation (or set of innovations).
“Instead, double down on your capacity to be ready,” said Kelly. “Double down on responding to market changes as they come. Build a foundation for where you want to go – but as the market changes, invest in being ready for whatever comes next.”