Traditional banks are truly at a crossroad. It is a divergence carved out by increasing competition and changing consumer attitude. On one side, there’s the familiar way that things have always been done. On the opposite path, runs the dark and foggy road of uncertain banking territory, ripe with hybrid cloud, API interfaces, and concepts like open banking.
This road less traveled is rumored to lead to consumer empowerment and the financial inclusion of the traditionally under served. Its streets are paved with the free flow of information. However, it is narrow and winding. While small fintechs and financial institutions weave nimbly around obstacles, the sheer massiveness of a traditional bank holds them hostage.
First thing to remember, the physical movement of paper checks is what roots traditional banks. For decades, the bank and consumer relationship has existed at the branch level via bank tellers and managers. In the past, the more branches a bank opened, the more convenient it was for customers, and that was about it. Customer retention was seemingly effortless because people rarely change their bank accounts.
In fact, it’s estimated that the average U.S. adult keeps the same primary checking account for around 16 years. While 26% hold onto to the same account for more than 20 years. These low churn rates aren’t that surprising. In his book Doing Digital: Lessons from Leaders, Chris Skinner remarks that the core reason why people don’t switch bank accounts is that they view banks as a utility. Even after large scandals, customers wouldn’t change banks. Skinner writes, “…the only time customers do switch banks is if the bank screws up on that basic promise of being a safe store of value.”
However, research shows that this trend is changing. Younger customers say they’re more willing to change banks if they feel they aren’t getting what they want. According to the 2020 World FinTech Report, 48% of Gen-Y and tech savvy consumers are likely to switch banks in the next 12 months. The motivations for switching vary, but the top reasons that customers of all ages adopt banking services from non-traditional players are low-cost offerings (70%), ease-of-use (68%), better features (39%) or personalized products (39%).
While banks have made strides in the right direction, such as developing mobile apps, customer satisfaction remains lackluster. The 2020 Fintech Report details how this is due to the fact that middle and back office operations of traditional banks have remained largely untouched for decades.
In a way, this represents a continued focus on the traditional customer-facing interface of the bank, or the branch, versus investing in real innovation. Skinner makes this observation in his book. He talks about the fundamental differences between the traditional banking business model and those of digital-focused businesses. He says that many banks claim to have embraced going digital, when:
“In reality, these banks had changed nothing. There was no rethinking of product and service. No new idea about how to structure the bank. No fundamental redesign of core systems structures. Effectively nothing had changed except that they had stuck an app on the front end of the banking process.”
Going further, Skinner argues that while the banking model was built for physical distribution with a focus on pushing products through channels, the heart of going digital is real-time availability and the use of customer data as a way to create intimacy through devices.
True innovation requires rethinking and re-prioritizing both middle and back office operations and forgetting about the branch for now.
There are many things holding banks back from true innovation. One important example is the amount of weight that legacy technology and processes bear down on traditional banks ability to change. In fact, 92 of the world’s top 100 banks still rely on the mainframe as their system of record.
There’s no doubt that traditional banks need and want to modernize their legacy systems to enable change. However, modernizing complex banking systems is no piece of cake. There is no quick fix. The real question is what is the most cost-effective, low-risk way to modernize that will get banks closest to their ideal future state in a time frame that they deem reasonable. Easy? No. Possible? Very!
With over 35 years’ experience in helping banks leverage the systems they already have to achieve their modernization goals. Whether reducing labor requirements for new mainframe integrations 80-90%, or combining drag-and-drop capabilities with a no-code platform to side-step talent shortages, Ivory is the optimal tool to help organizations maximize the value of their existing resources.
Download this case study to learn how we helped a large, traditional bank integrate their mainframe to execute the first instant payment in Europe.