The adoption of digital banking has been growing at exponential rates over the past several years. Fueled by an increase in remote lifestyles and evolved consumer preferences, digital banking channels now surpass that of the legacy banking channels. Many banks were already preparing for this trend and were able to quickly adapt as the COVID-19 pandemic rapidly changed the way companies interact with clients. Others were caught scrambling to modernize their digital capabilities and adopt the crucial technologies that play a pivotal role today and in the future of banking.
Neobanks emerge
The emergence of non-bank FinTech challengers is catching many traditional banks off guard. This evolution of neobanks, also referred to as “challenger banks”, is adding significant pressure to a market where shrinking deposits are challenging the liquidity position of many banks across the country. Several large brands, such as Walmart, are partnering with FinTech companies to launch digital banking entities that can attract deposits and offer financial products and services to their customers. These new digital banking entities can be launched quickly and easily with the help of FinTech partners, allowing the brands to offer a more seamless and convenient banking experience to its customers, moving them away from the traditional bank that occupies the pad site in front of the big box store.
While neobanks are a newer form of competition for community banks, they can also be part of the solution to modernize and digitize the industry. These FinTech companies seek partner banks under $10 billion in assets, given advantages in interchange income thanks to the Durbin Amendment. This exemption provides an opportunity for FinTech companies to partner with smaller banks and access higher interchange income, which can be a significant revenue stream for both parties. Community banks are ripe for these partnerships, which can open new doors for legacy organizations to grow deposits, loans, and fee income.
Core banking and neobanks
As bankers are better understanding the neobank model, many have a desire to participate in this marketplace but find their bank without the technical capability required to do so. And, at this point, bankers find themselves more and more frustrated by their core banking provider’s unwillingness to assist. For decades, core banking providers have made it very difficult to integrate with third-party partners. Compound the inability to integrate with slow innovation, and lackluster customer service, there’s no question why about half of bankers reported in a recent American Bankers Association Core Platforms Survey as being dissatisfied with their core. That said, only 21% of bankers were seriously considering switching their core provider at the termination of their agreement.
To the outside world, this phenomenon may seem outrageous and hard to understand – why would so many dissatisfied customers (some of whom are extremely dissatisfied) continue to put up with this status quo? The bankers of the world understand the reasons switching the core is a daunting task that requires significant effort and time and will require many other strategic initiatives to take a back seat until completion.
To be fair, there are some core providers who are bucking this trend and are likely to pick up sizable market share in the coming years – especially considering ways to partner with these cores in a parallel processing environment, absent of a full conversion. But given years and years of frustration, it’s time for bankers to prioritize their core strategy and ways they can modernize their approach to fully owning their data.
Owning your data and data strategy
While the importance of data in today’s world is well known – ‘data is king’ -, too often data is thought about in terms of access from a reporting perspective. It is imperative for bankers to think of data in terms of true ownership – the ability to move, manipulate, integrate, and of course report against it at will. This requires a new strategy, where the bank, not the core, determines how data flows, connects, intersects, and is stored. In short, every bank should consider owning an API (Application Protocol Interface) layer that controls the connectivity to the core and every ancillary system the bank wishes to engage.
According to American Banker’s article “Bankers Top Tech Priorities,” published in March 2023, 45% of bankers pointed to APIs as being a top transformative force in the next two years – only second behind digital applications at 46%. The need for digital transformation and investing in technology to gain a competitive advantage is gaining steam in the community banking world.
New data models to own your data
The diagrams below demonstrate the concept of an API and its functionality. The first picture shows an environment that is core centric, which is how most banks are built today. In a core centric model, all data flows through the core and the core serves as a connection point for communication and processing. The core controls the ability to connect services, provide access to information, and when special integrations are needed, the core controls integration in one-off scenarios.
The second image shows an API centric environment. In this environment, a bank builds its own communication and data layer, and controls the connection point and flow of data for processing. In this model, the core simply becomes another system, much like the teller application or online banking. The bank controls where and how data moves, which opens the realm of possibilities well beyond what is capable in the core centric model.
As you can imagine, some core providers don’t like this model and won’t help banks enable this. They may not allow it or will make it cost prohibitive to achieve. That said, this is the bank’s data and as the customer, the bank needs to build the environment that best supports its strategic goals and direction. Contract renewal events create a great opportunity to discuss and negotiate this strategy with your core provider. If the current core provider isn’t open to, or reasonable about this, the bank may want to consider if the current core is the right strategic partner.
To own an API does not require teams of professional programmers, it can be accomplished through third party relationships who build, manage, and maintain this on your behalf. Of course, some banks may want to consider insourcing this versus outsourcing, but that strategic decision should be separate from whether to pursue this path. And while the core itself may “offer” an API layer, you should think long and hard about putting more eggs in the same basket.
Contact Hartman and learn how to take charge of your data
Technology is too intertwined in the business of banking for banks to simply rely on their core, or any one partner, to control their future. Reach out to the financial services team at Hartman Executive Advisors to learn more about API strategies and ways your bank can take ownership of data and grow strategically.
